One of the keys to being truly a successful day trader is to have a list of rules that you consistently follow. Unlike a normal job where you would have a boss overlooking your shoulder, as each day trader you’ll be your personal boss and thus be responsible for your own results. By recording and following your entire day trading rules, you’ll develop a system that reinforces your trading discipline and prevents you from making costly errors. In this post, I’ll share my three most significant day trading rules.
Rule #1: Manage Risk On Every Trade
This rule is really the foundation of my trading philosophy. It means that on every trade I make, my first consideration isn’t how much potential profit I could make, but how much money I could potentially lose. Too many traders focus an excessive amount of on the potential profit and overlook the need for risk management. Before I make any trade, I understand what my downside is and the purchase price at which I am going to exit the trade if it goes against me (my stop-loss). This means that no single losing trade will be catastrophic. As a trader, my goal would be to hit consistent singles and doubles and not necessarily home runs.
Rule #2: Limit Midday Trading
Another key to learning to be a consistently profitable day trader is to understand the importance of that time period of day. When it comes to trading opportunities, not all times are created equal. Generally, there is much more volatility and volume in the stock market at the open and close of trading and a pronounced lull in trading activity through the middle of your day. Because day traders need volatility to create money and in addition must overcome their transaction costs, trading in the center of the day is frequently a bad idea. To enforce this rule, I keep my eye on the clock and drastically reduce my position sizes and risk in the middle of the day (generally 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. Among the beauties of trading is that you will get instant feedback on your decisions. In this review process, I focus my attention not on the outcomes 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 several times where poor trades end up being profitable while excellent trades don’t work out. In order to improve as a trader, it is important that you learn from every single trade you place.
By following these daytrading rules, I know that I could be consistently profitable and make excellent risk/reward trades. While risk management may appear to be an abstract principle, I implement it by knowing my stop-loss ahead of 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 with a thorough review process. Take time to jot down your trading rules to create clarity to your trading and ensure you stay disciplined.