TEN RULES FOR SUCCESSFUL DAY TRADING
Rule 1: Day trading is not a strategy to get rich quickly.
Day trading looks deceptively easy, so one of the most important lessons you can learn, regardless of your level of experience, is that you will not get rich quickly by trading. It is not the same as gambling or playing the lottery. Brokers do not normally release customer statistics to the public but there was one exception in Massachusetts that any day trader should be aware of. A state court ordered the release of the records of financial brokers, and they revealed that after six months of trading, only 16% of day traders actually made money. So it is very easy to be one of those 84% of traders who are losing money.
Rule 2: Day trading is not easy. It is a serious business, and you should treat it as such.
A very common misconception that people have about day trading is that it is easy: just “Buy low and sell high!” or “Buy the dip, sell the rally!” If it were that simple, everyone would be a successful trader and each year we would not see such a high failure rate amongst active traders. You must always remember that day trading is difficult and will not make you rich quickly. If you have this misconception, and if you want to get rich quickly and easily in the stock market, you should stop reading this blog right now and spend the savings that you put aside for day trading on a nice family vacation. It would be much more satisfying to spend your money that way, rather than losing it in the stock market.
Rule 3: Day traders do not hold positions overnight. If necessary, you must sell with a loss to make sure you do not hold onto any stock overnight.
The process is simple. First, you’re looking for stocks that are moving in a relatively predictable manner. Secondly, you are going to trade them in one day. You will not keep any position overnight. If you hold onto any stock overnight, it is no longer day trading, it’s called swing trading.
Swing trading is a form of trading in which you hold stocks over a period of time, generally from one day to a few weeks. It is a completely different style of trading, and you shouldn’t use the strategies and tools that you use for day trading to do swing trading.
Several traders over the years have emailed me about this rule, and wondered why I advise them to close their position at the end of the day, even with a loss. Of course I do not want you to lose money, but I often see traders suddenly change their plan at the end of the day because they do not want to accept a small loss. They should get out of a losing trade, but they instead suddenly decide to stay in the trade and hold it overnight, in the “hope” that perhaps a stock will come back the next day. I myself have turned some of my day trades into swing trades, and I paid a heavy price for that. Often, many of the stocks we day trade will lose even more of their value overnight. As a day trader, you must stick to your daily plans. You should never change a day trade that was supposed to close at the end of the day into a swing trade. It’s a common human inclination to accept profits quickly but to also want to wait until losing trades return to even.
Rule 4: Always ask, “Is this stock moving because the overall market is moving, or is it moving because it has a unique fundamental catalyst?”
A fundamental catalyst is what you as a day trader are looking for. It is some positive or negative news associated with a stock such as an FDA approval or disapproval, a restructuring, a merger or an acquisition, or some other significant development that will impact its price during the trading day.
Rule 5: Success in day trading comes from risk management – finding low-risk entries with a high potential reward.
Risk management is one of the most important skills for a successful day trader to master. You must find low-risk trading setups with a high reward potential every day that you are trading.
The key to successful day trading is finding trading setups that have excellent risk/reward ratios. These are the trading opportunities with a low-risk entry and a high reward potential; for example, a 3:1 ratio means you will risk $100 but have the potential to earn $300. A 2:1 ratio is the minimum I will ever trade.
Rule 6: Your broker will buy and sell stocks for you at the Exchange. Your only job as a day trader is to manage risk. You cannot be a successful day trader without excellent risk management skills, even if you are the master of many effective strategies.
Do remember that risk management starts from choosing the right stock to trade. You can have the best platform and tools and be a master of many strategies, but if you are trading the wrong stock, you will definitely lose money. Finding the right Stocks in Play is an essential element in successful day trading. You must avoid stocks that (1) are heavily traded by computers and institutional traders, (2) have small relative trading volume, (3) are penny stocks and are therefore highly manipulated, and (4) don’t have any reason to move (no fundamental catalysts).
Rule 7: Retail traders trade only Stocks in Play. These are high relative volume stocks that have fundamental catalysts and are being traded regardless of the overall market.
If the market is moving up, the majority of stocks will be moving up. If the overall market is going down, the prices of the majority of stocks will also go down. But, remember, there will be a handful of stocks that will buck the trend of the market because they have a catalyst. These are the Stocks in Play. This is what retail traders are looking for – that small handful of stocks that are going to be running when the markets are tanking, or tanking when the markets are running.
Rule 8: Experienced traders are like guerrilla soldiers. They jump out at just the right time, take their profit, and get out.
Day trading is the serious business of selling and buying stocks, at times in a matter of seconds. You should be able to make decisions fast, with no emotion or hesitation. Doing otherwise results in losing real money.
Rule 9: Hollow candlesticks, where the close is greater than the open, indicate buying pressure. Filled candlesticks, where the close is less than the open, indicate selling pressure.
Candlesticks are a very common way to chart the price of stocks They allow you to easily see the opening price, the highest price in a given time period, the lowest price in that time period and the closing price value for each time period you wish to display.
Rule 10: Profitable trading does not involve emotion. If you are an emotional trader, you will lose your money.
One key message I hope that readers take away from my book How to Day Trade for a Living is that under no circumstances can you be an emotional trader. Somehow, you have to find inside yourself the ability to resist making emotional decisions in the midst of a trade.
A significant part of achieving that success is to learn how to control your emotions. You need to enter each trade with a well-thought-out plan and then stick to it.
- Join us every trading morning for the live Premarket Prep show to find stocks in play, from 8:00 to 9:00 am ET on YouTube.
- Develop your trading skills with this free real time day trading simulator.
- Check out the most advanced tools for traders and investors: https://tradingterminal.com/
- Learn about one of the best technologies for active trading.
- A Glossary of terms frequently used in day trading.
Would you like to ask Andrew Aziz some questions or share your own experiences? He would enjoy hearing from you at [email protected].