Home > Lessons from the trading floor > day trading and money management

day trading and money management

Day trading for a living requires discipline. Of course we all know about “stop loss” discipline but what about the decision you must make before you decide on a stop loss point for an unprofitable trade?

How much are you going to risk on the trade? This must be a definite dollar amount you are comfortable placing at risk. Whatever this dollar amount is to you, it must be consistent. This decision is money managment. How you manage the trade after you are in the trade is risk management.

Why is it so important that this dollar amount be a number you are “comfortable” with? Most new traders enter a position thinking about how much they can make on a trade, if the trade moves against them they are not prepared to take the loss because they never thought they would need to. This is what turns reasonable small losses into account draining catastrophes.

In order for you to earn consistent money as a stock trader you must exit losing trades flawlessly. It will be easier to do if you “look both ways” before you put the trade on. If you accept the possibility of a loss or profit on any trade and you are comfortable with the amount you are risking on each trade you will never let one trade blow you up.

I have seen it time and again where a talented trader sits on a losing trade for hours or days just because he or she did not have a money management plan. If you accept the risk (the dollar amount) before the trade, a flawless exit is a cinch! Once you have decided on a dollar amount, then stop loss and this dollar amount will combine for the amount of shares you will have in the trade………more on this in a later post 🙂

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