Market Insider's Trading Room uses the simplified table below to illustrate a few important observations about profit and loss. Most trading strategies have a built-in success/failure rate. For example, scalping incurs a high %WIN but a low AvgWIN. Alternatively, buying breakouts reflects a lower percentage of winners but the average gain is greater. Regardless of how you trade, the market offers only three ways to improve profitability (for any given number of trades):

• Raise your %WIN
• Raise your AvgWIN
• Lower your AvgLOSS

Day traders have fewer profitability options than position traders. Price tends to move away from an entry point as a function of time. So individual day trading gains (AvgWIN) are generally smaller than position trading gains. Very short-term time frames also frustrate attempts to raise %WIN since day traders must be right immediately while a position trader can wade through many whipsaws to get to a profit.

But day traders are in a much better position to control losses than position traders. The price-time tendency now works to their advantage. In other words, incurred losses should be smaller (on average) because the position is held a shorter period of time. This allows day traders to take their individual losses closer to -0- than position traders.

Manage the loss side of trades and you'll increase profits more quickly than chasing gains. In preparing your exit, recall a valuable rule for optimal technical analysis entry: execute your trade where price must move only a short distance to prove that you are wrong. This frequently defines a strategy where you enter a promising position right at support/resistance. If price goes through the line, exit immediately with a small loss and get on to the next trade.

You have to be very, very good before you allow yourself to be bad. %WIN simply measures your winners against losers. If you make money on 3 out of 4 trades, your %WIN is 75%. See how the average loss changes from the 75% to 25% levels.

AMZN's daily range expands over a 3-day holding period. This tendency of price to move away from an entry point underscores a natural advantage the day trader has over the position trader or investor. The shorter a position is held, the more efficiently losses can be taken. Day traders must capitalize on this mechanism through quick exits on non-performing entries.