One of the keys to being a successful day trader is to have a summary of rules that you consistently follow. Unlike a normal job where you’ll have a boss overlooking your shoulder, as a day trader you’ll be your personal boss and thus lead to your own results. By writing down and following your day trading rules, you’ll develop a system that reinforces your trading discipline and prevents you from making costly errors. In this posting, I’ll share my three most important day trading rules.
Rule #1: Manage Risk On Every Trade
This rule is really the building blocks of my trading philosophy. It means that on every trade I make, my first consideration isn’t how much potential profit I possibly could make, but how much money I could potentially lose. Way too many traders focus too much on the potential profit and overlook the importance of risk management. Before I make any trade, I know 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 is to hit consistent singles and doubles and not necessarily home runs.
Rule #2: Limit Midday Trading
Another key to becoming a consistently profitable day trader is to understand the importance of the time of day. When it comes to trading opportunities, not absolutely all times are created equal. Generally, there is a lot more volatility and volume in the stock market at the open and close of trading and a pronounced lull in trading activity during the middle of your day. Because day traders need volatility to create money and also 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 concerning 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 will get instant feedback on your decisions. During 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 various times where poor trades end up being profitable while excellent trades don’t workout. So as to improve as a trader, it’s important that you learn from every single trade you place.
By following these daytrading rules, I know that I can 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 probably 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. yoursite.com Take the time to jot down your trading rules to create clarity to your trading and make sure you stay disciplined.