Day Trading Rules

Everything in our lives is based on rules. Think about it for a minute. Remember being a kid? Think about some rules your parents were diligent at enforcing. Think about your time at school, your time at university, your job, your city, etc. I bet you can think of many rules in place in each of those settings, but do you ever wonder why there are so many rules? Imagine your workplace without any rules. Would you wake up and get yourself to your job for 8:00AM? Would you finish a report on time? Now think about an entire society with no rules whatsoever.

Yes, rules can be annoying as they restrict us from doing whatever we want. However, rules exist to keep our life organized, safe and in order. Without rules, life would be chaos, and day trading is no different. Day trading without rules is chaos! Without rules, you will blow up your account faster than you can ever imagine. There is a difference though. When attending school, the rules are already set in place, and there are people to enforce them. When going to work, the rules are already set in place, and there is someone to keep an eye on everyone to ensure those rules are being followed. On the other hand, when you are day trading, there are no rules already set in place by someone else that must be followed, and there is no one to keep an eye on you. It is you, yes, you, who needs to make those rules, and it is you who needs to enforce those rules.

As a beginner, where do I get those rules from?

It might be difficult to develop rules for something you are just starting to do. Luckily for you, many experienced traders have shared what they consider to be the most important rules based on their experience, and all you must do is some basic research and then make notes. One of the best places to find these rules are in psychology books, as much of successful day trading is about psychology.

Can I borrow the rules of a successful trader and become as good as they are?

The answer to this question is both “yes” and “no”. Yes, because there are some general rules every day trader must follow, and no, because everyone’s trading style is different.

A) General rules

  1. Your max loss for the day:
    A successful trader must always know when to stop trading. Some days, we could feel sick, emotional, or just not be in the right frame of mind. Other days, the market is just simply not in its best state and doing nothing but sideways consolidation. Therefore, we need to know when to stop trading and when not to trade. We cannot keep trading in an attempt to force the market to give us money. It is preferable not to risk more than 1-2% of your equity per day.
  2. Your max loss per trade:
    Similar to what was mentioned above, we must also know when to bail on the trade. We cannot go long on a stock and just stay long forever until it decides to move in our direction. It may never happen. Before entering a trade, you must have an entry, a target and, most importantly, a stop loss. If the trade hits your stop loss, then it will be a wise decision to exit your trade.
  3. Your stop loss should always be at market order:
    Once the price hits your stop loss, you will want to exit immediately, no matter whether it just hit your stop loss or if it went way below or above it (depending upon whether you are going long or going short in the specific trade). You do not want to use a limit order as with a limit order you may not get filled once your stop loss is triggered, and that will result in an even bigger loss.
    Do note that these are not the only general rules out there and this blog is only meant to give you a taste of them. You can check our forums for more information.

B) Rules related to your trading style

These are the rules you will need to develop for yourself. You cannot use a momentum trader’s rules to trade a trend and you cannot use a trend trader’s rules to trade HOD/LOD (high of day/low of day) breakouts.

Where do I get these rules from?

  1. Make sure to figure out a trading style which suits your personality.
    If you are the kind of person who takes a long time before making a decision but who is patient while waiting for the results, trend trading might suit you. If you are the kind of person who is quick at making decisions, but not patient while waiting for the results, momentum trading may work best for you. If perhaps you are a contrarian who often finds yourself going against the grain, trading reversals might be the best trading style for you. It is your job to decide which style you want to focus on.
  2. Keep up with your journaling.
    It is from your journaling that you are going to get most of your rules. After each trading day, make sure you have screenshots for each of your trades and then make some notes:-Why did this trade work out?-Why did this trade not work out?

    -What could I have done better?

    Those are not the only questions you will want to ask yourself, but they are sufficient to get you started. The more you know about your trades, the easier it is to come up with solid rules that answer questions such as:

    -When should I enter a trade?

    -When should I avoid taking a trade?

    -How long should I hold on to a trade?

    -Should I bail on a trade at breakeven?

When day trading, you will never come up with a final version for your rules. They will keep changing and they will keep being added to according to the condition of the market. Accordingly, no matter how experienced you think you are, keep up your trading journal!