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Manage the Risks of Day Trading

When you know more about the risks, returns, and related activities of day trading, you can think more about how you’re going to run your day-trading business. Before you flip through the book to find out how to get started, consider two more kinds of risk that you need to think about:

  • Business risk

  • Personal risk

You need to understand and manage both in order to better manage the risks of the trading day.

Day trading is your business

Business risk is the uncertainty of the timing of your cash flow. Not every month of trading is going to be great, but your bills will come due no matter what. You’ll have to pay for subscriptions while keeping the lights turned on and the computer connected to the Internet. Taxes come due four times a year.

Keep track of your business expenses and keep them as low as is reasonable. You should invest in your business, obviously, but only to the extent that you can pay your bills even if you have an off month in the market.

Regardless of what happens to your trading account, you need cash on hand to pay your bills or you’ll be out of business. The best way to protect yourself is to start out with a cash cushion just for covering your operating expenses. Keep this cushion separate from your trading funds. Replenish it during good months. Walk away from trading if it goes down to zero.

Keep a personal life

The personal risk of trading is that it becomes an obsession that crowds out everything else in your life. Trading is a stressful business, and the difference between those who succeed and those who fail is often psychological.

You need to be on when you are trading and then, at the end of the trading day, close out the emotions the same way that you close out your positions. It’s not easy, so you need to have ways to manage your mood. Figure those out before you start trading, and you’ll be ahead of the game.

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