Day trading rules are the gorilla glue that hold your trading together.
Without rules you don’t stand a chance. With rules, well, it’s less difficult.
Yes- day trading is that challenging.
Day Trading Rules are the Ultimate Sign You Take Trading Seriously
There are so many moving parts, it’s easy to get seduced into the action. The action is what we crave, but it’s patience that pays the bills.
We need day trading rules because we can’t predict the market. You may think you can, but trust me, you can’t. Nobody can.
What you can do however, is know exactly what you are going to do. This is where the money is. The more specific your rules, the more consistent your P&L will be. Take that to the bank.
Let’s dive into my trading rules. Leave a comment if you agree, disagree or simply want to add your own rules to the conversation…
Day Trading Rule #1 Make a commitment.
The minute you make a commitment to a strategy, you immediately have focus.
It’s no accident this is day trading rule #1. Far too many traders overestimate their resources. It is incredibly difficult to trade everything.
Decide exactly how you define an edge. This means every thing else is off your board. You’re not going to be swayed into a trade you didn’t plan. This is incredible difficult if you are trading in a proprietary trading office. The adrenaline gets pumping and you want to do something. Resist it.
Stick to your strategy and master it. Make it a rule to trade one strategy, and one only until you are making consistent money.
Day Trading Rule #2: Accept Risk, Don’t Take Risk.
Traders who move a stop-loss never expected to need it.
They never expected to face a loss. If they did, they would simply exit the trade.
If you learn to accept risk in exchange for the potential profit, you never hesitate. It’s the cost of doing business.
What does it mean to accept risk? It means before the trade you decide on a dollar amount you are willing to put in harm’s way. You adjust share size for volatility but you don’t change the risk amount.
As you gain experience you can adjust risk based on the quality of the idea but in the beginning, you want this to be a hard rule.
Day Trading Rule #3: Get Your Game Plan Homework on the Schedule
Game Plan on the 7’s.
Set a scheduled time to craft your daily game plan. Make it an appointment. Don’t wait for the last minute, don;t ask your buddy what she is trading. Man up and get prepared.
I do mine at either 7pm or 7am. I want to give my list of stocks to trade some time to breath. My best game plans are done 7pm, then I review 7am. This gives me time to review, and let’s me make adjustments in case of news.
The absolute power, that results from of a solid game plan, can’t be measured in numbers. To trade like a pro, you need to get serious about scripting your success.
Day Trading Rule #4: Journal Fast-Edit Later
You don’t need to write a book, but you do need to write. Don’t worry if it’s perfect. Just write what you observe.
Yes-you need to journal while you are trading. You will NEVER remember at 5pm what you noticed at 10:15am. Not with clarity and context anyway.
Don’t tell me you are too busy to write when you are trading. That’s saying you don’t have to time to document how to be successful. It doesn’t need to be detailed. Bullet points are fine, you can add to the point later.
If you are diligent, you will find yourself writing the same thing. Maybe not 2 days in a row but most likely twice in the same week. Most often it’s a mistake. Something you need to stop or do more often. Either way it’s in print so you can review.
Your day trading rules will change as your skills evolve, but this rule should never be let go. It’s that important.
Day Trading Rule #5: Don’t Change Your Bias Intraday
Institutions build positions over time. You should join them.
Find an obvious bias and stick to it. Especially for day trading.
Yeah, yeah I know. You will send me charts of big reversals from high to low and low to high. I don’t care.
You will never make consistent, big money flip-flopping from long to short and short to long. Even scalpers should pick a side. It’s easier and the right thing to do.
If a stock is reversing, let it go. It’s perfectly OK to step aside.
Day Trading Rule #6: Be Aggressive When the Market and Change from the Open is on Your Side
This is a RULE, not a “once in a while” or “gut feeling” decision.
You can’t turn a $3,000 day into a $1,000 day. You must have rules in place for when to trade bigger.
I use the word aggressive but it’s really criteria that leads to trade management. You aren’t doing anything different other than paying attention with a purpose.
Aggressive means 3 things:
- More share size.
- More positions.
- Hold longer.
According to William O’Neill in his classic trading book How to Make Money in Stocks, 38% of a stocks move can be attributed to the direction of the general market. You think it makes sense to identify when the market and your stock are in sync?
To add a little more spice to this rule let’s add time frame continuity. Each day your stock has an opening print. The first trade of the day. Start paying attention to the last price relative to the open price. This tells you today’s order flow.
Let’s think it through.
Your game plan says to be a buyer today, yet your stock is trading lower from today’s first trade. This means today, right now, sellers are in charge. Change from the open is negative.
Time to set an alarm. Set it for when the last price is positive from the open. You now have long-term order flow, in sync with today’s order flow. Sit up straight and hold to the close.
Day Trading Rule #7: Stick to Your Draw-down Number
We can’t help it. We always believe we can trade our way out of a bad day.
The fact is most traders can’t. It might be the market, it might be you. Either way it’s difficult to turn around.
Admit it and log off.
Don’t throw away valuable capital with stubborn blindness. It’s too hard to earn.
I am referring to a draw-down in two situations:
- Giving back existing P&L.
- Hitting a predetermined stop-loss and trading through it.
I have witnessed (and participated in) epic melt-downs that ruined weeks or months of consistency. One bad trade is all it takes.
Let’s end the article on day trading rules with a TRUE story: I once had a trade who I backed in my NYC office. His daily stop-loss was $1,023 (yes he was a Michael Jordan fan). This particular day I was out of the office doing a seminar in Chicago.
His P&L was +$5237 at 11am.
At 4pm his P&L was -$1,100.
When I got back to the office I asked why he didn’t stop at some point and book some profits. He said he was allowed to lose $1,023 so he doesn’t see what he did wrong…
He is no longer in the trading business.