By Taro Hideyoshi
As I mentioned in previous article, a key to success in day trading is to minimize the size of your loss while maximize the profit for each trade.
Since day traders have to keep their losses small, hence, they will get stopped out often. This causes their win/loss ratio of their trades to be low because it is hard to maintain a high percentage of profitable trades.
Therefore, the trading plan for day traders is to pick the most promising opportunities. Simply stated, enter a trade while the price is most likely to move in the direction of the trend with maximum range.
In order to accomplish this, the security we look for must have room to run. Before enter a trade, consider if there is a good portion of the range available for making profit.
Most traders tend to take their profits prematurely because they get nervous when the price makes its normal pullback. Letting your profit runs by staying frozen and watching the price pulls back before it makes new high is harder than it seems. The emotions get in the way when you start thinking about the money.
So, you have to understand the normal characteristics of price movement. The more proficient in this will help in maximizing your profit per trade in price movement.
Let get to another part: small losses. This is the part where you have the most control. If you are able to manage your losses, you will gain more profits even with average security selection.
The difficulty is it takes discipline and the proper mental attitude to determine your stop levels and execute it as your plan.
When it comes to real trading, what usually happens is traders determine a stop loss level but when the price gets to the stop level. They hesitate to pull the trigger. Maybe, it is because they see the price reverse and they hope that the price will start to move in the same direction as their position. However, the price move in another direction offers them a bigger loss.
This is forbidden territory for day traders. If you keep taking bigger losses, you have to increase the size of profit on your wining trades and also the win/loss trade ratio.
Controlling your profit is hard; it is easier to control your loss side. It is better to take the judgment out of your hands by placing stop order immediately after you enter a trade. It will protect you from your emotions.
About the Author
Taro is an experience trader who trades in stocks, futures, forex. He strongly focuses on technical analysis, trading systems and money management.
If you would like to find more articles on MetaStock Tutorials, MetaStock Formulas, Trading Systems and Money Management. Please go to MetaStock Trading System.
You would also find the list of recommended books for trading & investing at The Investing Books.
