10 Important Day Trading Rules

If you are going to day trade, it’s essential to have a set of rules to manage any possible scenario. Even more important, you must also have the discipline to follow these rules.  Sometimes, in the heat of battle, traders will throw out their own rules and play it by ear — usually with disastrous results.

Although there are many rules, the following are the 10 most important:

1. The three E’s: enter, exit, escape

Rule No. 1 is having an enter price (buy in a series of buys as the strong stock dips), an exit price (a series of sells starting a certain price higher scaling out of the position), and an escape price (monitor stops to approx. 1% - 5% of trade dollar amount) in case of a worst-case scenario. This is rule number one for a reason. Before you press the “Enter” key, you must know when to get in, when to get out, and what to do if the trade doesn’t work out as expected.

Escaping a trade, also known as using a stop price, is essential if you want to minimize losses. Knowing when to get in or out will help you to lock in profits, as well as save you from potential disasters. Do not be Greedy or you will be punished more than rewarded.

2. Avoid trading during the first 15 minutes of the market 

Those first 15 minutes of market action are often panic trades or market orders placed the night before. Novice day traders should avoid this time period while also looking for reversals. If you’re looking to make quick profits, it’s best to wait a while until you’re able to spot rewarding opportunities. Even many pros avoid the market open. Wait for the opportunities to present themselves to you.

3. Use limit orders, not market orders

A limit order, lets you control the maximum price you’ll pay or the minimum price you’ll sell. You set the parameters, which is why limit orders are recommended. Can always set price below the bid to get out.

4. Margin can be your friend or foe

When you use margin, you are borrowing money from your brokerage to finance all or part of a trade. Full-time day traders (i.e. pattern day traders) are usually allowed 4:1 intraday margin. For example, with a $30,000 trading account, you’ll be given enough buying power to purchase $120,000 worth of securities. Overnight, however, the margin requirement is still 2:1. Using a prop firm to trade with pro traders get 10:1 leverage trading with $300,000 in buying power from the same $30,000 account.

When used properly, margin can leverage, or increase, potential returns. The problem is that if a trade goes against you, margin will increase losses.

If you have the ability to trade with a mentor than can show you the WHAT, WHY & HOW trades happen would be invaluable resource so you do not learn to trade on your money.

5. Have a Selling Plan

Before you enter the market, you need to know in advance when to exit, hopefully with a profit. “Playing it by ear” is not a selling strategy, nor is hope. As a day trader, you’ll set a price target as well as a time target. DO NOT BE GREEDY – SELL ON THE WAY UP. IF YOU THINK IT”S GOING HIGHER SELL HALF AND RIDE THE REST ON THE HOUSES MONEY AND RAISE THE STOP SELL PRICE HIGHER AS THE STOCK CONTINUES TO CLIMB.

6. Keep a journal of all your trades

Many pros swear by their journal, where they keep records of all their winning and losing trades. Writing down what you did right, or wrong, will help you improve as a trader, which is your primary goal. Not surprisingly, you’ll probably learn more from your losers than your winners. Keep track of your daily equity and commissions so you know at all times what your costs of trading are.

7. Practice day trading in a paper-trading account

Although not everyone agrees that practice trading is important, it can be beneficial to some traders. If you do open a practice account, be sure to trade with a realistic amount of money. It’s not helpful to practice trade with a million dollars if the most you have in your account is $100,000. Also, if you do practice trade, think of it as an educational exercise, not a game.

8. Cut your losses & Bankroll management

Managing losing trades is the key to surviving as a day trader. Although you also want to let your winners run, you can’t afford to let them run for too long. It’s more art than science to get it right, but learning how to control losses is essential if you are going to day trade. Once again, never forget the three E’s: (enter, exit, and escape). Bankroll management – try to put 10% of your account into each trade. If you trade an account with $100,000 in buying power you should put $10,000 - $20,000 in each trade with a 1% to 3% stop loss.

9. Be willing to lose before you can win

Although many traders can handle winners, controlling losing stocks can be difficult. Many rookies panic at the first hint of losses, and end up making a series of impulsive trades that cost them money. If you’re day trading, you must be willing to accept some losses. The key: know in advance what you’ll do if you’re confronted with losses.

Although anyone can learn to day trade, few have the discipline to make consistent profits. What trips up many people are their emotions, which is why it’s so important to create a set of flexible rules. Your goal: follow the rules to help keep you on the right side of any trade.

10. Be well rested and in a good frame of mind

You will trade your best when you are well rested and confident.