Day trading is a great way for those looking to not only make some extra money, but also can expand your investment portfolio. However, like anything else that costs money, there are risks to day trading that you need to be aware of before you get started. The more you learn about the market and the steps you can take to protect yourself from a financial downturn, the better off you’ll be in the long term.
If you’ve been thinking of learning how to day trade, it’s important you start on the right foot. Here are some of the biggest problems that new day traders face, and how you can avoid them.
Failure to Properly Manage Risk
One of the biggest dangers that day traders face on a regular basis is an inability to manage their risk. Before you begin spending your money on Forex trades, stocks, or futures, it’s important to have a strategy in place that lets you know when you need to retreat from a trade, and when you should keep going.
The easiest way to launch your risk management strategy is to begin by placing a stop loss on every trade. This simply means that when you lose too much money, you automatically pull out of your negative position. This can help you from losing too much cash too fast.
You can also put a limit on how much you can afford to lose each day. If you reach your “daily stop loss,” you stop trading for the day and come back 24 hours later to start again.
No Proven Strategy
If you’re new to day trading, then there’s a good chance you haven’t had time to build a great strategy yet. Don’t worry; you’ll learn more about the marketplace and what you need to do to master it as you go along. However, rather than wasting your money on strategies that you aren’t sure will work, it may be a good idea to improve your chances of success by “paper trading” or virtual trading before you use up your cash.
Virtual trading allows you to test your trading strategies in a safe, simulated trading environment, without spending any of your money. You won’t win anything this way, but you won’t lose your money either, and you will end up with a better knowledge of the market.
Finally, most people don’t need anything special to start engaging in the day-trading market, but you will need at least a fast-enough computer that you can get in and out of trades quickly. Some experts recommend using a computer with two monitors. However, this isn’t always necessary.
What is important is that you have a fast internet connection, and a back-up power supply in case something goes wrong when you’re in the middle of a trade. Without the technology to keep yourself online during the most important times of the day, you could be helpless when your computer shuts down, and you’re left unable to exit a failing trade.