Profitable day trading isn’t easy.

You need to be precise with your timing, execution, and exits, or else you’ll get chopped up by paying the bid/ask spread and commissions. 

In trading books, much of the focus is put on your entry price.

Should you enter on a pullback, wait for a moving average crossover, an indicator reading, etc.? But little attention is paid to your exit point, which is arguably much more important in day trading.

The thing about day trading is the dynamics are so different from swing trading. Much of the returns swing traders realize are due to overnight gaps. Day traders don’t see these gaps, making their gains and losses more linear than that of swing traders.

Critical corporate announcements typically before the open or after the close, reducing intraday price shocks, but also reducing the opportunities that volatility offers. 

Know Your Style

It’s critical to nail down what you’re doing with your strategy.

If it’s a trend strategy, what is your target? Are you looking to take a lot of small losses looking for the big win, or are you looking to trade a more consistent strategy with a win-rate closer to 50%?

Can you handle closing a position and seeing it run for the rest of the day, knowing that if you just kept the trade on, you would have made 10x your initial risk on the trade? 

This decision has to factor in your strategy. Some setups, like shorting overextended intraday highs in large caps, typically aren’t apt to looking for big profit targets. Either play the hand you’re dealt or draw a new card. 

A common distinction is that mean reversion traders look for smaller targets, while trend traders look for larger targets. 

Know Your Market

You should understand the long-term tendencies of your asset class.

Does it go on long trends like interest rates, or lots of short-term trends like commodities? Does it tend to mean revert like equities?

These types of insights should partly drive your strategies. After all, if you tried to apply a mean reversion strategy developed for stocks in the bond market, you probably won’t have fun. 

Know Your Trading Day

It’s critical not to lose track of the broader market context when staring at 1-minute charts.

Zoom out and consider where the stock is on a daily timeframe. Are we inside or outside of yesterday’s range? Did the stock have any significant reaction to testing the prior day’s high and low? Has volatility changed? What is going on in the equity indices? 

Most day traders don’t statically apply one strategy, but instead adapt to what the market brings them on that day. If you’re trading to fade a stock on a “trend day,” you won’t have fun.

Setting Profit Targets: Paying Yourself

No trader is perfect obviously.

Traders tend to fall victim of one of two exit issues: overstaying your welcome or exiting too early.

Taking a portion of your position off at an intermediate profit target can solve some of the guilt you have for booking profits too early or letting a nice gain turn into a loss. 

It’s a simple but very powerful concept. How much of your position is really up to you, and can vary based on your conviction in the trade setup. 

Let’s pretend you’re an intraday trend trader.

You buy a bull flag and it’s working in your favor. You’ve been here before, and many times the market has reversed and stopped you out. Perhaps exiting 30% of the position at the most recent high in the trend would alleviate some of that stress.

You’ve paid yourself a bit, and if the market reverses, you break even or make a little bit of money. Once you take some of the position, it’s a lot easier to let your profits run should the stock make new highs intraday.

What About Big Winners?

Sometimes you happen to put your fishing rod in the water at the right time and catch one and you don’t want to let go.

When the market is really going in your favor, it’s probably reaching extreme levels and could be prone to a quick reversal due to the elevated volatility. 

This can be a really tough decision. The worst thing that could happen here is your really big gain turns into a small gain. You’ll somehow feel guilty for making money after a trade like that. 

A simple solution might be a tight trailing stop.

You could use a short-term moving average, the high or low of the previous bar, or a short-term support/resistance level. This is a trade off, because you could get stopped out and the market keeps running. However, you can’t hold on forever.

You’re always going to leave some on the table in the best trades.

If you’ve ever read/watched The Big Short, you know that the guys betting against the mortgage bonds closed their positions prematurely (with full knowledge of the prematurity of their liquidation) because they knew the psychological toll letting a big gain slip away can take.

Setting Stop Losses

Avoiding Stop Clustering

In a market dominated by day traders, like a hot low float play, stops tend to cluster around predictable levels; the low of the day or an obvious support/resistance level.

A simple tweak like placing your stop loss a bit beyond or ahead of that obvious level can reduce the slippage when tons of stop market orders are triggered, creating a massive range bar. 

Bottom Line

Day trading is so radically different from swing trading or position trading.

You have to make decisions so quickly and even the best traders make suboptimal decisions when they’re forced to make them quick. 

It’s obvious, but using bracket orders to preemptively place a stop loss and (perhaps partial) profit target can allow you to move from the “trade management” mindset, to just letting the trade play out and only tweak if things change.