Day trading consists of buying stock and then turning around and selling it on the same day to make a profit. Knowing how to limit your losses when day trading is essential to minimizing inherent risks. No day trader can turn a profit each and every day but with the right strategies in place, you can enjoy significant earnings and long-term success. You may even find you want to make a full-time career out of being a day trader.
The goal is to downplay losses as much as possible, ensuring they don’t lead to irreparable damage to your account. With the right strategy in place, you can have a 50 percent win rate that still churns a profit. Think about it. If you profit on only half of your trades but your average profits are twice the amount of what you normally lose, this still puts you on top. This is why you mustn’t look at how many wins you’re making. Instead, look at how sizable the wins are and then compare them to your losses.
Controlling the risk on each trade starts with refined risk management. Whether you’re a beginner or a seasoned investor in the day trading industry, don’t risk more than two to three percent of your account balance. You can calculate the risk by taking the difference between the stock’s entry price and its stop-loss price. From here, multiply the answer by your position size. If this number exceeds more than three percent of your account balance, don’t make the investment. Check out our helpful infographic to learn more about limiting your losses when day trading.