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: 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 is not how much potential profit I could make, but how much money I could potentially lose. 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 price at which I will exit the trade if it goes against me (my stop-loss). This ensures 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: Reduce Afternoon 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 single trade I make as a learning experience, both to learn more about the tips and techniques I’m applying in addition to obtain information about the current market. One of several beauties of trading is that you get immediate feedback on all your actions. During this review procedure, I focus my attention not on the end result from the trade but on the decisions I made. Was my position sizing suitable? Should I have moved my stop-loss? Did I follow my risk management plan? Just like any experienced trader will tell you, there are lots of occasions where bad trades result in being profitable while outstanding trades don’t work out. To be able to improve as a trader, it’s important that you learn from each and every trade you place.
By simply following these particular day trading rules, I know that I can be consistently successful and create exceptional risk/reward trades. Even though risk management might sound like an fuzy concept, I implement it by being aware of my stop-loss well before placing any trade. I’m also aware of the most favorable times to trade and restrict my trading when situations aren’t perfect. Lastly, I gain knowledge from every trade I make by having a comprehensive review process. Take time to jot down your trading rules to give lucidity to your trading and be sure you remain self-disciplined.