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Tuesday, October 2, 2012

10 top day trading rules

Day trading is probably one of the riskiest ways to trade financial markets. As trades are opened each day the entire trading capital can be lost in a week or even a few days (if one decides to risk a lot). You will find some good traders among those who are in the echelon of the most successful, but they are the minority. Most are swing or trend traders. However, successful day trading is possible and if you feel it fits your personality best I would concentrate on that type of trading and would not bother myself with other types of strategies. One of the keys to success in day trading (like in any other) is a set of rules that you will have to follow ‘religiously’ and with very strict discipline. Improvisation is a road to ruin in trading. Only the best of the best can afford doing that. And they do burn doing that quite often. So, let us try to set some of those rules in the article. 

Entry level, profit target and stop loss

Do it ‘religiously’. Never start a trade before setting these things in order. Decide where you want to enter, where to exit and if the trade goes wrong what your loss will be. Setting these three things before you actually enter a trade is is one of the keys for you to become a disciplined and finally successful trader. It will help you to make a plan and follow the plan and avoid spontaneous decisions. 

Do not overtrade
Day trade, but do not overtrade. This is the most usual ‘trader’s disease’ that all newbies have. They believe that markets offer enormous profits daily. Theoretically they do. But hardly anybody can materialize all of those ‘theoretical possibilities’. What you will end up by trying to do this is losing big picture of the market and eventually most of your capital. If you really want to be a good trader start from selecting one best possible trade (after serious analysis) a day.

Enter proactive not reactive trades

Action should follow from your plan, not from what you see happening. This can come with time too, but for the time being learn to plan your trades. Reactive trades can be very costly. Even today I lose some of my profits if I decide to trade reactively. I remember a few situations when I would have five or six consecutive losses. Those would often happen after a nice trend or swing and I would lose around 30-50, sometimes even more of the profits I made during the move. This happens less often now. I learned something! Praise God!

Do not risk more than two percent of your equity on any given trade

You can even start from 1 percent. It will take you a lot of time to lose your money. By the time it may happen you may have learned a lot and save your capital for the best trades. It would take you ten bad trades to wipe out your account if you choose to risk ten percent of your capital on a single trade. This can happen in a week. Or even faster! If you risk just one percent and do not trade often, but choose your trades you can survive a year (if you are a bad trader). Not all of your trades will be bad. Not all of them will be good. Just be sure you do your homework to pick the best ones. 

Record your progress and details about your trades
There is no surprise that a lot of good traders record their progress by writing a journal. They cover these things: reason behind the trade they took, possible target, maximum risk, rationale why they lost or won, what could have been done better. They might mention emotions that they had (fear, greed, joy, exhilaration). This always reminds them of what they should and shouldn’t do. Try doing the same and see if your trading results improve or not. I bet they will. 

Analyze first, then trade

A lot of traders just do the opposite. They get into market and then start thinking why they got there. Reverse the process. Spend 90 percent of your time analyzing and 10 percent of your time trading. At some point it may become 99 percent of your time analyzing and only 1 percent of your time trading. Wait for the best situations when 9 of 10 points indicate a very good trade which you should take.

Imagine A, B, C and all other possible scenarios before you enter a trade

Markets can go up, down or sideways. However, you need much more than this in order to be a profitable trader. You need to make predictions on where it is going to go and how far (up and about 500 pips till next resistance). This would help you to plan your trades when your predictions are right and get out of your trades the moment you see they are not right. You have to make an optimal decision regarding your entry level, take profit area and stop loss. If you excel in this you will be a top day trader sooner rather than later.  

Do not follow tips, trust your analysis

It is better be wrong but follow your judgment rather than follow somebody else’s tips and win. Why? You need continuity in your trades. You want to be successful. If you want somebody else to think on your behalf it is better to give money to some fund manager and let him do the job from A to Z. If you want to be a good day trader you have to develop your own understanding of market and trust your analysis and judgment. If you are wrong be fast to change your opinion about the state of the market. 

Think in terms how much you can lose, not how much you can win

I learnt this from Paul Tudor Jones. He thinks like that. This enables him to limit his losses and increase his profits. The same works for me. Thinking about possible profits can inspire you to make unjustified risks. Do not do that. You can always come back to the trade if you have enough capital. You may not have it if you take too much risk (let’s say 50 percent of your equity). Money is your tool and if you lose the tool you will not be able to make money. Save it for best time always having in mind that if you are wrong you can lose a lot. You do not have to live in fear, but be protective in your trades. 

Do not be afraid of losses, beware of your successes

Nothing teaches best than mistakes your make (provided they do not destroy your account). And nothing is as dangerous as successes are. Mistakes make you aware of your weaknesses and cause you to take protective trades (with manageable risk) while successes tend to make us arrogant and even lose common sense in trading. Very successful traders lost millions, even billions of their profits (sometimes everything), because they lost sense of reality and their weaknesses and started breaking their trading rules. It is better to have a lower opinion of oneself than too much confidence. Learn to be defensive before you become offensive. Learn to protect your capital before you learn how to increase it. Enthusiasm and other positive or negative emotions are not your friends in trading, but rather enemies. 

If you want to make extra money and are ready to trade Forex, futures, indexes and stocks I recommend Etoro. 

Final thoughts

Profitable day trading is possible but it requires strict rules that a day trader would follow without any exceptions till he is able to feel market rhythm by means of long practice and hard learning. It may take a lot of time and even when you develop your own judgment for markets you will have to follow your trading rules strictly. Learn discipline, because a successful trader will always be a disciplined one. Good luck in trading.
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Trading financial markets carries a high level of risk, and may not be suitable for all investors. All information on the blog is of educational nature and cannot be considered as advice, recommendation or signals to trade in any financial markets.