10 Essential Day Trading Rules You Can Use

You’ve read a bit about day trading online and would like to get started on your own trading journey. You need to develop some day trading rules but don’t know where to start ?

Not to worry, this post has got you covered. 

If you don’t know where to start, this getting started in trading guide is a useful post on where to begin. Once you have some idea of what you have to do to get started, you’ll need day trading rules to follow.

Now, before we dig into this topic, let’s make one thing clear. There are different rules for different traders and that is completely fine. These rules are just some I lived by when I was day trading.

You can use these or create your own around what you find unique and helpful to your own trading strategy. The checklist is a daily routine you can follow to improve your own day trading and keep you on the right path of growth.

It’s all about getting better and we all have to start somewhere so never compare yourself to others when you are starting out. No one trader is the same and like I mentioned above, you can create your own unique rules that suit your own personality.

These rules are best for beginner traders (actually both beginners and veterans) but we would assume veterans are aware of them.

So without further ado, let’s dig in.

day trading rules

 

Day Trading Rules To Live By

  • Have An Exit & Stop Loss Point Before Entering The Trade
  • Have A Trading Plan
  • Always Work On Your Trading Psychology
  •  Don’t Risk Large Amounts Of Capital On Individual Trades
  • Avoid Illiquid Hours For Trading
  • No Adding To Losing Trades
  • Avoid Boredom Trading
  • Stick To Your Daily Loss Allowance
  • Use Limit orders over market orders

 

Now, that we have a list of 10 very important rules, let’s explain them in a bit more detail.  These rules will not guarantee instant success but will merely take you on the right path and may help avoid some major draw-downs if followed correctly.

The hardest part of course being to have the strict discipline required to follow them. 

 

We will all go through tough times in the markets, that is probably the one guarantee from trading. What separates the success from the failures is how we overcome these obstacles and move forward.

The rules are simply a protection mechanism against yourself should things take a turn for the worst and you are staring at a potential big trading loss

 

1. Use Limit Orders Over Market Orders

The first rule is to simply use limit orders over market orders. For those that don’t know, limit orders are simply placing an order at a price you want in advance of price getting there. The benefit here is you won’t encounter slippage compared to market orders.

Imagine buying a breakout and getting filled 20 cent higher than you wanted? 

Well, this is a risk you run especially if you buy illiquid stocks on market orders.  It’s much better to use limit orders to eliminate this problem.

If you don’t get a fill at a price you want, who cares! There will always be plenty more opportunities around the corner. Over time, using limit orders is far more advantageous in the long run, not to mention the savings on fees.

Limit orders are providing liquidity in the market. As a result, brokers charge less as opposed to market orders which are more expensive.

There are circumstances where market orders are useful but to keep things simple for rookies, it’s better to stick with limit orders until you get more experience and even then I’d still be reluctant to use them on entry.

 

2. Have An Exit And Stop Point Before Entry In The Trade

 

day trading rules to live by

 

Another very important rule to live by is knowing where to get out.  Picture the scenario you see a trade you want to entry, you get in and it goes against you. You don’t know where to get out, panic and hold.

Before you know it, you are staring at a big fat loss that could easily have been avoided.

Always come prepared or the market will humble you very quickly. Unfortunately, this is an expensive lesson most of us have to learn the hard way.  Know where you want to stop out if you are wrong in advance of even entering the trade.

Simply put  – Always cut your losses !

I’d rather be sore over a small loss than sore and broke over letting a trade get out of hand.

 

3. Keep A Trading Journal

day trading under 25k

If you’ve read articles on this site before, you’ll probably know the importance of keeping a trading journal.  How can we improve if we don’t journal everything.

You are very unlikely to remember ever little detail of a trading day so write it down. You’ll be surprised how fast you can improve when you start to notice patterns in your own trading that need to be addressed and improved upon.

 

It’s also why I include journal software in the best tools for traders.  Even a simple spreadsheet is more than enough. You need to be journalling. If you are fortunate enough to have made a million without a journal, maybe you could have made $2 million had you used one. e

My breakthrough came when I started journalling in detail where I was going wrong and working on it.

 

4.Have A Trading Plan

trading plan rules

Not to be confused with knowing where to enter and exit, this is a more detailed version. What I mean by having a trading plan is know what your trading strategy is inside and out.

Every trader should have a trading business plan when they get started. It should outline your strategy in detail and have contingency plans for every possible scenario you can think of.

If you don’t have a trading plan and would like a template to follow, this trading plan post has a useful template you can download and follow when getting started.

From that, you can see the level of detail required. Treat trading like a business if you want to make money, not a hobby.  If you have it all written down, you’ll be far more likely to succeed and that’s the ultimate goal.

 

5. Work On Your Trading Psychology

trading psychology

Ah yes,  a very tough one. Trading psychology can be the hardest thing to work on. Why ? Because we are emotional human beings.

Even the calmest of individuals can crack when they take a big loss.

Simple example: 

Imagine you have a string of losses and get angry and revenge trade? If you’re honest with yourself, you’ve probably done this at least once in your trading career. Well, imagine the damage that can do to your overall returns.

This is a simple example of how your trading psychology can play such an important role in your progress.  Read this how to guide for tips on improving your psychology.

I wish there was a button where I could turn off my emotions completely but I can’t and am forever working on this myself.

 

6. Don’t Risk Large Amounts Of Capital

day trader rules

Sounds obvious right ? Don’t risk too much capital on a trade or risk blowing up. Yet so many of us do it.  If you read my trading story, I too did this when I started trading and it was a very sore lesson to learn.

Now, if you follow the other rules above, this shouldn’t be a problem for you.  But just to illustrate how important it is, let’s look at  a simple drawdown recovery chart to show exactly the return you need to comeback from losses.

 

So looking at this chart, cut your losses short folks. There’s a reason why top traders always say keep losses small and this is exactly why!

 

7. Avoid Illiquid Trading Hours

Now, this comes with a bit more experience and should be included within your own trading plan. But there are times of the day where markets get really illiquid.

Obviously, there are exceptions but overall the low volume periods of the day are times to be avoided. You can get poor entries and prices are easier to manipulate during these times.

These times vary for markets and simply looking over your charts and the volume at different times is a simple and effective way to know when you should try avoid trading these times.

Most day traders lose money during these illiquid times so focusing on avoiding this can be very helpful.

day trading rules to live by

Although the chart is a daily one, you can still see the importance of avoiding illiquid times. Look how the breakout failed.

Why? There was no volume. So  stocks with little to no volume usually means choppy sideways action and should be avoided.

 

8. Don’t Add To  A Losing Trade

Paul tudor jones losers average losers

There’s a reason Paul Tudor Jones has a sign above his computer “losers average losers”

Simply put, why would you buy more of a stock going down if you are already in a loss. This can be a very dangerous game to play and can cause a blow up very fast.

Now, just to be clear. There are traders who scale into a trade and that’s fine. By this I mean they may plan to buy or short within a particular price range of say a dollar. So in this scenario, they would have planned for this and adjusted their risk accordingly.

This is different to buying some at example $40. Then deciding when it hits $35, you’ll buy more.  This is the number one cause of blowing up.

 

9. Avoid Boredom Trading

boredom trading rules

When you find yourself having to force a trade you think is there, you are boredom trading. Generally, this occurs during illiquid market hours and is more common in day trading than other styles of trading.

It’s hard to recognize when you are trading out of boredom but if you can, it’s best to get away from your desk or go online shopping ( trust me, that’s cheaper than the money you could lose boredom trading)

If you have no trade setups for the day, this can be a common time you might decide to force things. This for me was one of the toughest challenges I personally faced as a rookie.

 

10.  Have A Daily Loss Amount

Another very important rule for day traders. You need to have a daily loss amount. I don’t care who you are. If you suffer a few losses in a row or one larger loss, you are not trading at 100%

You need a figure where you stop trading for that day. It can be any number unique to you.  A loss where you know that any more trading afterwards will be useless and unproductive and cause more damage than benefit were you to continue.

You’ll  ‘know your number’ with a bit of experience.  

The easy part is knowing your number. The hard part is stopping trading when you hit it.

A simple solution is setting up with your broker a system to cut your buying power when you hit it. That can act as a protection against yourself to ensure you don’t go to crazy with it.

  

Conclusion

Throughout the course of your trading careers, you’ll gain more experience and realize how important a solid foundation of good rules is. The key is simply to protect your capital at all costs.

With protections in place, we can live to fight another day. 

There will be the inevitable tough times in our careers and these basic rules will always help with that. The hardest part of course is sticking to them. Unfortunately I know this first hand 🙂

But as you get better, you’ll develop your own or make some tweaks to these and that’s great. The best of luck in your own trading and I hope you found these rules helpful for your own trading.

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