How to Manage Risk and Rewards When Trading Stocks

Learning about day trading and investing in penny stocks can be one of the most valuable things you do in your life. With a strong day trading strategy, you can potentially give up your job, make a serious amount of cash for your future, and even protect your family’s financial health too. However, it’s fair to say that there is a lot to consider and learn before you become an expert in the stock market. Although it’s tempting to jump straight in and let your gut guide you, the truth is that the best trading decisions come from carefully thought-out trading strategies and plans. You need to know how to manage your risks and rewards before you ever put a penny into the stock market. Fortunately, we’ve got some advice that could help.

Determining Potential Risks and Rewards on Every Trade

The key to a successful day trading strategy is winning more than you lose with your trade decisions. Of course, that’s much easier said than done. In a day trading environment, your overall profit margin is determined by the percentage of the trades that you win, versus your average loss. Day traders typically strive to have average winning trades that out-rank their losing trades. The only way to do this is to assess your positions before you start placing any money into a business.

Make sure that every trade you get involved with matches a pre-set checklist of essential features. For instance, you should know the background of the company that’s offering the stocks, and how successful they’ve been up to now. You’ll also need to make sure that there’s plenty of volume available in the stocks you’re buying so that you can easily buy and sell stocks according to your trading strategy. By carefully doing your research before you invest in any trade, you can reduce your chances of losing cash unnecessarily.

Stop Losses and Limit Orders

Another fantastic way to manage your risks and rewards when you’re day trading is to implement daily stop losses and limit orders. A daily stop loss is a cap on the amount you’re willing to lose within a single day. Ultimately, while all day traders aim to be successful in their trades as often as possible – bad days happen to the best of us. The last thing you want to do is let a bad day ruin your entire month because you begin to get emotional with your decisions.

A common rule of thumb for new traders is to make sure that they don’t lose more than 3% of their trading capital in a single day. You can also use limit orders to control the price that you’re willing to enter a trade. This will make sure that you don’t pay more than necessary for a stock that you’re interested in. With stop losses and limit orders, you’ll have additional resources in place to make sure that you’re always getting in and out of stock market positions at the times that are best for you.