Basic day trading rules for beginners
Table of Contents
Basic rules in trading
Thanks to advancements in technology, virtually every person who fancy trading in the financial markets can easily open a brokerage account (from the comfort of their homes) without breaking a sweat.
While access to the financial markets is increasingly made easy ( which is a good thing), there is a need for new traders or will-be traders to be cautious about how they get into the markets, especially as traders.
A quick peek at the online platforms will lead you to a very long list and a vast library of trading ideas and strategies from experienced traders and amateurs alike on how to enter trades.
Even though some of the resources you will find online are not far from what’s obtainable in day trading, some are entirely off-course. As such, to make the right decision about trading, you must make time to grasp the basic day trading rules and opt into mentorship programs that will take you by hand and provide all the support you need to make your trading journey relatively smooth.
Here are some of the basic day trading rules that should form the bedrock of your trading decisions:
1. Have a plan and know what you are doing
One of the most important rules in day trading is to have a plan and know what you are doing. A lot of people make the mistake of jumping into day trading without having any plan or idea of what they are doing.
Without a plan, it is very easy to lose track of your trades, your goals, and your overall performance. A trading plan helps to keep you focused and motivated, and also provides a clear roadmap for achieving your trading goals.
2. Start small and gradually increase your position size
Another important rule in day trading is to start small and gradually increase your position size as you become more comfortable with the markets. Many new traders make the mistake of going all-in from the start, which often leads to big losses.
Starting small will also help you to manage your risk better and focus on learning how to trade rather than on making money. Once you have a good understanding of the markets and how to trade, you can then start to increase your position size.
3. Use stop-losses to protect your capital
Stop-losses are one of the most important tools in day trading and they should be used to protect your capital. A stop-loss is an order to sell a security at a certain price, and it is used to limit your losses in case the market goes against you.
You should always have a stop-loss in place before entering a trade, and it should be placed at a level where you are comfortable losing. Remember that you can always re-enter the trade if the market turns back in your favor.
4. Take profits when you can
Another important rule in day trading is to take profits when you can. Many new traders hold onto their trades for too long, hoping to make a big profit. However, this often leads to large losses as the market can quickly turn against them.
It is important to remember that you should not let your profits run too far, as you always want to lock in some profits in case the market turns against you. However, you also don’t want to take profits too early, as you may miss out on further gains.
5. Cut your losses quickly
One of the most important rules in day trading is to cut your losses quickly. Many new traders hold onto their losing trades for too long, hoping that the market will turn back in their favor. However, this often leads to even bigger losses.
It is important to remember that you should not let your losses run too far, as you always want to limit your downside. However, you also don’t want to exit your trades too early, as you may miss out on further gains.
6. Manage your risk
One of the most important rules in day trading is to manage your risk. You should always have a risk management plan in place before entering a trade, and this plan should include your stop-losses and position sizes.
Many new traders make the mistake of not managing their risk, which often leads to big losses. Remember that you can always lose more than your initial investment, so it is important to always use proper risk management.
7. Stay disciplined
Another important rule in day trading is to stay disciplined. This means following your plan and sticking to your rules. Many new traders make the mistake of deviating from their plan, which often leads to big losses.
It is important to remember that you should always stick to your trading plan, and only make changes if you have a good reason to do so. Otherwise, you are simply increasing your chances of making a mistake.
8. Have patience
One of the most important rules in day trading is to have patience. Many new traders make the mistake of entering trades too early, sometimes even before the market has moved in their favor.
However, it is important to remember that you should always wait for the perfect setup before entering a trade. Otherwise, you are simply increasing your chances of taking a loss.
9. Keep a journal
One of the best ways to improve your day trading is to keep a journal. In this journal, you should track your trades, both winning and losing. This will help you to identify your mistakes and learn from them.
It is also important to note down your emotions during your trades, as this can help you to manage your risk. If you find that you are losing control of your emotions, then it is time to take a break from trading.
10. Review your trades
Another important rule in day trading is to review your trades. This means going over your journal and analyzing your winning and losing trades. This will help you to identify your strengths and weaknesses.
It is also important to always be learning, and there are many great books and courses available on day trading. By constantly reviewing your trades and learning from your mistakes, you can improve your day trading skills over time.
Getting a good trading education
With the proper trading education on day trading, you would have saved yourself the heartbreaks of running into brick walls and getting caught on the wrong side of the swing. Also, you won’t be downloading whatever app that crosses your path.
Apps like Robinhood and Webull are pretty easy to get, and anyone can download them within minutes. Downloading trading apps has never been an issue. The big question is, now that you have downloaded your choice app, what’s next?
Have you got the skillset and experience to start taking trades, or are you going to wing it? Starting your trading journey by “Winging it” is arguably one the quickest ways to fail as a day trader or stock trader. Between 90% to 95% of day traders lose money trading blind or winging it, simply because they don’t poses some of the basic day trading rules.
If you want to be part of the 5% or 10% that actually make it as professional day traders, then you must follow the rules stated above as you get educated.
Why do you need to follow basic day trading rules?
Unless you are looking to “blow” your trading account even before you get started day trading, you will invest in trading education, which most people overlook before trading or investing in the stock market.
To be on the safer side and not continuously throw your money to the sharks (speaking of unethical brokers) and avoid making avoidable mistakes, it will help a lot if you make time to understand basic day trading rules before risking your hard-earned money in the open market.
For starters, every day trader should learn to conserve/manage their capital and be mentally prepared to take on the ups and downs of trading.
Yes, it takes time to learn the basics of trading and even longer to learn how to control one’s emotions during trading. And controlling one emotion is a big part of day trading.
Speaking of emotions, having your emotions in check is an essential aspect of trading. If you are constantly struggling or grappling with your emotions, then you may have to step on the brakes and figure out how to be in control. You wouldn’t want to be second-guessing yourself before taking trades.
As a day trader, your primary concern is catching as many profitable movements in the markets. It’s the little wins that compound into something big — more like the proverbial drops that make an ocean.
Compounding profits and keeping losses low is the driving force behind every trader. And that leads to developing suitable trading and learning proper risk management techniques/practices.
When making decisions regarding your trading strategy, you must learn how not to allow your emotions to get in the way of your trades. This is why you often hear traders (experienced and inexperienced, profitable and non-profitable) talk about the importance of sticking to basic day trading rules.
Combining education and the basic rules
You can’t afford to make rash decisions while opening positions because you may end up making the wrong decisions and losing your capital or running your account aground.
While it may take time to establish your trading rules, you don’t necessarily have to take “forever” to develop your strategy. With the aid of a good course that teaches you the ins and out and what mistakes to avoid, you already are miles ahead of the masses.
How to apply trading rules
As we mentioned earlier, there is a myriad of basic day trading rules out there, and every trader has a unique trading style. While some traders prefer a hands-on approach to trading — technical and fundamental analysis, others rely on trading signals and alerts or automated trading systems.
Regardless of what trading rules you adopt, you can always consider trading rules from other traders. For instance, some traders don’t trade stocks under $1.00 and don’t initiate trades until it’s 9:45 am EST.
Pro-traders don’t chase momentum but instead wait for patterns to develop — trading price action. These are a few rules you should consider while developing your trading strategy.
Trading rules are not binding. However, they will help you make an informed decision and guide you on your trading journey.
Factors to look out for in trading rules include getting an education on how to trade (knowledge is power), and your trading rules must be realistic. You also need to keep your emotions in check and determine how much capital you want to start with.
Your trading rules should take into consideration your entry and exit plan, the number of stocks or positions you should hold at any given time, trading time frames, rush hour, and limit orders, among others.
Lastly, day trading requires time, skills, and discipline. If you can strike a balance between these criteria, you will be amazed at how far and smooth your trading journey will be.
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