Spark Global Limited Reports:
Day trading can be rewarding, but it can also be challenging, and most traders fail because they can’t control their emotions or develop a winning mentality.
When most people first get into day trading, they think that all it takes is a great trading strategy and analysis.
After that, they just have to go to the market every day, trade using their strategy, and the market will immediately start pumping money into their account.
Unfortunately, as any professional trader knows, this is not easy. There are many traders who have sophisticated trading strategies and systems, but still often suffer losses rather than profits.
This article is for those interested in the stock market and day trading, as well as those wondering how to determine the size of an account should get started.
But before we go any further, let’s talk about day trading.
What is day trading?
Day trading is a form of market speculation in which participants continually buy and sell stocks or other financial securities and then sell them on the same day for a short-term profit.
Before the end of the trading day, traders will exit all positions and make a profit or loss.
Day trading is a completely different way of investing than long-term investing. Long-term investing is when investors hold stocks or other securities in the hope that they will increase in value over time.
By opening and closing positions on the same day, day traders eliminate the risk of explosive volatility overnight.
Day trading capital
Not every day trader starts with the same amount of capital. The amount of cash you have (the size of your trading capital) will determine the size of the position you can enter the market.
Position size is the amount of money you trade.
The bigger the position, the more profit you can make if the trade wins. But it also means you could lose more.
That’s why deciding the size of your trading account is so important, because you can protect your money from trading losses and stay within proper money management.
Decide the size of the trading account you should start
If you are new to day trading, you are not entitled to start using real money until you have first proven that you can turn a profit in a trading simulator.
The next step should be to understand the concept of the break-even ratio.
Without realising it, most traders end up with negative breakeven ratios, meaning their average losses are often double or even triple their average profits. That’s a tough metric to overcome and make a profit on.
So we tell our students that it’s best to take a conservative approach and start day trading with no more than 1-2% of your account at risk per day.
While you should risk 1% a day, your goal should be to increase your account’s return by 2% a day.
This is also in line with our minimum p&L ratio, where the profit is at least twice the risk, and the p&L ratio is 2:1.
For example: If you have a $5,000 account and you risk 1% every day, that’s $50. That means you made $100 while risking $50.
This could mean that you traded 500 shares at $3 a share (total cost $1500)
If the price falls by more than 10 cents, you will have reached the maximum risk loss you are willing to take. (0.10 x500 shares = $50)
To allow this trade to be combined with our standard trading plan then you need to have a reasonable expectation based on setup, technicals and momentum that the price will hit $5.20 giving you a reasonable risk profit target of $100 (0.20 X 500 shares = $100) only at risk of $50 (0.10 X 500 shares = $50)
Based on about 250 trading days a year, if your goal is to make $50,000 a year before taxes, you need to make an average of $200 a day. From there, you can make sure you want at least $10,000 in a trading account to start. This would be an ideal scenario just to start the calculations from.
Each transaction can be riskier, starting with a smaller account. But by doing so, you run the risk of depleting your account when you make withdrawals.