10 Day Trader Rules

Published: Jul 12, 2021

If you’re considering entering the fast-paced world of day-trading, you need to be aware of the risks. You can’t afford to leave day trading strategies to chance. As a day trader beginner, you need a few rules to prevent you from losing money and coming away empty-handed. 

Successful day traders don’t make money with luck. They use guiding principles and informed trading strategies to protect themselves from catastrophic losses. Asking yourself which trading strategy guides are the best yields different answers. Understanding the rules behind each trading strategy is what will help you discover the best trading strategy for you.  

1. Day Trader Knowledge Rules

The first rule of day trading (as it is with other trading strategies) is to do your homework.  You don’t want to become a prisoner to the whims of the market and trade based on emotions. However, you must understand the potential influences of the market you’re investing into. The Fed’s rates, economic outlooks, and the latest stock market news are all essential metrics to use when trading. 

Monitor the stocks you have on your wishlist and watch their movements over time before committing to them. You should also scan business websites for financial information. Everyone has an opinion, so you don’t want to inundate yourself with the experts’ takes. However, you should understand the discourse occurring around your potential investments. 

2. Set Your Day Trading Limits 

When day trading, you should understand precisely how much risk you’re willing to take with your investments. Plenty of successful traders achieve success only trading with 1-2% of their account per trade. For example, if you have a $100,000 budget and you are only willing to part with 1% of your capital on each trade, you only stand to lose $1,000 per trade. The bottom line is, especially with day trading, set aside funds you can afford to lose. 

3. Set Your Day Trading Time

Day trading requires intensive monitoring. If you want to day trade at a serious level, you will likely have to commit most of your day to monitoring stock activity. If you only have a small amount of time to spare, day trading is probably not the best choice for you. 

Day trading requires traders to track the markets and spot opportunities. These opportunities can arise throughout the day, and you need to execute them quickly. Moving quickly on trades is imperative to make day trading lucrative.  

4. Timing Is Everything

Seasoned day traders recognize patterns and pick appropriately using these patterns. The middle hours are typically less volatile than the early hours. The last hour also has increased volatility. 

When planning your trades, stick to your strategy. Some traders have strategies geared toward the higher volatile times. Others trade more often during the softer times. Regardless, you should know your strategy beforehand and execute your trades accordingly. 

5. Remember the Three Es: Enter, Exit, Escape

When day trading, you need an enter price, an exit price, and an escape price. Committing to the three Es is a significant component of your trading strategy. The three Es identify when you need to get into the trade, when to get out of the trade, and they give you an exit strategy.  

Using a stop price is essential to minimizing losses, and understanding your enter and exit prices will maximize your profits. 

6. Avoid Day Trading Within the First Fifteen Minutes of Market Open

This rule is essential for beginner traders looking to wet their feet in the day trading market. Beginner day traders shouldn’t trade within the first 15 minutes of trading. Novice traders should also be on the lookout for reversals during the first fifteen minutes. ‘

When trying to turn quick profits on your trades, you should wait until spot rewarding opportunities present themselves. Many pros also avoid the open market.  

7. Use Limit Orders, Not Market Orders 

Market orders tell your broker your ideal price to enter your position. Unfortunately, these positions don’t always translate into profits, especially for day traders. Limit orders give you some reassurance on the money you stand to lose. They set the maximum price you pay or sell. You control the parameters. 

8. Beginner Day Traders Should Avoid Using Margins

Using margins means you borrow money from your brokerage to finance part or all of your trades. Full-time day traders (pattern day traders) are allowed a 4:1 intraday margin. Appropriately used, margin can leverage or maximize potential returns. 

However, margins were responsible for one of the most infamous occurrences within day trading, when people cashed in their 401ks and borrowed money to finance their trades using margin. When the bull market ended, so did the traders’ accounts—avoiding margin while trading stocks is a critical component of day trading as a novice.

9. Have a Selling Plan 

Considering when to buy stocks is only part of the equation. Equally important is understanding the correct time to sell. Before entering the market, you should have a defined understanding of when you plan to sell and how much money you can stomach losing. Don’t leave your exit strategies to chance. Devise a way out and stick to it when the time comes, regardless of how you feel. 

10. Journal All of Your Day Trades 

One of the best ways to get better at something is to examine what works and what fails. Day trading is no different. Journal your trades as you can go so you can sharpen your skills, develop your strategy, and maximize your investment growth. Day trading is highly volatile, but it doesn’t favor those who concern themselves with luck. It rewards traders who do their homework and learn the tools for day trading success. 

Conclusion- 10 Day Trader Rules

The fast-paced world of day trading will burn you if you’re not careful. The rules in this article represent a few of the many guidelines that help you avoid trading yourself into dire financial straits. 

Only using the money you’re comfortable with losing, devising a clear investment strategy, and understanding when to enter and exit trades will help you keep safe and protect your investments. Every investment comes with risk, but these rules will prevent you from risking it all. 

Additionally, if you journal your trades, you can modify your investment strategy to work best for you. There are no one-size-fits-all trading strategies. You have to develop trading strategies that work for your personality and risk tolerance.