On the surface, it feels like the phrases risk averse and day trading shouldn’t be in the same sentence.
When you think of risk-averse investors, things like certificates of deposits and T-Bills may come to mind.
So is it possible? Can you have a risk-averse person trading the markets and winning?
Well in this post I will make the case of why a risk-averse person can still day trade without having to risk it all.
low volatility stocks
Readers of the Tradingsim blog know that I am a big believer in trading low volatility stocks.
This is not because I read a book about it, it’s because I have tried this first hand and it just works for my trading style.
The thing is high volatility stocks move too quickly for me. I know there are people that make a living trading penny stocks, but the action is so fast on both sides of the trade, I couldn’t adjust quickly enough.
For example, I could go from being up 20% in 90 seconds to down 8% 30 seconds later.
These swings were too dramatic for me and while I could trade things consistently for a period of time, if I made a mistake it was costly.
So, while I day trade, I would honestly consider myself a risk-averse person.
For a risk-averse trader, I would think you want to avoid your exposure to stocks. Well as a day trader you do not have to carry positions overnight.
You will know where you stand at the end of each trading day – good or bad.
So if you are worried about your possible returns, day trading allows you to closely monitor your trading activity and keep a close pulse on your progress.
Another misconception of day trading is that you need to place a large volume of trades per day to be successful. [1]
Did you know you can actually place one or two trades per day and still be a wildly successful trader? Now, this will require you to actively trade but placing one trade a day will not feel like you are really pressing against the gas.
Small Account
The first thing I tell new traders is that they should not worry about funding some huge trading account. You can start day trading with a few thousand dollars.
Now this will limit you to only three trades per week, but if you are risk averse, this should fit right within your trading profile.
So, if you are concerned about day trading and blowing up an account, you can remove this risk by taking the account down to a size that is manageable even if you take a major hit.
Risk Limits
Did you know you can set daily loss limits?
For most retail traders, if they are long-term investing, there aren’t features which can lock out your account. You are simply stuck having to manage through any downturns in your account.
As a day trader, you can set a percentage or dollar amount that you are willing to risk per day. If you trip this threshold, your account is locked out and you are unable to place any further trades for the day. [2]
Then if you somehow manage to trip your loss limit for the week at any point, you stop.
At this point, it’s more about keeping your profits and not about quick gains.
One Winning Strategy
Day trading doesn’t mean you need to be a quants trader building some overly complicated quants machine. It just means you are able to trade a profit.
To this point, you can literally focus on one setup that you trade for less than an hour per day. You don’t need to understand every trend line and Fibonacci sequence to turn a profit.
With the current market climate, I am trading one breakout setup successfully. I look for bull flags to setup right near pivot point resistance levels.
Now this one is not as clear on the surface. But what I mean here is that you can decide for example that you will only place trades on the long side.
By removing short trades from the equation you eliminate the unlimited upside risks of being wrong on a short trade. [3]
You also are focusing on picking one side to trade to further master your craft.
If you are concerned about your ability to successfully day trade, don’t rush into it. You can practice trading with Tradingsim.
It’s not enough to run backtests, you need to see how you would actually trade the stock in real-time. Keep placing trades using one system to figure out what actually makes you the most money.
Before placing any trade you can use a stop loss. This goes beyond setting a daily stop limit as you can limit the amount of risk per trade. This allows you to further minimize your risk and place additional controls on a per trade level.
If you are risk averse, then you likely don’t believe day trading successfully is even possible. Well, that makes you the perfect candidate for active trading because you are skeptical from the start.
This means you will put in the hard work to see if you can even figure this whole day trading thing out. Most importantly you are not jumping into day trading with a mindset of making a whole lot of money fast.