All of us and everything around us is exposed to risk. That is the reason why life insurance exists – to protect us from unexpected events that might drag our finances down the drain. There are also other kinds of insurances like car insurance, real estate insurances, marine, and many more. These insurances all have the same goal: to protect us, our family, and our finances.
It is also the same in our trading life. We have to protect our capital. We wouldn’t want our losses to keep eating our capital until it is eventually wiped out, right? That is why it is important to set a level of risk you are only willing to lose and know your risk appetite. Keep in mind that you should not be complacent with the thought that the stock market always rises, because as much of a cliché this sounds, “What goes up will eventually come down.”
So what do we do to protect our capital? Here are some basic points you could use when trying to minimize your risk.
PLAN YOUR TRADES
The first is to plan your trades. The stock market is a highly volatile market so going in head first without a plan, is like going to war without a concrete battle plan. Know that you are not the only one that will pursue day trading, so there will always be someone waiting to pick your pockets through making you cut loss, and them, well, rich as they buy what you sold for a lower price, to a much higher price. Planning ahead of your day trades would highly predict your success and failure. I know that you do not ever plan for failure, but failing to plan, would always mean that you are planning to fail.
DIVERSIFY YOUR PORTFOLIO
I think you already know the saying to never put all your eggs in one basket. Spreading out your trades in different stocks when day trading is always a good decision. You cannot predict the market so going all in one stock will put you in a position of losing all your money. So how do we diversify? Do I trade 15 different stocks daily?
Actually, for a beginner, start focusing on 2-5 stocks in trading. In that way, there is balance in all your trades in case one of the stocks you are trading doesn’t go with your analySesis, the other four will offset the loss. This helps you still capture your gains while minimizing your losses. Try separating your trades through different sectors. In that way, you could mitigate your risks, and still be open to new opportunities.
SET STOP-LOSS AND TAKE-PROFIT POINTS
Stop-loss and take-profit points are like your alerts. When you plan your trades, you always consider these points because they help you become objective when you are actually doing your trade. These points prevent day traders to have an “It will come back” mentality and limit your losses before they escalate further and expose you to a much bigger loss.
The take-profit on the other hand is the price at which a day trader will sell a stock before it consolidates. When the stock’s price is going higher, you may be more inclined to wait for it to go higher before you do the actual profit-taking. This will make you enjoy and keep your profits while protecting you from being held longer than what you planned in a stock.
HAVE A SOUND PSYCHOLOGY
It would be very easy for day traders to lose themselves in the heat of the madness and dramatic moves of the market, but know that the market must be volatile because that is how they work. You will need the volatility for you to profit off of it.
Even the most seasoned traders lose in the market. Just in case that you might be having losses, just take a little break and try to regain your perspective. Breathe, and remember that you are not your trade.
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