One of the keys to being truly a successful day trader would be to have a summary of rules that you consistently follow. Unlike a normal job where you’ll have a boss overlooking your shoulder, as each day trader you’ll be your own boss and thus be responsible for your own results. By recording and following your entire day trading rules, you’ll create a system that reinforces your trading discipline and prevents you from making costly errors. In the following paragraphs, I’ll share my three most significant day trading rules.
Rule #1: Manage Risk On Every Trade
This rule is really the building blocks 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 cash I could potentially lose. Way too many traders focus too much on the potential profit and overlook the need for risk management. Before I make any trade, I understand what my downside is and the price at which I will exit the trade if it goes against me (my stop-loss). This means that no single losing trade will undoubtedly be catastrophic. As a trader, my goal would be to hit consistent singles and doubles and not necessarily home runs.
Rule #2: Limit Midday Trading
Another key to learning to be a consistently profitable day trader is to understand the importance of the time of day. Regarding trading opportunities, not all times are created equal. Generally, there is much more volatility and volume in the stock market at the open and close of trading and a pronounced lull in trading activity through the middle of your day. Because day traders need volatility to make money and also must overcome their transaction costs, trading in the center of the day is frequently a negative idea. To enforce this rule, I keep my eye on the clock and drastically reduce my position sizes and risk in the center of the day (generally from 10:00 am -2:00 pm CST).
Rule #3: Review Every Trade I Make
I view every trade I make as a learning experience, both for more information concerning the strategies and techniques I’m using in addition to to gain information about the existing market. Among the beauties of trading is that you get instant feedback on your decisions. During this review process, I focus my attention not on the results of the trade but on the decisions I made. Was my position sizing ideal? MUST I have moved my stop-loss? Did I follow my risk management plan? As any experienced trader will tell you, there are lots of times where poor trades become profitable while excellent trades don’t workout. In order to improve as a trader, it is important that you learn from each and every trade you place.
By following these day trading rules, I know that I could be consistently profitable and make excellent risk/reward trades. While risk management may appear to be an abstract principle, I implement it by knowing my stop-loss ahead of placing any trade. I’m also aware of the most opportune times to trade and limit my trading when conditions aren’t ideal. Finally, I gain insight out of every trade I make by having a thorough review process. Take the time to write down your trading rules to bring clarity to your trading and make sure you stay disciplined. Matt Poll scam