fyi ADVICE: DAYTRADER STRATEGIES:
· DAYTRADING STRATEGIES ·
HOW MUCH CAPITAL DO YOU NEED? - This is a very common question and one we receive quite often. By the same token, it's also somewhat difficult to answer. How much do you really need in order to start day trading. How big a "stake" (a term used to refer to your starting capital) is required to get going?
The only answer is that it's different for each person and it's something you must consider for yourself before you start. However, I personally feel that, generally speaking, you should have enough trading capital to purchase between 500 to 1000 shares of any given stock. Ideally, without having to use margin.
So, if you are in the habit of trading $40 to $80 stocks, this could mean you need as much as $40,000 to start. At the same time, one can trade with as little as $10,000 and get their feet wet. It also doesn't hurt to have enough capital to diversify into several different positions (two to five generally) at one time - each with say 300 to 500 shares. Just remember, if you are starting small, keep your expectations realistic. Certainly, someone trading with $10,000 to $20,000 is going to have a much more difficult time generating $1,000 per day than someone using $100,000 or more. As long as you keep this in perspective, it will help keep you grounded as you begin learning.
When you get into the bigger leagues of day trading, then it's nice to be able to "step on" (i.e. purchase or short) a "block" or two of stock. This would be generally defined as 10,000 shares of stock. This typically is going to require $500,000 or more of trading capital, plus some use of margin in limited situations and for a limited time. When you reach this level, it's easy to see how daytrading can become quite profitable (and quite risky!). A few points (or even a few fractions) across 10,000 shares can return quite a bit of money quite rapidly. Just remember it goes both ways; you can quickly lose quite a bit as well.
There's no right or wrong answer with regard to how much you need to start. Simply keep your objectives in perspective and reasonable. This will go a long way to giving you a good start in the markets. Also understand that if you are starting small, factoring in things such as equipment fees and transaction costs may become much more important.
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REDUCING RISK AND PROTECTING CAPITAL - Reducing risk to your money and protecting your trading capital must come before making money in the stock market; it must always be put first in your mind when trading. You must learn and become comfortable with this being your first priority when trading. I know that sounds a little strange, but it's 100% true and a very important mind set to get into. After all, you can't play the game if you don't have the dollars. You should always be willing to give up a trade in order to reduce risk and save capital.
You absolutely must seek to reduce risk and protect yourself at every turn in the stock market, even before making a profit. Don't get me wrong, you are here to make a profit, but never at the expense of taking silly risks.
Always consider the risk to reward ratio of any trade you plan to take up. What is the risk? What is the reward? Keep that ratio in your favor and you'll be well on your way to making a good start in the trade and protecting your trading capital. I would rather miss 10 trades, than make 10 bad ones. Any trader would. Reduce risk, reduce risk! Bad trades, mistakes, and large risks are like leaks in a dam. Forget about everything until you correct the leaks, then worry about increasing the water level.
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GET YOUR FINANCIAL HOUSE IN ORDER FIRST - Trading and speculation in stocks (more commonly called 'Daytrading') has been around as long as the stock market has been in existence. Whether it's the days of the Buttonwood tree on Wall Street, or the Bucket Shops of the 1920's, or the electronic trading that takes place every day across the Internet, there are and there always will be "traders".
It's certainly not difficult to imagine that the first time a person bought a stock and saw it go up, they had the urge to sell and take a quick profit. Daytrading is nothing new - it's simply human nature to want to take a quick profit and then repeat the process.
Some people would like you to believe daytrading is something new and that therefore it must somehow be "bad". However, when you really stop and think about it, daytrading is really no more risky than any type of investing or financial speculation. Any investment or trade can go bad, just like any trade or investment can go well. Just talk to anyone that has owned large amounts of real estate for any extended period of time.
There have been times in the economy when interest rates sky rocketed and suddenly exposure to a large mortgage has been quite risky. No matter what the situation, speculation with any financial instrument brings some amount of risk - especially if done incorrectly or unwisely. Daytrading is no different.
Certainly, daytrading, like anything else, can be risky if you don't know what you are doing. I've known of people making one silly mistake and getting wiped out over night. Since daytrading does come with a certain amount of risks, it's only wise to get your financial "house" in order before you begin. As such, a few basic guidelines are in order.
First, we should understand that there are two basic categories of people that tend to seek out daytrading and that these two categories are drastically different in their approachs to the markets.
The first (and more historically typical) category is made up of people who are basically pretty financially well off. These include individuals who have solid financial worth from other means. They also tend to have homes which are paid for (or largely paid for) as well as being relatively high net worth individuals, particularly in the liquid assets category. For individuals in this category, daytrading most likely is only a small part of an overall (and diversified) investment strategies or portfolio - and typically it's only used to further an already solid net worth without exposing a high percentage of the individuals assets to undo risks. Basically, these are individuals that can "afford" to do a little day trading and typically don't go over board in "only" stock speculation.
The second (and not only more recent, but more dangerous) category tends to be people who are attempting to build their net worth strictly from daytrading. These are individuals who view daytrading not so much as simply one small aspect of an overall financial investment landscape, but more as the major way to generate and build their entire financial worth. This tends to also be the category of people who take larger risks and sometimes generate a bit of negative press regarding daytrading. This negative press would be along the lines of people that daytrade using funds from a credit card and/or home equity mortgage of some form or another. When things don't go well in the markets, typically the losses tend to have a more dramatic impact on the individual's net worth and life style.
It's pretty clear that these are two radically different approaches to daytrading. If you are in the first category, then as long as you do not expose more than around 10% to 20% of your overall liquid net worth to stock speculation, you probably won't get into too much trouble. However, if you fall into the second category - where you are trying to create wealth through daytrading and/or you are using daytrading as your only means of addressing stocks - then some guidelines are in order. Of course, at the end of the day, no one can force you to follow these guidelines. However, if nothing else, you should strongly consider the following information as it relates to your individual case.
First and foremost, you should never trade using money you cannot honestly afford to lose should some catastrophic event wipe you out in the markets. These funds should be largely similar to funds you would ear mark for Vegas or other forms of higher risk speculation. In the event you lost these funds in total, they should not have any dramatic impact on your life whatsoever. Generally speaking, these funds should represent no more than 10% to 20% of your overall liquid net worth. Beyond this, you should strongly take into account areas of your financial picture such as home ownership, outstanding short and long term debts, as well as future responsibilities such as college for your kids, etc. You should also take into consideration your age as it relates to your future retirement. Daytrading at age 20 or 30 is one thing, daytrading your retirement funds at age 65 or 70 is a whole different situation and very unwise unless you limit the amount of funds at risk.
Again, before you undertake anything but causal daytrading, you should seriously consider such things as paying down all of your short term debt. This would include paying off all credit card balances and any loans which may be near maturity. You should also consider allocating funds for and/or paying off longer term debts such as car notes and/or home mortgages. Additionally, if you have a family to provide for, you should not only consult with your wife, husband, etc. before attempting any sort of daytrading, but you should take into account what impact large and unexpected losses could have on your current as well as future living situation.
Generally speaking, unless you have tremendous earning power, you should have very little debt and a stable housing situation before using much capital in the markets for day trading.
AI
