Thinking Like a Professional Day Trader

Thinking Like a Professional Day Trader

One simple trick to start thinking like a professional day trader an be what sets you apart in a world where everyone is trying to make a lot of money. Do you rely on the hope and pray method that a losing trade will work out? Or worse yet, enter a trade, not knowing when to get out? 

Did you know there is a considerable difference between the thought process of a beginner day trader and a professional day trader? 

I don’t necessarily consider myself a pro (yet), but I have found myself consistently profitable, making small gains every day.

What was my secret? Please keep reading for my one simple trick to start thinking like a professional day trader. 

Do you know how to day trade? If you’re new knowing one simple trick to start thinking like a professional day trader can help a great deal. 

It can be overwhelming when you’re new. There’s a lot going on and a lot to know. Therefore, make sure you begin with proper stock training.

There are going to be a lot of people that’ll tell you they know how to make you a millionaire quickly. Wouldn’t that be nice?!

If only trading where that easy. But when you go in equipped with the right tools, you have a much better chance of being successful long term.

The Beginners vs the Pros

How Beginners Think

  • Fear = Cut Winners
  • Hope = Keep Losers

How Professionals Think

  • Fear = Cut Losers
  • Hope = Keep Winners

Please take a good look at what I wrote above; can you relate? Be honest with yourself, is this you? Armed with a high-speed laptop and a lightning-fast execution platform, all traders look the same from the outside.

But there’s one striking difference between beginners and pros, and it might not be what you think. No, it’s not the right mentor; although it plays a considerable part, nor is it the proper screening software.

In fact, it’s what’s on the inside that counts. Now I know this may sound cheesy, but it’s true. Mark Douglas, the late famous author of “Trading in the Zone” couldn’t have put it more eloquently:

“If you can learn to create a state of mind that is not affected by the market’s behavior, the struggle will cease to exist.”

Profitable stock trading does not involve emotion. If you are an emotional trader, you will lose money. 

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One Simple Trick to Start Thinking Like a Professional Day Trader Is Knowing When to Take Your Money and Run

Similar to setting and sticking with stop losses, many traders have trouble with taking profits. All of these issues boil down to one reason; their trading psychology.

It should come as no surprise, but the nasty emotions of fear, greed, and impatience strongly influence your trading decisions and ultimate success.

Nevertheless, all these emotions have the nasty habit of causing the trader to either take profit too soon before they even reach their target, or not take any profit.

And by not taking the optimal profit, of course, creates a (too) low reward to risk ratio, thereby harming long-term profitability.

Here are some of the typical and unfortunate consequences of the emotions which can occur during trading:

  1. If traders are too fearful, they close the trade too soon;
  2. When traders are too impatient, they exit too soon;
  3. If traders are too fearful, they could leave the trade open too long.

Lately, my approach has been to take some profits along the way and let the winning trade work for me. An excellent fringe benefit of this approach is that my emotions are simmered.

No longer do I need to worry about profits or losses because I know when to exit and I don’t fear it. Consequently, if I am wrong (which does happen), then I’ll be out of the rest of my position at break-even so that I can still enjoy a profitable day.

When Should I Take Profits?

Every trade you enter will eventually require an exit at some point. With the advancement of hotkeys and ECN’s, getting into trades is the easy part.

Deciding when to exit, however, trips up not only the seasoned pros but can completely wipe out a newbie. In an attempt to curtail these painful emotions, you need a profit target based on specific exit criteria.

A profit target is a pre-determined price where you will close the trade. When you use a profit target you are estimating how far the price will move and assuring that your profit potential outweighs your risk.

For example, let’s say you buy a stock at $10.50 and have a profit target of $10.60, you place an order to sell at $10.60. If and when the price hits $10.60, you close out the trade. Profit targets have both their advantages and drawbacks, and there are multiple ways to determine where you should place your profit target.

Placing a profit target like most things in life is like a balancing act. You want to get as much profit potential as possible, but you can’t get too greedy.

Otherwise, the price is unlikely to reach your goal. In a nutshell, you don’t want it too close or too far.

One of the Simplest Ways to Calculate a Profit Target

It goes without saying that taking profits is just as important as your stop-loss placement. Both aspects are integral parts of your risk management strategy.

One of the simplest ways for determining your profit target is to utilize a fixed reward: risk ratio. This ratio analyzes and determines the ratio between your potential profit and what you stand to lose in the trade.

The reward:risk ratio is a vital and crucial factor whether a trader is profitable or not.

In the following example, I’ve decided to enter a short trade at $18.15 with a 2:1 reward: risk ratio.

Since I’m only willing to risk $0.10 a share, I set my stop loss at $18.25. Based on my 2:1 reward: risk ratio, my profit target is set $0.20 from my entry, at $17.95.

One Simple Trick to Start Thinking Like a Professional Day Trader Knowing the Ideal Risk: Reward Ratios

Day traders must strike a balance between their win rate and their risk: reward undertaking.

 A high win rate means nothing if your risk: reward is very high. Likewise, a great risk-reward ratio may mean nothing if your win rate is very low. When day trading, the typical risk: reward ratios are between 1.5:1 and 3:1.

For new traders starting, the fixed reward: risk method works really well. Why don’t you use a 1.5 or 2:1 reward to risk, and see it how it works out?  

If your target price isn’t hit, reduce the target slightly (on all your trades). If the price is running well past your targets, then increase the target slightly (on all your trades).

As you become more experienced with more trades under your belt, fine-tune your profit targets based on the other methods provided, if needed.

Your ideal mix will depend on what type of trader you are and your trading style. But it might be refreshing to know that you don’t need a very high win rate or a super low risk/reward ratio to be successful.

I suggest that if you strike a balance, and strive for consistency, the profits will follow. And that is one simple trick to start thinking like a professional day trader.

Final Word on Profit Targets

One simple trick to start thinking like a professional day trader can give you confidence. Fixed reward: risk ratios are an easy way to place profit targets.

The upside is that they’re easy to use and you always know your winning trades will be bigger than your losing trades.

For more tips and tricks on how to become a successful day trader, head on over to our website. We have thousands of dollars of free online trading courses not to mention a trade room and mentors ready to help you. 

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