Day Trading Rules

Here are some quick day trading rules I like to live by. These types of quick and simple rules tend to keep you sane in an insane market. These rules in normal auction behavior tend to work. There are exceptions when they don’t: market announcements, short squeezes, surprise announcements or panic situations resulting from world events.

1.) Don’t bet against the overall market momentum. As far as day trading rules go, this one is huge. Are you trying to trade GOOG long while the market is tanking? Not a wise choice. The market overrides individual stocks.

2.) Don’t place trades based on a “feeling” you are having. Your day trading rules should be in place and followed; that’s why they are rules. Your “feelings” on the matter will generally get you in trouble. Don’t worry about those times when your “feeling” turned out to be right. Stick to the hard data of your rules, and you will be ahead more often than not.  Using a mentor or trading service can help you out with this.  Check out my review of TraderSmarts’ trading services here.

3.) Don’t allow fear to dictate your day day trading rules. If you take a few losses because you don’t follow your rules, then your inner monkey may take over your emotions causing you to hesitate on the trades you should be making. This can have a compounding roller-coaster effect on your day trading rules. Before you know it, you will lose complete confidence the rules you have made. This is devastating to a trader’s mentality and account. When experiencing these types of effects, you need to a break immediately. Get up and walk around and clear your head.

Need to clear your head? Don't do it by jumping back into another trade. (photo credit: melodi2)

4.) Cut your losses quickly. I hate taking losses, everyone does, but it’s just the cost of doing business with the market. The market will require you to give back some of your gains. That is the cost of knowing if a trade idea will work. So imagine that you are of the personality type that feels they cannot take a loss. You may end up holding on to a losing position that never comes back. I have watched a trading career come to an end playing that way. It was unbelievable. I had never seen a guy make so much money so fast, only to lose it based on the idea that he never took losses. This is a business and needs to viewed as such; losses are a part of that business. Plan for those losses and they won’t bother you nearly as much.

5.) Trading during the first 30 minutes can be good… or very bad. This can be a wonderful idea or it can end in some pretty frustrating losses. A lot of people only play the first 30 minutes of the trading day and then call it quits. If you are a very savvy and experienced trader, then by all mean, do your thing. But if you are just starting out, that first 30 minutes can be extremely tricky. Stop losses being triggered during the opening is not out of the ordinary. It almost seems to be the norm, so be careful if you are trading during that opening, it can be extremely choppy.

The biggest rule of all? Stick to your day trading rules; that’s why they’re there.