4. Risk Management Strategies

Using Technical Analysis

Many traders often use technical analysis using support and resistance levels to determine where they should entry or exit a position.

You might consider using trend lines or moving average to find support and resistance levels that will help you determine the best place to take profits and stop loss. In the chart above a trader might be short selling gold, with a stop loss at the 50-period moving average, and a take profit at an upward sloping trend line.

You might consider a trading strategy that uses a momentum oscillator such as the relative strength index (RSI) which produces overbought and oversold levels. This could work in conjunction with support and resistance levels as your risk management triggers.

For example, you might buy when the RSI moves into oversold territory and rake profits with it reach the 50-period moving average. Your stop loss could be an upward sloping trend line or a horizontal trend line.

You might also consider using a Bollinger band strategy. Bollinger bands define the most recent range using volatility (the standard deviation). You can also alter the Bollinger bands for intra-day data which could help you define your take profit and stop loss levels.

Bottom Line

To successfully trade the markets, you need to develop a risk management plan. Your plan should be formulated before you place a trade. Day trading offers risks, where the returns should be above the risk-free rate of return.

One way to avoid one day trading strategy ruining your entire day trading activity is to use multiple day trading strategies. This type of diversification will help you avoid the risk of ruin.

There are also several ways to define risk management. You can use simple methods such as the percent you will gain or lose on a trade. You can also use technical analysis techniques, which will help you pinpoint your entry and exit levels.

Before you start to trade, calculate the potential risk/reward ratio. This will help you determine your financial goals related to the risk you will assume. Remember you get paid to take risks beyond the risk-free rate of return.

You need to understand that you will not win every trade. You are trying to formulate a plan that will follow your risk management plan allowing you to create a successful day trading strategy.

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