Day Trading Money Management

Trading money management for the day trader is possibly the most important technique that one must learn in order to become successful. Due to the relatively small profits one will take during the trading day, the day trader must learn to take even smaller losses and avoid large losses at all costs. The best way to do this is to treat day trading as a business and plan for all possible contingencies. We will look at two aspects of a well thought out business plan, capitalization and risk control.

Capitalization

With any good business plan, one of the first steps is to identify the type of dollar investment that is required in order to be successful. Lack of proper capitalization is probably the most common reason traders fail at day trading and trading in general. Many investors open an account with the minimum amount allowed by the brokerage service and expect to become profitable immediately. When four or five losses occur immediately, one's trading attitude will change from an offensive to a defensive stance and trading equity will suffer.

Prudent trading money management can be accomplished by opening an account with sufficient capitalization to weather unexpected draw downs. We suggest a minimum of $10,000 to open an emini s&p day trading account. This amount which will allow the small day trader to have a reasonable reserve set aside and also risk only 3% while trading a maximum of 3 contracts. Using a conservative 2 point stop, we will only be risking $100 per contract (2 points = $100 x 3 contracts = $300). Trading three contacts will allow the trader to take profits at different price targets, gradually scaling out of profitable moves. Beginning traders should start with only one contract and gradually move their trailing stop to capture more and more profit as price moves in their favor.

Risk Control

Using a well built day trading system, such as HLDayTrader, will help establish acceptable risk control. All systems should supply rules for setting up an initial stop after entering a position. Whether it is a fixed stop from entry, (such as a 2 point stop in the emini S&P), or a stop placed underneath the previous swing's high/low, the initial stop must ALWAYS be placed in the market as a resting stop order.

Traders who try to use a "mental stop" while "watching" the market will eventually find themselves in a very difficult position. If the market blows past their stop, they feel like they must wait for the market to reverse, not wanting to take such a large loss. However, most times, a large loss is exactly what will happen, wiping out many profitable trades taken earlier in the trading week.

Exiting a position is, by far, the more difficult task for the day trader. While there is no perfect answer or exiting technique, using a trending indicator to point out exits will allow a trader to capture a large part of the move. Although the position will not be exited at the very top or bottom of a swing, trending indicators will usually help the day trader to stay in a trade longer than if subjectivity or emotionalism are used to exit a position.

Using these trading money management techniques will help the day trader to become more disciplined and consistent. Day trading can be a fairly low risk business if the proper rules of capitalization and risk control are followed with discipline and perseverance.

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