Successful trading can be reduced to four factors: risk on each trade position size , win-rate, reward-to-risk and how many trades you take. Understanding these four numbers will help you reach your goal of day trading for a living. Here's how:. To be successful, control the risk on each trade. Risk a maximum of one percent of your account on each trade. Once you know your entry price and stop loss level, calculate your position size how many shares, lots or contracts you take in the stock market, forex market or futures market.
While we only risk one percent, we strive to make 1. Only risking one percent also means that even if you hit a losing streak of five to 10 trades, you haven't lost much capital. A few winning trades and you have made that loss back. Risk more than one percent though, and a losing streak can decimate your account.
That means you are making 1. That is a reward:risk of 0. Reward:risk is interlinked with the win-rate. The win-rate is how many trades you win, expressed as a percentage. If you make trades in a demo account and win 53 of them, your win-rate is 53 percent. Win-rate is interlinked with reward:risk. You are adding 1. You increase your account capital by 25 percent over those shares. If you win 40 percent of your trades, then you don't make any money: 40 x 1. See how win-rate and reward:risk are linked?
If you only win 40 percent to 50 percent of your trades, try to bump it up to 50 percent or more by making small changes to your strategy. Alternatively, you could try to reduce risk slightly or increase your reward slightly to improve your reward:risk. Slight adjustments could push this break-even or losing strategy toward being a profitable one. If you make one trade per day, that is about 22 trades per month. If you make two trades per day, you win 22 trades and lose 22 trades, but your percentage return increases to 11 percent for the month.
If you only trade a two-hour period —which is all that is required to make a living from the markets this is the end result, at the beginning you will want to put in at least several hours per day of study and practice —day traders should be able to find between two and six trades each day that allow them to maintain the statistics mentioned above. Note that some days produce no trades because conditions aren't favorable, while other days may produce 10 trades.
Don't take trades for the sake of taking trades though; this will not increase your profit. If you take trades with a poor probability of winning, or where the reward doesn't compensate for the risk, this will drag down your statistics, leading to a lower return or a loss.
If any of these statistics get out of whack, it will hurt your results. It's a razor-thin line between profitable trading and losing. Over trades, winning 50 means a nice income, while winning only 40 means you break even or lose money when accounting for commissions.
A slight drop in win-rate or reward:risk can move you from profitable to an unprofitable territory. Risking too much on each trade can decimate your account quickly if you hit a losing streak. Wins and losses are distributed randomly. Some days you may lose all the trades you take, while other days you may win them all. There is no specific number of trades you should, or need, to take each day. However, over many days, it should average out to at least two trades or more a day if you want to eclipse the 10 percent-per-month return mark.
The only way to know if a strategy can produce the numbers above or better is to test that strategy out in a demo account. Small adjustments may be required over time to keep the strategy aligned with the numbers above. If a strategy produces those numbers, then only trade that strategy.
The statistics above apply whether you trade stocks, forex or futures— the main day trading markets. Calculating your profit or loss on your stock holdings is a fairly straightforward procedure; it is calculating the percentage change between a beginning value and an ending value. When calculating your profit or loss, it's imperative to look at the percentage return as opposed to the dollar value. Financial Analysis. Investing Essentials. Real Estate Investing.
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