Many people imagine day traders sitting in front of five monitors with 15 indicators running in real time and a “squawk box” feed live from the trading floor while MSNBC blares away in the background. However, the best day traders start with one main principle… KEEP IT SIMPLE! By following the day trading rules below, you will have a much better chance of developing your own trading system and stand a greater chance of success.
1. Know Your Market
The best day traders focus on only a small number of indices or stocks. Get to know them intimately and over time, you will be naturally be in sync with the rhythm of your chosen instruments. Beginner day traders should try to familiarize themselves with their chosen instruments by experimenting with a day trading simulator before investing their own capital.
2. The Three E’s: Enter, Exit, Escape
Once you have decided to make your first trade, the most important day trading rule is to have an enter, exit and escape price. Before you even make the trade, you must know when to get in, when to get out and what to do if the trade doesn’t work out as expected.
Having a selling plan is necessary before your make the trade. Most rookie day traders spend their time thinking about stocks they want to buy without considering when to sell. “Playing it by ear” is not a selling strategy, nor is hope. Setting a selling price target as well as a time target is a rule all experience day traders follow.
Escaping a trade, also known as a stop price, is necessary to minimize your losses if the stock doesn’t respond according to your predictions. Setting an escape price you are comfortable with will allow you to lock in profits as well as save you from potential disasters.
3. Avoid Trading During the First 15 Minutes of the Market Open
The first 15 minutes of market action are usually panic traders or market orders placed the night before. Even many pro traders choose to avoid the market open. So, if you are new to day trading, or looking for quick profits, its best to wait a while until you gain more experience. Soon, you will be able to spot reversals and find rewarding opportunities to trade.
4. Stick To Your Plan
One of the most important day trading rules is to always stick to your plan. However, make sure your trading plan models the best trading practices and maintain a winning percentage. For example, a good strategy is objective and leaves little room for human emotions to get in the way. If this is accomplished, then over time you will make money by sticking to it.
5. Don’t Be Greedy
Do not try to squeeze the last tenth of a point out of each trade. By not hanging on for ‘maximum profit’, you will not risk the chance of a winning trade turn into a losing trade.
In case you pick a loser, take a loss where necessary. Most day trades fail because they fail to kill their losers soon enough, not because they cannot make winning trades. Knowing when to cut your losses is one of the most important day trading rules to follow. If you minimize your losses, you can come back to fight another day.
Following your own rules is one of the biggest challenges many novice day traders face. However, any successful day trader will always have the self-control to follow his or her own day trading system. For more information on how to become a successful day trader check out some of the articles below!