Day Trading Risk Management

Day Trading Risk Management

Not risking too much money in a particular trade is of vital importance for day traders. Unfortunately, when most people start day trading, they do not think about the danger that they are

Every day trading strategy must take into account the maximum share of total trading day capital, which should be risked in a transaction. In fact, a Day Trader's ability to limit its losses is just as important (or even more important) as his success in managing to win crafts.

Think about it. If a dealer lost a small amount on each transaction, he will not stay in the game much more? Faced with huge losses is one of the main reasons why so many dealers will not survive in this business. Why dealers commit financial suicide this way, you may ask? If all the big losses start small, it should not simply to prevent loss of a small stake? The answer is "Yes".

Limiting losses when daily transactions with a lot of common sense. First, I do not believe that every dealer should risk more than 2 to 5% of its capital trading on a particular trade. Why? If a dealer sticks to a 1% to 2% maximum loss guideline, his chances to stay in the game are greatly increased because there will be many consecutive losses to wipe it out and it will be more opportunities available to him.

If a dealer Trading A $ 10000 account, he should not lose more than $ 100 to $ 200 (1% to 2%) to each position. With the same reasoning, if it is a trading company that the $ 100000 in size, the maximum loss can be increased up to $ 1000 or $ 2000 per trade. Based on these percentages and the amount of price against the trader can (out of the charts), he may be the maximum size of its position. This is much clearer with an example:

Position sizing example of the use of shares (remember that trade stocks to day you'll need at least $ 25000 in your account by law, so I will use an account size of $ 30000 in the example below)

Assume that an investor has a $ 30000 account to day-trade stocks. He wants to trade with Intel (INTC) stock, which is at $ 30 per share.

Based on its strategy, it finds that the stock can appreciate $ 1.00 during the day, but the benefits of appreciation, he must risk $ 0.50. Because he has a intraday margin of 25% (4 to 1 leverage), he can be a maximum of $ 120000 position in INTC with its $ 30000 (4 x 30,000 = 120,000). Should he do it? Let's do the numbers.

With $ 120000, traders can buy 4000 shares of INTC (120000 / 30 = 4000). If INTC moved up 1 point, the dealer profits $ 4000 If it drops $ 0.50 (his stop-loss), he loses 2000. A two thousand U.S. dollars loss represents 6.7% of its commercial capital - much too big a risk for him. Consequently, a 4000-shares INTC position is too big for his account size. On the basis of a 1% ($ 300) maximum loss, the Day Trader should not buy more than 600 Intel shares (300 / 0.50 = 600). Based on a 2% ($ 600) risk, the maximum size of the trade is 1200 shares.

Risk of day-trading (or in any other form of speculation) must be controlled. An effective means of risk management at the trade is not by taking over a position higher than an account of a certain size can handle. While some authors and "experts" have complicated method of determining position size, these methods tend to confuse traders and slow them down. The 1 to 2% guideline easier to use in my opinion. It is common sense more than anything else. Not for trading on a day other statistics - limit your losses all the time with protective stop orders!