The rise of the internet has transformed the investing/trading world. With many brokers offering instant demat accounts nowadays, entry barriers have dropped tremendously. With this easy accessibility feature and the associated online trading feature, many traders can day trade from the comfort of their homes using just a smartphone.
Day trading is a risky endeavor that involves buying and selling securities. All these are executed on the same day. While many commence day trading to earn huge profits rapidly, most of these traders lose money. While the reason behind their failures is varied and numerous, most of them shared a common thread: lack of a day trading plan.
In this article, we will talk about what a day trading plan is and what factors should be considered before creating a day trading plan.
What is a Day Trading Plan?
While many fail day trading due to numerous reasons, two of the most significant factors behind these failures are:
- The absence of a trading plan, and
- Psychological pressure on the trader.
Being emotionally invested in the market is a recipe for disaster among day traders. A day trading plan can help the trader overcome this issue and successfully execute trades according to the envisioned way.
A day trading plan is a framework that aids a trader in the decision-making process. This framework/strategy is planned beforehand and referred to while trading in the market. A typical day trading plan has the following attributes:
- Entry/Exit Criteria: Sticking to these criteria would help the trader in the timely execution of trades without emotions clouding judgment.
- Risk per trade: This principle limits the risk taken per trade. This involves setting up either a stop-loss or a trailing stop-loss.
- Keeping a record of trades executed: This helps traders learn from their past mistakes. Maintaining a record of all the trades executed helps traders in further evolving their day trading plan/strategy.
Factors to be considered before creating a day trading plan.
- Before beginning day trading, you should know how to read a chart. You should be familiar with candlestick patterns, indicators, and oscillators. Understanding technical analysis is necessary to develop a unique trading strategy that generates profit.
Lack of proper trading knowledge often leads to reliance on the trade recommendations of others. This leads to risky trade executions, which often result in losses.
- You should set aside a fund and utilize this fund only for day trading purposes. This fund should be the amount of money you can afford to lose. This is done because there is a possibility of you losing all your capital/money while day trading.
- Since all securities are not suitable for day trading purposes, you should select and trade on those securities optimal for day trading purposes. Securities ideal for day trading purposes should have good liquidity, volatile but not too volatile, and some form of familiarity
- Select a trading strategy that is well-suited for you. Some typical strategies followed are scalping, fading, range trading, momentum or trend following, etc. The goal here is to specialize in a specific strategy that gives you an edge in the market. It is possible to pick up certain elements from each of the different strategies to form a complete day trading strategy, as long as it enables you to profit from the market.
- Risk management is crucial to succeeding in day trading. This is all about limiting your downside potential if a trade goes awry. It deals with the potential risk-to-reward ratio of a trade executed. This determines how much of your capital or what percentage of your capital you are willing to risk for a given amount of reward.
If not managed properly, a single potential downside has the potential to wipe out the trader’s capital. Proper risk management stops small losses from turning into huge losses and preserves the trader’s capital for future trades.
Conclusion:
Day trading can be a profitable undertaking. A day trading plan is essential to being a successful day trader. Setting up a proper day trading plan with proper risk management and a strategy that gives you an edge is imperative to succeed as a day trader.
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