March 17, 2021

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Some of the best day trading rules everyone should follow

Trading without rules can be likened to a pilot flying blindly or driving with poor visibility. It won’t take long before you run into a brick wall.

As a beginner or first-timer in the financial markets, one of the reasons why you could be losing so much money is probably because you don’t have a strategy or any day trading rules to hold you from taking the wrong position. Most old-timers or experienced traders learned the importance of day trading rules the hard way and it’s a lesson they won’t forget in a hurry.

The importance of trading rules

In trading, there is no such thing as an airtight strategy. If you are looking for the best day trading rules to get started on your trading journey, you may never get your trading career off the ground.

Instead of learning the hard way and losing tons of money, you can get started with these basic rules (from experienced traders) and improve on them as you become more experienced.

The idea of having a set of rules is to prevent you from making rash decisions and not getting emotionally driven while trading.

These day trading rules will give you a framework to work within and make it much easier for you to develop your own profitable strategy.

Some of the basic day trading rules:

Now, I am sure you have heard of the basic trading rules, as you read them you might be thinking well, duh, but then as you read the rest you might see that some are not as obvious as you might think.

1. Define your trading strategy before putting money at risk

2. Have a trading plan and journal to avoid making impulsive decisions

3. Set realistic profit targets and stick to them

4. Cut your losses short but let your winners run

5. Be patient and wait for the perfect trade setup

6. Emotional detachment is key to being a successful trader

7. Keep learning and expanding your knowledge base

8. Review your trades regularly to find areas of improvement

9. Practice, practice, practice, that’s right, even after you are profitable

10. Join a trading community that you can use to bounce ideas

The rules I bet you didn’t know about

Yup, these are the rules that only experienced traders know about from years of experience in the market, I bet as you read these, they are going to have you rethinking your entire trading career.

Don’t take the trade!

Yes, I said it, don’t take the trade! Learning when not to trade is as essential as learning when to day trade. This is because if you know what situations to avoid, you can simply focus on what works for you. Giving you a real fighting chance to grow and learn as a true trader.

Sometimes is as simple as sitting at your desk and waiting for the setups to come. By doing this, you will be investing in the high probability trades which will put you in an environment that is ready for success. This is why learning when not to trade is essential for all traders in general.

Sit on your hands, yup, literally

Learning when to sit on our hands is an essential lesson we must learn as new traders. It teaches us to be patient and helps us wait for the right opportunity to come our way. This is why basic day trading rules are essential, they help us not force trades.

It also helps us avoid errors that can cause us to lose money. If we know we do not trade well before 9:45 am, then setting a rule to avoid that time frame is the most sense-worthy thing to do.

As day traders we seem to think that we have to trade every single day that the market is open. However, this is far from the truth, especially after one has gained experience in trading. And have set certain rules set in place for themselves.

Remember the three Es: Entry, exit, and escape

Before taking any trade, you must plan your entry and exit. And of course, your escape if things go south (worst-case scenarios). It’s no longer news that the market can swing in any direction at any time.

As such, your plan should be to follow the trend and make the most out of it. While you are following the trend, you should know when to enter a trade and know when to exit. That way you will be able to lock in profits and protect your account from the potential dangers of sticking around for too long.

Only noobs rush in

Speaking of rushing into trades, it’s always best to stay away from the markets during the first 15 minutes. The market tends to be rowdy and spontaneous at that time because of noobs and panic traders and market orders carried over from the previous trading day.

Also, this period is not ideal for finding reversals. It’s always best to wait for the market to settle and have a bearing before looking out for possible opportunities.

From experience, a great number of pros stay away from the market at this time (market open).

Leverage the power of limit orders

As you may already know, you can execute trades at either market order or set a limit order. A market order tells your broker to buy/sell a financial instrument or asset at the best available price.

However, years of experience have shown that the best available price is not always a profitable price.

A limit order allows you allows you decide on the maximum price you will pay and the minimum price at which you are willing to sell your positions. That way you get to set the parameters however you want. Think flexibility.

Be careful with margins

Trading a margin account means you are borrowing money from your brokerage to finance your trades. Pattern Day Traders ( PDT), those who execute more than 4 or 5 trades every day are allowed up to 4:1 margin.

Meaning that they have $120,000 worth of securities with just $30,000 in their trading account. Trading a margin account offers leverage, but leverage can either make or end your account. If things go well, you will take in large profits.

And the same goes for when the market swings against you and you get caught in the red zone. So, it’s always best to kickstart your trading journey with a non-margin account.

Make your own sensible rules

After spending some time trading we gather our data to identify certain things. For example, accurate time of day, stock prices, volume, all these criteria, and more can be useful when helping us identify our opportunities. Then, with this information, we formulate rules that apply to us specifically. For instance, no trading before 9:45 am, during lunchtime, stocks under $1.00, and so forth.

There are trading days when we might sit on our hands for hours before we take our first trade. This is perfectly normal for a trader with rules because no stock had a setup that fell within the rules or parameters.

The last rule is to stick with your rules!

The very last rule is also the most important and probably should be number one. If you don’t stick to the rules you put in place then what good are they? You must have had it at the back of your mind that having trading rules is just a piece of the puzzle. You must also develop the discipline to stick to the rules.

The role of discipline cannot be overemphasized in day trading and professional day traders will attest to that. In the heat of trading, most day traders become emotional, abandon their rules, and just wing it.

And when your start to trade without rules, you are prone to making costly mistakes — mistakes that can cost your trading account.