How to Become Amazing at Day Trading

There is a lot to know when you start day trading. This list of 20 tips will help you make sure that you are starting on the right foot, have a plan in place, and know how to manage your risk.

Create a Trading Plan

Silver-haired man day trading on a computer in front of three monitors

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Before a single real dollar is put at risk, a trader needs to have some idea of how they will make a profit. The steps that will be taken to attain those potential profits are laid out in a trading plan. A trading plan is a personal, written document that states what we will trade and when, how we will enter a trade and why, when and how we will get out of winning and losing trades, and how we will determine our position size. These are the basics. Additional rules can be added over time as needed.

Prove Your Methods Before You Trade Real Money

With a trading plan in place, the next task is to test that plan in a demo account to see how it performs. Demo or "paper" accounts allow you to place hypothetical trades that don't risk real money. This is a crucial step for beginning traders since most day traders suffer severe financial losses in their first months of trading.

If the plan doesn't work in a demo account, it won't work in the real world. Revise the trading plan, then go back to the demo account to test out the changes. This process continues until a profit has been made for several months in a row. At that point, it is likely the trading plan is a good one. The following tips will help you get your trading plan to that point.

Create a Day Trading Routine to Avoid Mistakes

Create a routine for the trading day. A routine includes getting up at the same time each day, starting to trade at the same time each day, and checking for scheduled economic data releases that may affect the market.

Quit trading for the day at a set time, and then have a routine for reviewing all trades taken. In terms of each trade, have a checklist you run through to make sure that each trade aligns with your trading plan.

Don't Hold Positions During High Impact News Announcements

High impact news releases are unpredictable in both how far they may push the price, and in what direction. High impact news events include company earnings announcements and scheduled economic data releases. Avoid holding day trading positions during such events. Instead, wait till after the news is released. Then, use day trading strategies to capitalize on the volatility that ensues. 

Review Trades Weekly and Monthly

A review is critical to long-term success. Without review sessions, a trader can't see the overall picture of what they are doing well and what they are doing poorly.

Each day, take a screenshot of your chart with all your trades marked on it. At the end of the week, review the charts for the prior week and note deviations from the trading plan. Note any areas of the trading plan that could be improved. Write down a plan for how to implement these improvements.

At the end of each month, review your weekly plans and note whether you have made progress on these or not.

Create a Mental Checklist That Each Trade Must Satisfy

When watching a price chart, it is easy to get distracted from the trading plan. Prepare a checklist to run through before every trade. The checklist makes sure that the trade meets all the specifications laid out in the trading plan. It only takes a second to mentally go over the checklist, but it can save a trader from many bad trades.

Have a Plan for When Your Weaknesses Pop Up

Each trader has weaknesses and strengths. Over time, traders will notice their weaknesses, such as not taking a loss when they should (and letting it get bigger) or taking trades that don't align with the trading plan (and thus, these trades are based on an unproven strategy). Such weaknesses can cause big losses in a hurry. Have a personal plan for what you will do when you notice yourself making one of these mistakes.

The plan may include closing the trade immediately, followed by a mandatory 10-minute trading break. Or, it may even include hiring or asking a friend to work with you on the issue until the weakness is eliminated.

Utilize a Stop-Loss Order

A stop-loss order gets a trader out of a trade if the price of an asset doesn't move in the expected direction. It is the point where the trader must admit they are wrong. It is impossible to predict what the market will do from moment to moment with great accuracy, therefore losing trades do occur. The stop-loss protects the trader from bigger losses during those times. Use a stop-loss.

Risk Less Than 1% of Capital Per Trade

The stop-loss should be placed where it limits the damage caused by a losing trade to less than 1% of the trader's account balance.

This 1% risk, in dollars, is the account risk. The difference between the trade entry price and the stop-loss price is the trade risk. Trade risk, multiplied by the position size, should be equal to or less than the acceptable account risk (1% of the account).

Stop-Losses Are Based on Today's Market Conditions

Place stop-loss orders based on a proven strategy, but also base them on the volatility being seen today. If a stock is much more volatile today than it has been in the past, the stop-loss needs to reflect that. Expand the stop-loss to give the trade a bit more room to move, and reduce the position size accordingly. On very quiet days, the stop-loss can be moved closer to the entry point.

Profit Objectives Are Based on Today's Market Conditions

Just as stop-losses are adjusted to accommodate for changes in volatility, so are profit targets. Targets are orders that get us out of a trade when in a profitable position. During volatile times, targets can typically be moved further away from the entry point, and they should be.

Setting a more ambitious profit target offsets the larger stop-loss also used during such times. When there is little volatility targets can be reduced, as stop-losses are also generally reduced during quiet times.

Potential Reward Should Outweigh Risk on Every Trade

Overall profit is determined by what percentage of our trades we win, and our average winning amount versus the average loss. Day traders should strive to have average winning trades that are bigger than their average losing trade.

That means only taking trades where the target has a reasonable chance of being hit and can be placed at a further distance from the entry point than the stop-loss. For example, if the stop-loss is $0.10 away from the entry, then the target is $0.20 away. In this case, the potential reward is twice the risk.

Implement a Daily Stop-Loss

Just as a day trader should control risk on each trade with a stop-loss, a trader should also cap how much they are willing to lose in a single day. Bad trading days happen. We can't let those days ruin our entire account. Limit single-day losses to an amount you can reasonably make back on a profitable day.

New traders, who don't know how much they can make on a profitable day, should limit single-day losses to 3% (or less) of their account balance.

Use Limit Orders When Entering Positions

A limit order will only execute at the price specified, or better. When entering a trade, we use limit orders to control at what price we will enter the trade. If you use market orders, your entry price might be different than expected, which may throw off your whole plan for that trade. 

Trade the Same Time Each Day

Markets have different tendencies at different times of the day. The most efficient approach to day trading is to implement strategies that work well at a certain time of day, and then only trade during those times. 

Focus on a Single Market at a Time

Some new traders feel a compulsion to trade anything that is moving. These traders typically end up mastering nothing. Focus on one market, and even one specific instrument (such as one stock, forex pair, or ETF), and become a master in it. Becoming a master in one thing will produce far more consistent results than being poor at trading a bunch of different things. 

Price Action Is More Important Than Indicators

How an asset's price is moving is more important than what an indicator is saying. Most technical indicators look at historical prices, and therefore, they can't tell you what is happening right now. The actual price will tell you what's happening now.

That isn't to say technical indicators can't be used, but they should only be used to supplement the information coming from price action.

Don't Let a Single Mistake Turn Into More

Trading mistakes happen. They are annoying, and they usually cost some money, but they won't prevent you from being a profitable trader—as long as you put a lid on the mistake right away.

Don't let a mistake fester, bother you, or cause you to make more mistakes. Accept that mistakes happen, and then move your focus back to implementing your strategy. Our goal should always be to trade another day. If we let a mistake force more mistakes out of us, we could lose a lot of money in a hurry. 

Avoid Distractions, Like Newscasts or Analyst's Opinions

A day trader's job is it implement a strategy that works, over and over again, as conditions allow. Outside input won't aid in this endeavor, and it may actually cause us to deviate from a profitable strategy we are already using. If you have a strategy that works, there is little reason to let other's opinions on the market influence your trading.

Trust Yourself, Your Research, and Your Practice

New traders often get stuck in an endless search for more knowledge, reading one book after another, watching video after video, and jumping from this guru to that guru. Realize that all this extra knowledge won't necessarily improve results. You only need to implement one strategy effectively to make a profit. Once you are doing that, trust yourself; after all, it is your money.

The Bottom Line

These tips will help you find and stay on the correct path to profitable trading. However, these tips are not substitutes for practicing a strategy, testing your own trading plan, or gaining experience in real-world market scenarios. Ultimately, your day trading success or failure will come down to the amount of work you put into it.

The Balance does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal.