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Day trading is a trading style that seeks to profit from trades that open and close in the same day. Trading in this way avoids several risks, like overnight and weekend risk. However, day trading has certain weaknesses and in order to perform day trading on a long-term basis, your overall strategy needs to account for these weaknesses.
Weaknesses Of Day-Trading
Given that day trading typically takes place on 5-, 15- and 30-minute charts, it can be difficult to distinguish the signal from the noise. That is, it is difficult to tell whether price moves are legitimate, meaningful price action or just someone close out a large position.
Despite the simplicity of many day trading strategies, practice and research must still be undertaken to be able to identify opportunities quickly and to effectively execute the trades with precision.
A Robust Strategy For Day-Trading
For a strategy to be robust, it must be able to handle losses. The thing with day trading is that, since it is built upon a lot of small trades, losses can really take a toll. There are a few guidelines you can add to your strategy that can reduce your risk.
Trade Only With The Larger Trend
The lower the timeframe of the chart you’re looking at, the less significant the price action that is occurring. That’s why it’s a good practice to be aware of what is happening in larger timeframes and be committed to only trading in that direction.
That means if there’s a downtrend on the larger trend, then you should only be shorting on your shorter timeframe.
Trading with the larger trend avoids getting caught up in the noise. Countertrends do happen, but they are much harder to identify and are likely to be much shorter than with-trend impulse moves.
Set A Daily Loss Limit And Stick To It
There are days when our trading is simply not acceptable. In day trading especially, we can be prone to a gambling mentality and trying to “win our money back.” Effective trading requires mental discipline. If you cannot see your poor trading performance through your own self-awareness, take a look at the numbers on your trades.
Set a daily loss limit like 5% of your total account. If you lose 5% of your account in one day of trading, commit to walk away. You will still have 95% of your account to trade tomorrow.
It is not worth the risk when you let your emotions be the boss of your trading. If you fool around and get your account wiped out, you won’t have any capital to trade tomorrow. The money in your trading account may be the most important you have. Protect it by committing to stepping away when too much of your money slips away.
Conclusion
Day trading is a style of trading that avoids the uncertainty of events that could happen overnight or on weekends, but it also comes with risks of its own. The nature of day trading is such that it can be hard to identify meaningful trading activity against the backdrop of normal short-term price activity. By only trading with the trend of larger timeframes and committing yourself to a daily loss limit, you can mitigate these risks and start making stable profits in the long-term.
