I started day trading in 2005. The following lessons got me to profitability and have allowed me to make a living off the markets since then. Some of these lessons were taught to me while I traded at a proprietary day trading firm for several years, and others I learned on my own through trial and error.
Hopefully, these day trading lessons help you on your path to profitability…or to stay profitable if you have already achieved some success.
Keys to Day Trading Sucess
Here are 12 lessons you can use to increase your chances of day trading success.
1. Control Daily Losses
No matter how good a strategy is, we can have impulsive days or days where our strategy doesn’t suit the price action. If I lose 3% of my account in a day, I’m done for the day. That’s equivalent to 3 losses risking 1% of my account per trade.
I call this a daily maximum loss. When starting out, don’t risk 1% per trade. That’s the end game. Start out risking 0.1%, and have a 0.3% maximum loss for the day. Losses occur more often when you’re starting, so you don’t want your capital dropping too quickly. As you get profitable, then you can increase your position size, and along with it your maximum daily loss.
The maximum daily loss should be roughly equivalent to your average winning day. This way, one average winning day erases a bad losing day.
2. Risk a fixed % of the account per trade
I have no idea which trades will be profitable, only that over many trades my strategies produce a profit. Therefore, I risk the same amount on every trade.
I don’t “load up” if I really like a trade, because if it doesn’t work, then I’m facing a big loss. I set a fixed risk limit to avoid that scenario. Big losses kill performance, because they wipe out lots of profitable trades, undoing all the progress that has been made.
I risk 1% of my account. When starting out, risk much less…like 0.1%.
This determines my position size, along with the stop loss size for each trade.
3. I use a stop loss on every trade
Before my trade, I set my stop loss and it goes out at the same time as my entry. ALWAYS.
If the stop loss is hit, look for the next trade.
The trade didn’t work. End of story.
Never let a loss be more than expected because the stop loss wasn’t placed.
If your broker doesn’t allow you to place a stop loss at the same time you enter a trade, get a new broker.
4. Only take a trade with 1.5:1 reward:risk OR GREATER
Nearly all my day trades are between 2:1 and 3:1 reward:risk. If I can’t get that (discussed next), based on typical movement, I don’t trade.
You already how where your stop loss is going if you follow the lessons above. The next part of this equation is the target.
5. Target must be within typical movement
Prices only move so much. My target must be within typical movement.
If the price moved $0.50 in one direction before a big pullback, my target must be less than $0.50…maybe $0.25 to $0.40…unless I’m willing to hold through a pullback.
Reward:risk means nothing if the target is unlikely to get hit. Take your stop loss size (difference between entry and SL) and multiply it by 2. That is how far the price must move to reach your target.
Look at recent price moves. Based on your entry, does the price move enough to reach that target EASILY?
Look at how long it took price to move that far in the past, and how price moved. Are you willing to hold this trade that long, and through similar conditions? See the Price Action Day Trading Cheat Sheet for more on this topic.
6. I prefer small stop losses or over large
Most traders “give their trades room”. That’s often a mistake, because you sacrifice your reward:risk. If a stock only moves $0.50 in an hour (or whatever time frame), the bigger the SL, the less room left for profit.
If I use a $0.05 stop loss I may be able to get in and out multiple times, capturing $0.10 profits. Since I am risking 1% of my account, my account gains 2% on every profitable trade. I can often do this 1-4 times in an hour. Even if you only win 50% of your trades. Do the math to see how much a day trader can make.
If I “give it room” and use a $0.20 SL, the price has to move $0.40, almost its entire hourly movement, just to give me a single 2:1 trade. Worse yet, many trader’s SLs are so big the price has almost no chance of hitting their target for hours with a 2:1 or 3:1 reward:risk.
7. Wishful thinking kills you
Trade what’s happening now. If price is trending, don’t assume it’ll change until it shows evidence. If it’s choppy, don’t assume it’ll change until it does.
This goes back to the reward:risk discussion above. Your target must be within what the market is providing.
8. What about stop hunting?
If I get stopped out, I lost. I look for the next opportunity.
If we have a favorable reward:risk, we still come out ahead even if we lose more than 50% of our trades.
If you’re losing all the time, you can’t blame stop hunters. It’s your strategy that needs work.
If your stop gets triggered and then the price goes in your direction, you’re in too early. Wait for the stop out move and then get in. And you will still lose sometimes.
9. Commentate while you trade
We are highly distractable. To stay focused continually repeat what trade setup you’re waiting for and what price has to do to create that opportunity. If price isn’t forming your setup, tell yourself that and remind yourself to wait.
This may sound silly, talking to yourself, but if you don’t consciously focus on what you need to, your mind will find something else to think about. Impulses will take over, and you’ll be missing trades or taking random trades before you know it.
Commentating is one of the best ways I have found to eliminate impulsive trades, random trades, and missed trades.
10. A mentality of “only the best” is better than “I want to trade”
People who fail sit down and want to be active. They WANT to trade. They don’t understand that the market provides our opportunities. They want to trade, so they take trades when conditions or trade setups aren’t good.
I sit down and tell myself (continually while trading) I won’t trade unless I see something great. If you sacrifice quality, there are infinite low-quality trades you could take. Most will lose. One quality trade a day is better than 5 low-quality ones.
One, or a few quality trades per day, assures profit over the course of the month….assuming a good reward:risk (discussed above) and even a 40% win rate.
Lots of low-quality trades result in the death of your account. The win rate, taking low-quality trades, will be too low.
11. Review and mentally prep
Each week review your trades. Note common mistakes. Pick the most costly common mistake and brainstorm how to improve it. The quickest way to improve is by reducing mistakes. That’s money your strategy is giving you that you are throwing away.
Do this every week. It never ends. It is part of trading.
I also work on my mental game every week. I write down things I need to remember for next week. I write or think about what is helping or hurting my trading. I strategize what to do with that information.
12. Enjoy the journey
I love my life as a trader. I have free time and money to do other things I enjoy.
But I also enjoy my time trading. Whether I win or lose a trade, or a day, I have feedback I can use to improve.
I view trading as a way to improve my mind. Making money is a by-product. I like the self-discovery aspect of trading. And I think this is a healthy mindset for trading. If you view trading as a journey of self-discovery, then you are not upset or sabotaging yourself every time there is a little hiccup. The life of a trader has many ups and downs. If you expect the hiccups, the ups and down, you are better able to adapt to them.
Final Word on Lessons for Day Trading Successfully
I hope you found some of this helpful.
A lot of these lessons are rather simple and can be implemented quickly. Others will take more time to integrate.
If you start integrating some of these lessons, your trading will likely improve. Dig deeper into the lessons you don’t understand. They are all important and worth putting time into.
My day trading strategies are covered, in-depth, in the following courses:
by Cory Mitchell, CMT
Disclaimer: Nothing in this article is personal investment advice, or advice to buy or sell anything. Trading is risky and can result in substantial losses, even more than deposited if using leverage.