Successful Day Traders Set Targets and Limits
Good day traders set limits. They often place stop and limit orders to automatically close out their market positions when they reach a certain price level. They have profit targets in mind and know how much they are willing to risk in the pursuit of those gains.
With a stop order, the broker buys or sells the security as soon as a pre-determined price is met, even if the price quickly moves back to where it was before the order took effect.
A limit order is only executed if the security hits the predetermined level, and it stays in effect only if the price is at that level or lower (for a buy limit order) or at that level or higher (for a sell limit order).
Day traders close out their positions at the end of each day, so they rarely review their limits. A swing trader or an investor, on the other hand, who holds for a longer period of time, needs to review those limits frequently.
How much should a position move each month, quarter, or year before it’s time to cover losses or cash out with a profit? How has the security changed over time, and do the limits need to change with it?
When the position is working, an investor thinks of letting it ride forever. But, alas, few investments work that long into the future, so the investor also needs to think in term of relative performance. Has the time come to sell and put the money into something else with greater potential?
When managing money, day traders usually think about maximizing return while minimizing the risk of ruin. For an investor, the goal is maximizing return relative to a list of long-term objectives, including a target for risk.
But because long-term objectives change, the portfolio has to as well. That means that a position that has been working out fine may have to be changed in order to meet the new portfolio goals. Like successful day traders, successful investors have a plan for how they will allocate their money among different investments, and they adjust it as necessary.
Although investing is a long-term proposition and lacks the frenzy of trading, it is still an active endeavor. Instead of putting energy into buying and selling, the investor puts it into monitoring.