Day Trading Guidelines - How To Become A Better Trader
Learn To Trade
Learn To Trade
May 25, 2023

Day Trading Guidelines - How To Become A Better Trader

How To Become A Better Trader

The first thing most traders will have to do is build a portfolio, this process is more complex than just choosing what assets to trade, and in order to build a good portfolio you will need to find your trader profile, which can be approximately determined by asking yourself the following questions:

1. What is your initial capital?

2. What is your targeted return rate?

3. What is your risk aversion?

4. What is the investment horizon?

5. What is your availability?

All these questions are related to each other, and as such it can be difficult to find non conflictive answer to them. The following sections give information about the theme of each question so that you may more easily find out what is your trader profile.

Initial Capital

The initial capital you are willing to invest is an important matter, again we could ask ourselves various questions to determine it, but let's go with a simpler approach.

A low capital can have a wide variety of effects, capital is directly related to buying power, and a low buying power will result in the trader unable to trade certain assets, but more importantly, it will reduce its ability to diversify its portfolio, and as a result, unable to lower its risk level. Leverage can increase buying power without having to have higher capital but involves increased risk.

Having a low capital also means potentially reducing the lifetime of your portfolio since you won't be able to tank more losses, thus conflicting with your investment horizon target.

Certain markets are more accessible than others for traders with low capital, this is the case of the forex and cryptocurrency markets that offer high leverages compared to the stock markets.


Risk/returns are two correlated concepts, the more returns you expect in an investment, the more risk you are taking, an investment with large potential profits and low risk does not exist. Knowing your risk aversion is crucial if you want to build a good portfolio, and you will need to choose this level in coherence with the other aspects of your trader profile.

Comparison of the risk profile and return rate of various financial instruments [1]

Financial instruments all have a different risk/return ratio, and it is important to choose them wisely based on your profile. It is also possible to mix various financial instruments in your portfolio, this is a good way to reduce risk, as such you can have a portfolio consisting of 60% derivatives (futures, options...) and 40% bonds.

Investment Horizon

Your investment horizon will be a huge factor of your success in trading, certain traders focus on long term trading, holding positions for years, and will use the buy and hold strategy. Others might hold a position from several days to several months, they are often defined as "swing-traders". Finally some traders might open and close positions within one trading day, and as such are named "day-traders", a particularly well-known type of day-traders are scalpers, who can hold positions for only several minutes.

Most beginners in trading will start using day-trading, and a lot will use scalping, however, it must be noted that the shorter is your investment horizon, the more difficult it will be to be profitable with consistency, this has various reasons, one of them is that shorter-term investments require more precise timing, also you are expecting smaller profits than ones you would get using longer-term investments, thus encouraging a trader to use higher leverage, thus maximizing risk, also opening a high number of positions will mean you will lose more from frictional costs (commission, spread...), and since your profits will mostly be smaller, frictional costs will have a higher impact on your profit margin.

We strongly advise beginners to stay away from scalping.


Trading requires time and effort, and it is impossible not to be involved with your positions (even when everything is 100% automated). However some users will still have more time than others. Traders will have to do certain tasks:

  • Monitor existing positions
  • Execute orders
  • Research for information

Users who can allocate a majority of their time to trading will be able to build and update more advanced portfolios and will be able to do shorter-term trades, however, traders with less time will often have to seek longer-term trading styles such as swing trading.


The question of which assets and securities to trade are extremely important, and such decision should be taken in relation to your risk aversion. It can be common for newcomers to focus on only one market and security, however, diversifying your portfolio is a good way to minimize risk instead of being exposed to the variation of only one security.

Asset Allocation

Having a portfolio containing various assets can allow an investor to balance risk. With assets allocation, you can mix various asset classes such as stocks, commodities, bonds...etc.

Adding less risked assets to your portfolio can decrease potential returns but will minimize risk, for example, a portfolio consisting of 100% stocks will be more risked than one consisting of 60% stocks and 40% bonds but will have potentially higher returns.

Optimal asset allocation can depend on the trader profile, more aggressive traders might want to have a low percentage of low-risk assets, even 0%, conservative traders on the other hand will prioritize safer assets. Some commons assets allocations consist of more than 50% of assets for speculation, and less than 50% of assets generating a fixed income.

Security Selection

Some traders will only focus on speculative assets or even on only one market, but this does not mean that diversification can't be achieved, a trader might only trade in the stock market yet have a portfolio consisting of various stocks.

Choosing the right securities is primordial, as a general rule, always choose liquid securities since they will generate lower transactions cost and faster order execution speed.

In terms of diversification, it is more effective to reduce the risk by choosing securities with a low correlation. The correlation between two securities can be quantified with a value between 1 and -1, with 1 showing a perfect positive correlation (the securities prices tend to go in the same direction), while a correlation of -1 shows a perfect negative correlation (the securities prices tend to go in opposites directions), while a correlation 0 shows no correlation between the securities.

Modern Portfolio Theory

Efficient frontier in blue

Efficient frontier in blue*

The modern portfolio theory (MPT) defines how an investor can select optimal portfolios given a certain risk level.

Selection of an optimal portfolio can be done by plotting the portfolio expected return against the portfolio risk, the portfolio that has the highest return given a certain risk level is considered optimal, each one of these optimal portfolios given a risk level form what is called the efficient frontier.

Risk Management

The next step is to develop a good money management strategy, this is crucial toward trading more profitably. When you start trading, you can't simply start buying and selling securities using random position sizing or without having a precise risk/reward in mind, money management will help you have control over the risk you are willing to take and will improve your capital lifetime.

Position Sizing

The size of your position determines the number of contracts of a security you will purchase. There are various ways to size your positions, the best way being by taking into account your risk aversion. If you don't want to lose x percent of your capital you will then need to size your position accordingly.

You can determine the size of an investment based on the percentage of capital you are willing to risk, or base the size depending on if the market is volatile or not, using lower position when market is volatile to reduce risk.

Don't use aggressive position sizing strategies such as martingales, which might make you lose all your initially invested capital in a short amount of time.

Position Sizing With The Kelly Formula

The Kelly formula is used to determine the percentage of capital you can use for your position size based on past performances and is calculated as follows:

K = p - \dfrac{1-p}{r}K=p−r1−p​K=pr1−pK=pr1−p

Where K\times 100K×100K×100K×100 is the percentage of capital you can invest in a position,


the probability of a win, and


the ratio of win/losses. In order to get the probability of a win take a look at your past trades, and divide the number of winning trades by the total number of trades, this will give you


. To calculate


, divide the average gains by the average losses.

Note that this value can be negative, which implies that the average gains are lower than the average losses.

Stop Loss

Stop losses help you protect yourself against variations opposite from the one you had anticipated, trading without a stop loss exposes yourself to potentially volatile variations that will significantly affect your capital.

In general stop losses are set at a specific price level, once the price reaches this level, your current position will be closed. Some platforms also allow you to set the distance between the price and your stop loss based on a value in pips, dollars, or percentage.

A stop loss will be filled once it triggers, but this does not necessarily mean it will be filled at the price it was set! As such you might have additional losses you were not expecting.

Where To Place A Stop Loss?

Your initial capital and your risk aversion are the most important factors when it comes to placing a stop loss. If you can't afford a $10 loss, then place your stop loss in accordance, but there are also more factors to take into consideration.

Volatility is an important factor, when a trader is expecting volatile moves, placing a stop-loss too close to the price might trigger it too fast, thus generating an unnecessary loss. Place your stop loss in consideration with the price variation volatility. If you are willing to trade a more volatile move, you are willing to take more risk, as such give some headroom to your stop loss.

The trade horizon and profit target is also an important factor, long-term trades with a more significant profit target will require a more distant stop-loss.

Trailing Stop Loss

While a stop loss will protect you from loss, a trailing stop loss will also be able to protect your current profits. As its name suggests, a trailing stop loss is a stop loss whose level changes over time, and is often set a percentage away from the current price.


Significant gap on AMD

Significant gap on AMD*

A gap is a structure in price where the opening price is different from the previous closing price. Since gaps are often produced by the market reopening, they are frequent in the stock market and can occur in the forex market, while they are virtually non existent in the crypto market.

Gaps are extremely important to take into account as they might trigger a stop loss at a significantly different price, and as such, present additional risk! There are various solutions toward avoiding this problem, one being closing any positions before the market closes.

Take Profits

Like a stop loss, take profits allows a trader to close a position once a certain price level is reached, however as their name indicates, take profits execute for a profit, and not for a loss.

Do's & Don'ts


Use a position inferior or equal to 2% of your capital.

Have a defined trader profile.

Be aware of news to see where a security might become volatile.

Diversify your portfolio (3 securities minimum is recommended)

Have a robust money management strategy.

When trading trends, make sure to set your indicator settings such that you don't catch retracements in the trend, this can often be achieved by using higher settings.


Don't keep a losing position that exceeds your loss aversion.

Don't use aggressive position sizing strategies such as martingales.

Don't make impulsive trades based on non educated guess.

Avoid trading lower timeframes where frictional costs are more significant.