My Three Most Important Day Trading Rules

One of the keys to being a successful day trader is to have a list of rules that you consistently follow. Unlike a regular job where you would have a boss looking over your shoulder, as a day trader you’ll be your own boss and thus be responsible for your own results. By writing down and following your day trading rules, you’ll create a system that reinforces your trading discipline and prevents you from making costly errors. In this article, I’m going to share my three most important day trading rules.

Rule #1: Manage Risk On Every Trade

This rule is really the foundation 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 money I could potentially lose. Too many traders focus too much on the potential profit and overlook the importance of risk management. Before I make any trade, I know what my downside is and the price at which I will exit the trade if it goes against me (my stop-loss). This ensures that no single losing trade will be catastrophic. As a trader, my goal is to hit consistent singles and doubles and not necessarily home runs.

Rule #2: Limit Midday Trading

Another key to becoming a consistently profitable day trader is to understand the importance of the time of day. In terms of 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 during the middle of the day. Because day traders need volatility to make money and also must overcome their transaction costs, trading in the middle of the day is frequently a bad idea. To enforce this rule, I keep my eye on the clock and drastically reduce my position sizes and risk in the middle 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 to learn more about the strategies and techniques I’m using as well as to gain information about the current market. One of 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? Should I have moved my stop-loss? Did I follow my risk management plan? As any experienced trader will tell you, there are many times where poor trades end up being profitable while excellent trades don’t work out. In order to improve as a trader, it’s important that you learn from every single trade you place.

Conclusion

By following these day trading rules, I know that I can be consistently profitable and make excellent risk/reward trades. While risk management may sound like an abstract principle, I implement it by knowing my stop-loss prior to 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 from 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 ensure you stay disciplined.