Beginners are attracted to day trading because of the potential for profits. A key factor in profitable day trading is to control or limit losses. Too many who are new to day trading do not pay attention to the costs of their trades in fees and commissions. Others become so excited by their gains that they start taking risks and then lose months of gains in an afternoon. At DayTradeSafe we teach the skills and discipline needed to trade successfully and safely. Here are ten steps to master safe day trading practices for beginners.

Understand the Basics of the Stock Market and the Types of Day Trading Strategies Available

The markets are not casinos. They are regulated places where buyers and sellers of stocks, commodities, foreign currencies, futures, and options come together. The first step for someone interested in day trading is to learn the basics. Just one example has to do with “why.” At DayTradeSafe we commonly recommend day trading commodity futures instead of stocks. Stock traders are subject to the pattern day trading rule which then requires that that traders deposit a hefty margin with their broker. Likewise, commodity futures trading has less restrictive rules regarding day trading taxes than with stock trading. Knowing these basics before starting to trade will save novice traders a lot of problems.

Find an Appropriate Broker That Meets All of Your Requirements

Day traders need to have a broker through whom they make their trades. Be certain that the one that you choose meets your day trading needs. For example, you want to make sure that the broker’s software is compatible with your preferred platform for day trading. You will need real time futures data, a trade simulator, and the ability to back test and develop strategies. And, of course, you want a broker that provides competitive fees and commissions but does not take advantage of you via unethical trade routing practices.

Establish a Budget and Risk Management Plan For Your Investments

Day trading is a business. As with any business, a trader needs to start out with a plan. Critical to successful day trading are having a budget and a risk management plan for your investments in trades. When starting out you need to ask yourself how much you can afford to invest in the business of day trading, regarding both the startup costs and what you can invest along the way. Because you want to make money, you need a plan to manage risk. A common rule of thumb is not to put any more than 1% of your trading capital at risk at any one time. This means that, out of a $20,000 account, you will not risk any more than $200 at any one time. It also means that you will tend to avoid risky trades!

Research Company Fundamentals Before Investing

This advice may sound like it is aimed at long term investors, which it is. But it also applies to day traders. Hugely successful investors like Warren Buffett never invest in a stock unless they fully understand the business plan of the company and how that business plan is likely to generate profits far into the future. Although day traders focus on technical indicators to predict short-term price movement, they also need to have a basic understanding of the same company fundamentals so that they can recognize when a market uptick is the beginning of a new rally or a short squeeze that will quickly reverse.

Research Technical Indicators Such as Volume, Momentum, and Support/Resistance Levels

Technical indicators tell a day trader what the market is likely to do in the coming minutes and hours. First, a day trader needs to understand what momentum, volume and support or resistance levels mean. Then they need to learn how to use these indicators in their trading. Beginning day traders should never risk their own money in day trades until they have traded in simulation. Here is where the beginner learns technical analysis. Do not leave this safe arena to trade with your own money until you are routinely making profits and limiting your losses in simulation trading.

Analyze Financial Data Carefully and Research Current Trends Before Making Any Decisions

At DayTradeSafe we teach our students rules-based trade entries, management, and exits. These are the keys to consistent day trading results. One of the biggest recurring risks in day trading is greed and the anxiety it generates. A day trader executes a winning trade and wants to immediately repeat the experience. This is where trading can start to feel like a casino when a person is having a string of luck (before they start to lose everything). What a new day trader needs to focus on is how they started that successful trade by analyzing financial data, researching trends, and then making a reasoned decision.

Set Specific Entry and Exit Points to Stay Disciplined

Using technical indicators as a guide a successful day trader sets their entry and exit points for every trade going in. They make stop loss orders that get them out of the trade if it goes bad and give them a profit if the market quickly moves as expected. To take advantage of a rally as it occurs, a trader will reset their stop loss orders as the market progresses. This is what we refer to as managing your trades and staying disciplined.

Use Limit Orders Instead of Market Orders to Minimize Risks

There is always a time delay between when you place an order with your broker and when it gets filled. Market orders typically get filled faster than limit orders. Despite the potentially longer wait to get an order filled it is a good idea to always place limit orders. The issue is this. You are following the market and using technical indicators to make the best decisions. No matter how finely tuned your timing is, you may see an opportunity that vanishes in a heartbeat. The market order you just placed will lead to disaster. To avoid this problem, only use limit orders. There are times you will not get your order filled and those are generally the times when you would have immediately lost money!

Set Realistic Goals for Yourself and Be Prepared to Accept Losses When Necessary

Nobody is perfect and that includes you, Mr. or Ms. Novice Day Trader. In this regard, when you are setting up your budget and risk management plan, be realistic. Profit in day trading comes from making more winning trades than losing ones. It comes from avoiding huge losses that wipe our prior gains. Never “double down” on losing trades. Accept a small loss, think about how you could have done things better, and move on the next trade.

Practice With Virtual Trading Before Going Live

Practice, practice, practice. That is the punchline of a joke. The guy is walking from his New York Hotel to Carnegie Hall. He asks for directions from a man selling pencils on a street corner. Sir, how do I get to Carnegie Hall? Practice, practice, practice says the pencil vendor. So, how do I make money day trading. Go to your trading platform, pull up the simulation app. Never start trading for real until you are routinely making money in simulation. And when you are a seasoned trader and trades start going wrong, go back to simulation trading with real historical data and figure it out. Always remember that the problem might not be so much in your strategies but in the degree of discipline you are using to apply those strategies!