Nobody wants to hear about the risks of day trading.
As traders, our goal is to make money.
Lots of money – hopefully.
We day trade to win, right?
No serious trader is trading to lose. People who tell me that they don’t care if they win or lose are not serious traders. They are gamblers.
A trader trades to win.
But unfortunately, losses are part of our business. Those are the risks of day trading. However, as long as they are within your risk parameters, you shouldn’t worry about them too much.
Let me give you an example:
As you know, we are running a Live Day Trading Room. In this room we show how to trade a $20,000 account.
Here are our risk parameters:
- Risk 2% of the account on any given trade = $400
- Acceptable drawdown: 20%
And according to these risk parameters we have certain expectations. Our goal is to make 5% per month = $1,000 based on the $20,000.
YOUR risk parameters and expectations might be different – depending on your trading plan. You might have more aggressive goals. That’s fine, as long as your expectations are realistic. I talked about realistic expectations in my blog post “How To Be A Trader – Part 1”
Anyhow… So here’s what happened:
During the last three trading session we made $1,360. This already exceeds the goal of 5% a month in only three trading sessions!
Obviously this winning streak can’t continue forever. If we would continue to make 2% per day, we would be up 40% at the end of the month. And that’s just not realistic. So we should expect a losing trade – or maybe even a losing day – very soon.
And sure enough: Wednesday was the day. During the opening hours of the room we placed 9 trades: 4 of them were winning trades, and 5 of them were losing trades. Total loss for the day: $880.83.
(Note: We placed a few trades according to the plan after the room closed and made $225 back, so the total loss for the day in our account is $655.83).
So after four trading sessions we’re still up around $480 – more than 2% based on the account. And there are another 18 trading days in the month.
(Quick Update: Just two days later, we made $970 in our Live Trading Room. So we’re again in line with our expectations)
Why am I sharing these results with you?
If you want to day trade to win you need to understand that…
- … losses are part of our business as a trader,
- … these are risks of day trading that you need to accept,
- … your equity curve is not a straight line,
- … when trading you will have winning days and losing days,
- … you need to have realistic expectations and
- … your trading results should be within the expectations.
If based on your trading plan and your testing, you expect 5% return per month, then be careful when you suddenly see a return of 5% in only three days. Sure, sometimes you might have a month in which you blow it out of the water. But you can’t beat the numbers! For each extraordinary month with results above expectations, expect a month with results below your expectations.
Trading is a marathon, not a sprint.
Know your risk parameters and expectations, and as long as your wins and losses are within these parameters, you are in good shape. That’s how you control the risks of day trading.
Quick question for you: Do you know YOUR risk parameters and expectations?
Leave a comment and let me know what you think.