One of the keys to being a successful day trader is to have a list of rules that you consistently follow. Unlike a regular job where you would have a boss looking over your shoulder, as a day trader you’ll be your own boss and thus be responsible for your own results. By writing down and following your day trading rules, you’ll create a system that reinforces your trading discipline and prevents you from making costly errors. In this article, I’m going to share my three most important day trading rules.
Rule #1: Control Risk On Each Trade
This rule is really the foundation of my trading approach. This means that on each trade I make, my first concern isn’t how much potential profit I might make, but how much cash I could possibly lose. Lots of traders focus excessively about the potential profit and neglect the importance of risk management. Before I make any trade, I understand what my downside is and the price at which I am going to get out of the trade if it moves against me (my stop-loss). This makes sure that no individual losing trade is going to be catastrophic. Being a trader, my goal is always to hit regular singles and doubles and not always home runs.
Rule #2: Limit Midday Trading
Another key to learning to be a consistently profitable day trader is to understand the significance of the time of day. With regards to trading opportunities, not all times are the same. Commonly, you can find a lot more volatility and volume in the stock market at the open and close of trading and a noticeable lull in trading activity during the middle of the day. Considering that day traders need volatility to make money and also need to overcome their transaction fees, trading in the middle of the day is normally a bad idea. To implement this rule, I keep my attention on the clock and significantly reduce my position sizes and risk in the middle of the day (commonly from 10:00 am -2:00 pm CST).
Rule #3: Review Every Trade I Make
I view every trade I make as a learning experience, both to learn more about the strategies and techniques I’m using as well as to gain information about the current market. One of the beauties of trading is that you get instant feedback on your decisions. During this review process, I focus my attention not on the results of the trade but on the decisions I made. Was my position sizing ideal? Should I have moved my stop-loss? Did I follow my risk management plan? As any experienced trader will tell you, there are many times where poor trades end up being profitable while excellent trades don’t work out. In order to improve as a trader, it’s important that you learn from every single trade you place.
Summary
By following these day trading rules, I know that I can be consistently profitable and make excellent risk/reward trades. While risk management may sound like an abstract principle, I implement it by knowing my stop-loss prior to placing any trade. I’m also aware of the most opportune times to trade and limit my trading when conditions aren’t ideal. Finally, I gain insight from every trade I make by having a thorough review process. Take the time to write down your trading rules to bring clarity to your trading and ensure you stay disciplined.
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