Let’s discuss seven important day trading lessons from experienced day traders.
A lesson is learned or taught, often through a formal learning experience, such as in a classroom setting, or informal, such as through real-life experiences. A good lesson teaches you something new and valuable that you can apply to your life.
As day traders, there are lessons all around us, but are we paying attention? Sometimes these lessons are obvious, and sometimes they’re hidden. But if we’re open to learning, we can find them along our day trading journey.
So, what’s the best way to learn a trading lesson? That depends on the person and the situation. Some people learn better by watching a webinar, listening to a podcast, or reading a book, while others learn better by making their own mistakes. Unfortunately, there is no wrong way to learn if you’re actually learning something!
One of the most important things to remember about lessons is that they don’t always have to be significant life-changing events. Sometimes the best lessons are the small, everyday ones that we can simply apply to our lives.
If you are new to day trading, be prepared to learn a few tough lessons. To help you along the way, I’ve scoured the internet to collect seven hard lessons from several experienced day traders.
1. Consistently Take Small Gains
Many experienced traders discuss the important lesson of taking small profits over big gains. In other words, don’t be greedy. Accept those little wins.
Easier than it sounds, right? Most traders agree that it’s easy to get caught up in the rising green numbers on your screen.
Most traders fall prey to dragon sickness – going mad from greed, which leads them to lose money.
One trader said he caught a few calls at the right time and saw his account jump high in the green. Rather than taking the profits while he was in the money, he watched the numbers increase. He was engulfed – full-on dragon sickness. But then that number started to dip. Since it was “only a loss of $100,” i.e., “no big deal,” he held on, hoping it would go up again. But the volume disappeared, and the price tanked.
Here’s a lesson for anyone who wants to be a successful trader.
Do not give your profit back.
Dragon sickness is very typical without a risk management strategy. Before going into a trade, decide what profit percentage you want to make. Set your profit order to that percent, so it just triggers to sell on your behalf.
2. Know Your Limits
Most people will tell you that an important life lesson is to know your limits. The same goes for day trading.
Have you ever tried to enter a trade and received a message that you are not allowed to buy or sell because you’ve exceeded your three–trade limit or your options buying power? This lesson hurts when you are on the verge of an excellent opportunity to trade. Unfortunately, you will have to wait a day.
Pattern Day Trading Limit
The Financial Industry Regulatory Authority (FINRA) has set this in place to govern registered brokers in the United States. According to Finra.org, the exact rule is:
Under the rules, a pattern day trader must maintain minimum equity of $25,000 on any day the customer trades. The required minimum equity must be in the account before any day-trading activities. If the account falls below the $25,000 requirement, the pattern day trader will not be permitted to day trade until the account is restored to the $25,000 minimum equity level.
The rules permit a pattern day trader to trade up to four times the maintenance margin excess in the account as of the close of business of the previous day.
In other words, pattern traders get three-day trades every five business days.
Options Trading Limit
Likewise, if your account is small, your ability to day trade is limited. In terms of exceeding the limit of your options, set a daily budget and conserve your contracts. With options, some strategies allow you to know exactly how much money is at risk before entering into the trade.
Case in point:
If you buy call or put options, the most you can lose is the dollar amount you spend. For example, suppose XYZ stock is trading at $50, and you purchased one call option contract on XYZ stock with a strike price of 53 at a premium of $5 per contract. This trade’s cost— equal to the maximum potential loss—is $500 ($500 = 1 call option contract $5 premium 100 shares per contract).
Alternatively, if you were to sell one call option contract, the most you can make is the premium received, but the most you can lose is unlimited. Let’s say you sell one contract on XYZ stock with a strike price of 47 at a premium of $5 per contract. If the stock dropped to $45 during the contract’s life and the option was not exercised, you would make money.
However, if the stock rose to $55 during the life of the contract, you would lose $3 per contract, or $300 ($500 gain for selling the option minus $800 for the stock price rising $8 above the strike price). If the stock rose to $60 during the contract’s life and exercised, you would lose $8 per contract, or $800, and so on. Hypothetically, there is no limit to how much you could lose when selling options. [Fidelity]
While the appropriate dollar value of the trade should depend on your tolerance for loss (i.e., how much you are willing to lose), the size of your trade (i.e., the number of contracts) is determined by your tolerance for loss as well as the gain/loss potential per contract.
While starting out, remember to trade small, limit losses, and be aware of the contract time frame.
3. Cut Your Losses Quickly
As alluded to earlier, this lesson is straightforward but often quite difficult to execute. For example, you get into a trade that looks great but reverses and goes south quickly. Unless you see technical data on the charts that indicate it’s going to bounce on a resistance line. Cut your losses. Have an exit strategy. Set a stop-loss.
How to Set a Stop Loss?
Learning how to properly set a stop loss is one of the most critical lessons for day traders. There’s no single answer to this question, as the best way to set a stop loss will vary depending on your trading strategy and goals. However, there are a few general guidelines you can follow when setting a stop loss in options trading.
First, you’ll want to consider where you would exit the trade if it went against you. This will help you determine an appropriate stop loss level. You’ll also want to factor in the volatility of the options market when setting your stop loss. If the market is more volatile, you’ll likely need to set a wider stop loss to account for potential swings in price.
Once you’ve determined an appropriate stop loss level, you can place your order with your broker. Be sure to specify that you’re setting a stop loss so that your order is executed correctly.
Remember, there’s no perfect way to set a stop loss. But taking advantage of these guidelines can help you make informed decisions about where to exit a trade if it goes against you.
4. Manage Your Risk
One of the hardest lessons of day trading involves risk management. Some traders lose substantial money during their first few years of trading. Why? Because they have no plan for risk management.
Risk management helps cut down losses. It can also help protect traders’ accounts from losing all of their money. The risk occurs when traders suffer losses. If the risk can be managed, traders can open themselves up to making money in the market. (Investopedia)
In other words, how much are you willing to lose before you force yourself to sell your trade? Are you okay with a 5% loss? 10%? 15%? Okay, you decided on a 10% loss for your trades; great. Now when do you call it quits for the day or week? Are you okay if your whole account drops 5%? 10%? 15%?
Percentages add up quickly.
Create a risk management plan for the risk you are willing to endure.
5. Don’t Spend What You Can’t Lose
An additional hard lesson from day traders relates to overspending. If you can’t afford to lose the money, do not put it in the stock market. An experienced day trader will not place trades they cannot afford to lose.
So, for example, if you have $10,000 in your account and lose it all, but that loss doesn’t affect your daily budget, that is okay. However, if you are conducting trades and you lose all the money in your account and cannot afford to pay your monthly bills, that is a losing scenario.
Be wise with your money, assume that whatever you put into the market is lost before you start.
6. Don’t Chase a Trade
If you missed an entry point, wait patiently for another opportunity. Don’t just dive in. And do not buy based on gut actions. These decisions often turn into losing trades.
Successful day traders apply trading strategies based on confirmations and a system that has been tested and tested again. This requires proper education and practice, and once the teaching and training are there, the day trader has dramatically improved the risk-to-reward ratio.
7. Avoid Peer Pressure
In order to bypass the hard lessons of day trading, do not jump into a trade just because someone else says it looks good. Likewise, don’t fall into the FOMO “fear of missing out” trap.
Are you a trader who loves to monitor daily news trends and social media accounts? This is a widespread problem. Essentially, people in the market can become affected by “chat rooms,” social media posts, direct messages from “specialists” with targeted marketing campaigns, and many other sources
(see Top 9: Day Trading Mistakes).
These efforts by marketing companies and influencers can sometimes affect a day trader’s decisions to enter and exit the market. Therefore, staying committed to a good day trading program, one based on research and learned professionals, is essential so that the day-to-day trading activities do not lose focus.
Do your due diligence. Learn to read the market and develop a trading strategy that works for you.
Summary: Day Trading Lessons
In sum, this article has covered seven important day trading lessons for day traders. These lessons involve taking small wins, knowing your limitations, managing risks, conserving your money, sticking to a strategy, and avoiding peer pressure.
From these lessons, it’s obvious that day trading is not easy. There is no such thing as easy money. At the same time, even if you take several significant losses, don’t give up so easily. Instead, always have a plan, never risk more than you can afford to lose, always use stop losses, take your profits when you can, and keep your emotions in check.
These lessons will teach you much about finances, markets, and emotions. If you never received much financial education, particularly in day trading, but want to learn more from someone who has “been there,” follow me, Maurice Kenny, for more.
To Learn More
Maurice Kenny has helped over 600 people become financially free through one-on-one coaching, mentorship, and options trading strategy. Many of these new traders are now full-time traders, and they all started by watching his 1-hr webinar.
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