There are many day trading rules that investors should follow, but some are more important than others. The following ten will help day traders build a solid foundation.
Two things are absolutely essential to successful day trading. First, you must have guidelines or rules that will assist you in a wide array of investment scenarios. Second, you have to develop the discipline to stick to these rules even when things seem the most chaotic.
Day Trading Rules You Can Rely On
Far too often– usually under stressful conditions– investors will forget what they know and start going on gut instinct. While understandable, this usually leads to very negative outcomes. By practicing the following 10-day trading rules, you can avoid this unenviable fate and make a consistent profit.
1. Master the 3 ‘E’s: Enter, Exit, Escape in Day Trading Rules
To start off, you need to set clear boundaries for yourself to maximize gains and minimize losses. Have a predetermined enter price, exit price, and escape price. That way, you know what you’re looking for when entering a trade.
These terms will determine what stocks are within your price range when you are ready to get out of a trade before taking damages, and a worst-case scenario plan for when the unexpected happens. Using a stop price to escape a trade will keep your losses down.
These boundaries can bring you steady profits while protecting you from any sudden downswings.
2. Use Limit Orders Instead of Market Orders
A market order communicates to your broker to buy or sell at the best available price, no matter what that price may be. Obviously, this does not take into account when it might be most profitable to trade. During the “flash crash” of May 2010, many market orders were filled at 10-20 points below the anticipated price, causing many portfolios to plummet in value.
When you use a limit order, you set the maximum price you are willing to buy for the minimum price at which you’re willing to sell. These parameters prevent any unforeseen changes from hurting you too much and will give you more control over each particular trade.
3. Do Not Trade Until the Market Has Been Open For 15 Minutes
When the market opens, it can be pandemonium. Many people are placing panic trades or processing market orders from the night before. Whatever the number may be right before open, they are sure to change in those first 15 minutes.
Wait until the chaos dies down to see where the actual opportunities lie. This will allow you to take advantage quickly without being blindsided by sudden changes in the market. Even weathered pros know to be wary of market open.
4. Stay Away from Margin Trading as a Rookie
When you borrow money from your brokerage to in any way finance trade, you are using margin. Pattern day traders or full-time day traders are allowed an intraday margin (usually 4:1). For example, if you have a $40,000 trading account, you would be granted enough buying power to purchase $160,000 worth of securities.
Margin trading can vastly increase your potential returns if used properly. But in that same vein, if a trade turns bad, your losses will be increased at that same rate. Day trading is now viewed as dangerous due to all the people who cashed in their 401k(s) and borrowed massive amounts of money to finance trades that all came crashing down when the bull market ended in 2000.
5. Plan Your Selling Practices in Advance
A novice may buy stocks all day long without ever thinking about when they should turn around and sell. Before entering a market, be sure you know when you should exit, and especially how to do so with a profit. Hope and dumb luck can only get you so far. Price targets and time targets will keep you on track.
6. Use a Paper-Trading Account to Practice
While opinions are mixed on the value of practice trading, some traders find it invaluable. If you decide to get a practice account of your own, set it up in a way that’s financially realistic. You’ll end up learning less– and possibly forming bad habits– if you practice with sums far larger than you’ll be using when you actually start trading. When you practice, keep in mind that the point of the exercise is to educate yourself, not to play games.
7. Use a Journal to Keep Track of All of Your Trades
Many experienced full-time traders consider a comprehensive journal to be an indispensable tool of their trade. Keeping an accurate record of your successes and failures can improve your day trading skills significantly. Just as with the development of most skills, you’re likely to gain more knowledge from your failures than your successes.
8. Don’t Base Your Decisions on Tips from Uninformed or Unknown Sources
Professional traders understand that making stock purchases based on tips from non-experts is nearly always a bad idea. Timing is everything– this is one of the implicit day trading rules– and knowing which companies are on the rise is far from enough. A truly good day trader will always profit more by using their own personal judgment than by listening to someone on the outside. If this isn’t the case, then day trading might not be for you.
9. Know When to Get Out of Day Trading
Handling a bad trade is one of the most vital skills that a successful day trader must learn. It’s also one of the most difficult. Sure, you have to let your winning trades keep going sometimes, but you also have to know when to get out. The ability to minimize losses is an absolute necessity for day traders. When in doubt, go back to Rule #1.
10. Accept Losses as Part of Your Learning Curve
Every novice day trader faces an inflection point early on in their career. Typically, it comes in the middle of a bad run, when mounting losses can make it seem like their judgment is fundamentally flawed. When this happens– and it will– you must resist the urge to start trading impulsively. This kind of practice will only make things worse. Like it or not, setbacks like these are simply a part of day trading.
Again, while these day trading rules are fairly straightforward, you still need the discipline to apply them across the board. Practice these rules consistently to avoid the danger of emotion-based trading.
About Katrina Julia Kiselinchev
MBA. CPA. CFE. CIA. NPC
Katrina Julia is a Lifestyle Entrepreneur + Creator + CEO of FLC. I love to simplify health, wealth, and business so others create a life and business they love and give back.