Setting Rules for your Day Trading
Day trading is often viewed as an activity that has no rules. A typical perception of day traders is a picture of individuals hunched over a computer with multiple monitors operating on intuition and making financial decisions on a hunch spurred on by pure adrenalin. Most non-traders don’t even realize the commitment, discipline, and knowledge required to be successful in day trading.
There are some basic rules and guidelines that apply to all traders regardless of the market or market segments chosen to invest in or individual experience level:
Understand your market – trading in businesses or segments where you have worked to gain some basic knowledge. If you have intimate knowledge of retail markets and trends you may not venture heavily into Forex trading without first gaining some background.
Have a plan – set your buy, sell, and escape points in advance and adhere to them. This helps take emotion out of the equation with your decisions for entry and exit well established before diving into a trade. Setting these values in advance will drive your decisions to execute buy orders, when to sell, and when to bail out when a trade is not turning out as expected. Once you establish those prices, adhere to them.
Also set your rule for what portion of your capital is available for any single trade. Doing so protects you from yourself by providing risk aversion. Be certain to not get committed to a particular trade so deeply that you cannot get out in a hurry if there is a significant drop. You may need to cut your losses quickly to avoid financial distress.
Observe – monitor market trends and ride along with the general direction. Betting against the trend may succeed on occasion but overall results will be more profitable when trading with the trend of markets you participate in.
Go with strength – selecting the best prospects in the best markets will produce the best results over time. There will be emerging markets and businesses that present particularly attractive opportunities for day trading, but consistency is provided by picking the financial assets that exhibit qualities of strength and endurance.
Do your homework – check historical performance to ensure long-term profitability. Day traders certainly want to buy low and turn trades around quickly for profits, but make sure that even though your target is trading low there is a history of profitability and consistent earnings. This is what ensures you that the value is going to trend back up to your sell point.
Study – observe more than traditional stock tickers. Market indexes and various charting techniques hold valuable information for day traders. Learn which ones hold the most value for your particular investment strategy and consult them for your trade decisions.
Technical Day Trading Rules
Most casual and professional day traders also have more specific technical rules they apply to their trading such as:
Set alerts for price or trend line sell stop points at a certain value to be aware of movements that will allow you to react on a timely manner. These alerts may be set at price points or could also utilize percentages.
If you add to a trade you’ve already exercised (often referred to as pyramiding) don’t exceed an additional 50% over the original buy. This protects your average price since the additional shares should be somewhat higher than your original buy. Also set an exit price for the added shares higher than the original trade’s exit value to compensate for the higher price of the additional buy.
Maximize the use of charts to identify a stock’s ‘optimal’ point in order to maximize your risk vs. reward ratio.
If a particular stock drops by more than 8% below your buying point – sell. Don’t hesitate and take an even larger loss. This percentage may vary among traders but the point is to cut losses as a rule rather than by emotion.
By the same token if your gains for a buy have exceeded 20% it’s time to sell off at least half or all the asset to lock in your profits. There may be exceptions to this rule where you have strong convictions that this is the latest record-breaking stock that supports risk of staying invested.
How Do You Apply Day Trading Rules?
Experience in day trading is the most effective way to find what rules benefit you most in your investing. Guidelines are general time-proven considerations especially valuable for beginning traders but as trading techniques and markets vary widely among day traders they can be adjusted and fine-tuned for your particular purposes.
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