A day trader who treats their day trading like a business gets great sleep! In my last editorial (March 1, 2010 Diary of a Day Trader Part 1) I spoke of the many traits needed to be successful at day trading. All these traits are necessary but two key elements that allow a day trader to sleep at night are:
Not holding a stock overnight and using "stops" religiously and effectively.
Using Stops will make the difference between sweet dreams or nightmares.
Stops are an ABSOLUTE MUST for a day trader's success. Not only do stops tell you what your maximum loss can be on a trade but they also allow you to maximize your gains by raising your stops where the technical pattern dictates it.
When you use stops you can sleep soundly knowing precisely what your risk was on that given trade or day.
Knowing exactly what your potential losses are allows you to maintain the psychological edge which is necessary for consistent day trading success.
Let me give you an example of how a using a stop gives you that psychological edge.
Let's say you're thinking about a trade on RIMM (Research In Motion Limited) @ $72.00 or better, with a stop @ $71.70. A 100% position would be a 1,000 share purchase. Let's not forget our golden rule, in order to initiate such a day trade we must have a minimum of a 2:1 risk/reward. Meaning we risk down to 71.70 (risk $300) and have minimum objective of 72.60 ($600 gain). That is not to say we take our profit at 72.60. This simply means we must see the technical possibility of that price objective in order to initiate the trade.
In the above example let's now say RIMM moved to 72.60 within 60 minutes. Say that the technicals have developed so we are able to move our stop up to our entry price.
At this point you have nothing at risk.
That is, our entry price equals our "stop".
Again, raising the stop based on the technical pattern is using effective stop management and allows you to maximize your gains. If the stock continues to rally you can now take half of the position off the table (lock in profits) and then continue to raise your stops and try and let the trade run based on how the technicals are evolving. Stops are your first line of defense to protect you. Not always just to limit your losses but often times to lock in gains and allow you to maximize the profit on a trade.
…I ask how can a day trader NOT sleep at night?
To know your risk on a trade AND to know you have only put a trade that offers a minimum of a 2:1 risk/reward ratio gives me great CONFIDENCE AND CALM. What a wonderful position to put yourself in! If you are not getting good sleep at night and you are a day trader then you really need to re-evaluate what you are doing. Always use stops, they are there to protect you!
Since December of 2008 we have been teaching our members how to day trade the correct way and use "stops" effectively. If you don't use "stops", don't be surprised if you find yourself in a world of hurt and having sleepless nights. Our real time trading setting allows our members to make money through the learning process. When you join us in our live webcasts you will see how we use "stops" effectively, and therefore get great sleep night after night.
