When diving into the deep and often chaotic waters of day trading, one must set realistic goals to avoid crashing and burning. It's tempting to dream of quick riches, but the truth is far more sobering. Aiming for a 2-3% return on investment per month is a reasonable target. Sure, it's not going to turn you into a millionaire overnight, but compounding gains over time can lead to significant wealth. Remember the story of Jesse Livermore, the famous trader who made a fortune in the stock market crashes of 1907 and 1929 but also went broke multiple times?
In the world of stock indices, like the S&P 500, a 10% annual return is considered excellent. Now, think about how much risk comes with aiming for 10% per month. It's like aiming for the moon and can lead to reckless decisions. The average day trader using platforms like E*TRADE or TD Ameritrade actually earns around 3-4% monthly, and that’s if they’re on the good side of the market.
Day trading requires an understanding of terms like "liquidity," "volatility," and "spread." For instance, liquidity is a measure of how quickly you can buy or sell a security without affecting its price. High liquidity means easier trades and often smaller spreads. Knowing this, a good trader might stick to high-volume stocks like Apple or Amazon, whose daily traded volumes run in the millions. Spreads, or the difference between bid and ask prices, are smaller for high-volume stocks, which is a huge advantage. Imagine trying to trade a penny stock with low volume and large spreads – a nightmare.
You’ve got to factor in the costs too. Platforms like Robinhood might offer commission-free trades, but others can charge $5-$10 per trade. If you're executing 10 trades a day, that’s a potential $100 daily cost which can skyrocket to $2,000 monthly. Add to that the software fees for premium trading tools like MetaTrader or TradeStation, which can run up to $200 per month. The costs quickly pile up, don’t they?
Ray Dalio, one of the masters of the hedge fund world, often stresses the importance of risk management. Imagine having $1,000 in your trading account – losing 2% on a trade means only a $20 loss. But imagine losing 20% – suddenly you're down $200. The psychological impact alone can send any trader into a frenzy. Dalio himself operates with algorithms and risk-parity strategies to hedge risk, but for an individual trader, maintaining a strict stop-loss order is crucial. Aim for risking no more than 1-2% of your capital on any single trade.
How much capital do you need to start? A common myth is you need a lot of money. But many have started with as little as $500 to $1,000. Is it possible to start with even less? Check out this Day Trading $100 to explore the journey of those who dared to start small.
Realistic goal-setting intertwines with time management too. If you’re planning to become a full-time trader, expect to spend at least 6-8 hours a day tracking market movements, analyzing charts, and executing trades. For part-timers juggling other jobs, carving out even 2-3 hours can be demanding but necessary. Time in the market often beats timing the market, underscoring the importance of being present and active.
Have you heard of the Pomodoro technique? It’s a time management method where you work intensively for 25 minutes and then take a 5-minute break. This can be applied to trading as well – seeking opportunities intensely in shorter bursts can reduce fatigue and increase focus.
Let’s talk strategy. An often-cited method is the moving average crossover strategy, using a 50-day and a 200-day moving average. When the 50-day crosses above the 200-day, it's a buy signal known as the "Golden Cross." Opposite to that, a "Death Cross" happens when the 50-day falls below the 200-day, signaling a potential downturn. These patterns are not just arbitrary; they stem from historical data showing repeated trends. Charting these patterns and backtesting can provide a more empirical approach to your trading guidelines.
Keep an eye on earnings reports which can be released quarterly, influencing stock prices significantly. Remember when Tesla reported unexpected profits in 2019? Their stock took a sharp rise. Planning strategies around these earnings seasons can yield significant rewards if executed with precision.
Understanding your tools is equally important. For example, using RSI (Relative Strength Index) can tell you if a stock is overbought or oversold. An RSI above 70 usually means overbought and may indicate a price correction, while below 30 indicates an oversold condition, potentially signaling a price rise. Facts like these provide a more data-driven basis for your trades, which always beats gut feeling.
Lastly, but just as importantly, is the mental game. Trading is a psychologically taxing endeavor. Even pros on Wall Street attest to the emotional roller-coaster. Maintaining mental resilience by regular exercise, hobbies, and even meditation can improve focus and decision-making under pressure.