Day traders manage their risk differently to most other types of traders, such as swing traders or investors.
Day traders elect not to carry positions into the next trading day. This could be because they prefer not to hold any risk while markets are briefly closed, or it could be due to increased margins.
Day traders or intraday traders attempt to capture moves that occur during the day. When normal investors study a day chart it does not really reflect the activity and show the smaller fluctuations that occur.
We simply see the high/low/open/close (candlestick and bar) and it is not until we reduce the timeframe considerably that we begin to observe all the price action that took place. It is the latter that day traders are trying to capture. They may only trade once or twice a day or possibly execute more than 10 trades. Scalpers may even trade more than 50 times in a single day!
Short term traders focus on monetary terms
Longer-term traders generally deal in percentages when managing their risk, however short-term traders focus more on monetary terms. They will have a daily loss maximum, and this must be split, depending on the number of trades they expect to do on the day.
A trader may be willing to risk $500 per day and expect to trade five times, which equates to risking $100 per trade. He is likely to be stopped out on many of his trades, certainly in volatile markets as his stop loss would be tight, depending on the contract he is trading. He calculates his risk-reward for each trade – if he is prepared to lose X then can he achieve 2X minimum (2:1) – twice as much potential profit against the potential loss.
Different types of day traders
There are many types of traders, all holding their positions for different lengths of time. I have already mentioned intraday, day trader, scalper and investor. There are also, arbitrageur, swing trader, breakout trader, technical trader, fundamental trader, instinct (gut trader), and of course, algorithmic traders that use bots to execute.
Trading is a different journey for everyone and much depends on their background, character, capital, and risk appetite as to which category each falls into.
Scalping (not advised), intraday and day trading are the most challenging as stop losses are pretty close to entries and as we know, most trades will go against us before they turn in our favour…if they are going to!
Traders that hold positions for days, weeks, months or years, trade less frequently, are more selective on their entries…and extremely patient (one of the key attributes of a successful trader, along with consistency). They therefore manage their risk in a different way.
Day traders assess the capital they will invest in the trade and know what percentage they are prepared to risk of that capital. They put their trade on and then relax, letting the trade play out. They will hold that position until they are stopped out or it reaches their target price.