Day Trading Risk Management -

Day Trading Risk Management

I wish someone had told me when I first started trading stocks that risk management is one of the most important skills you need to be a successful trader. I always use 2 to 1 odds, meaning every time I risk $1 I'm looking to make $2 or more dollars back. When you day trade with 2 to 1 odds, the odds are always in your favor. You have 50% odds when you place a trade. The stock can only go up or down. Just like flipping a coin you have 50% odds. If you take a coin and flip it 100 times and every time it lands on heads you win $2 and when it lands on tails you lose $1. You could literally lose 60 flips and still be in profit by $20. Lets dot the math....

Win 40 flips = 40 x $2 = $80

Lost 60 flips = 60 x $1 = -$60

$80 - $60 = $20 profit

When I learned this method it changed my mindset on how to trade. To be a good day trader you have to learn how to be a good loser. As long as your average loser is less than your average winner you will always be in profit. To implement the 2 to 1 strategy you need to be good at setting stop losses on every trade. Here is the formula on how you would calculate your stop loss amount.

Lets say you want to place a limit order on EXPR stock at $4.35 All you have to do is calculate $4.35 - 1% = 4.30

So if you purchased 100 shares at $4.35 = $435

if the stock went down to your stop limit you would only lose $4.35.  You would have to lose 100 trades to lose all of your money. If you get stopped out don't worry. It's another trade tomorrow that can bring you back a larger return. The next time you trade you could win 2% and make $8.70 making back what you lost plus an additional 1%. By implementing this rule your chances of being a profitable day trader increases significantly. 

You literally could throw darts at stocks and implement the 2 to 1 odds rule and be profitable over time. You could out perform the majority of Day traders if you just implemented this rule daily. 

I like to keep things simple. I had to start of the blog with this post first because it's one of the most important skills you need to be a successful day trader.