Day Trader Rules Traders Need To Know

The Day Trader Rules

Today I’m going to discuss important day trader rules that many beginners either forget to follow or avoid following for one reason or another.

Most often traders simply lack the required experience to know which rules can make or break their account and unfortunately learn the hard way after the fact.

I hope that this tutorial will help you avoid some very costly mistakes and get you started on the right track.

Trading Rule #1 – Know The Short Term Fundamental News

Most day trading tactics are based on technical analysis and momentum techniques, with that being said many traders completely ignore the fundamental news and reports that are related and relevant to the stock or market that they are trading.

This is one of the biggest mistakes beginners make because markets are driven by emotions and short term fundamental news provides clues as to what is driving the market at any present time.

day trader rules

Finding Out What Is Happening Before The Opening Will Let You Know What To Expect

For example if a stock is coming out with earnings after the closing bell, it will trade very differently than on a typical trading day or if economic reports are going to be released within the hour the index futures market will go through a choppy range bound period prior to the announcement.

Another good example is excessive volatility that typically occurs on stock option expiration that occurs the third Friday of every month.

These are just three basic examples of fundamental news that can have major impact on the financial markets that traders need to know about ahead of time.

Most professional traders look at economic calendars after the closing bell and before the opening bell so that they know all potential and foreseeable factors that can influence the market during the following trading session.

While I’m not suggesting you become a fundamental guru and begin calculating next years corn crop production costs, I do think it’s a great idea to know what players in the current market environment are thinking at any given time.

Trading Rule #2 – Stick To Your Trading Plan

day trader rules

If You Don’t Stick To Your Plan Your Odds Of Success Diminish

Many traders begin their day disciplined and ready to execute their trading strategy according to the rules but often times as soon as they experience a few losers or the market doesn’t do what they anticipate will happen they forget their trading plan and begin trading based on emotions and pure feel. This is a recipe for disaster and occurs more often than you can ever imagine.

Just last week I saw a veteran trader completely ignore his exit strategy and lose several thousand dollars in a few brief minutes. Don’t let this happen to you, follow your trading plan accordingly and make contingencies for situations that are not likely to happen.

Most of the time traders lose their discipline when they are faced with unforeseeable circumstances. Prepare for worst case scenarios so that if and when it happens you won’t be caught off guard.

What I do each day before the opening bell is prepare for 5 worst case scenarios and I write down each of these so if any of them occur, I know exactly what I have to do and how I have to react.

This will prevent you much undue stress and will provide you with confidence in difficult market situations.

Trading Rule #3 – Avoid Market Entry Late In The Day

day trader rules

Initiating Positions Late In The Day Is Not Advisable

There is only so much time in the session each day and there is only so much ground prices can cover in that time. You must understand that market entry late in the day reduces your profit potential greatly and reduces the odds of trades working out in your favor because they simply don’t have the time to work out.

Unless you are scalping which involves taking numerous small profits every several minutes, I don’t recommend initiating positions after lunch time Eastern Time.

Trading Rule #4 – Never Enter Trades Without Placing Protective Stop

day trader rules

Avoiding Stop Loss Placement Is The Major Cause Of Large Losses

You probably heard this rule hundreds of times but do you really follow it each and every time. The problem occurs after the entry is placed, the mind has a great way of talking us out of doing thing that are good for us so make sure you figure out your stop loss level and place your protective stop order when you get your entry fill.

After you practice this exercise it will eventually become second nature, kind of like putting on a seat belt.

Avoiding stop loss orders is the biggest reasons why small losers turn into large highly unmanageable positions that can turn your trading career into a nightmare quickly.

Don’t take huge risks and always protect your positions with protective stop loss orders.

Trading Rule #5 – Always Perform Relative Strength Analysis Before Entering Positions

Relative strength analysis is simply comparing the instrument that you want to trade with a very similar instrument.

For example if you are trading semiconductor stocks you would compare the stock you want to trade with other stocks in the semiconductor industry group or if you intend to trade e-mini futures contracts you should compare the e-mini NASDAQ to the e-mini SP futures contract.

Relative strength gives you a strong indication of how strong or weak your stock or market is compared to other related stocks or other markets.

This offers you some very important clues as to what related stocks or other markets are doing and can give you important information about the stock or market that you intend to trade.

day trader rules

Compare Relative Strength With Direct Competition

If you are going long you probably want to pick the strongest stock out of the industry group and if you are trading short you would probably want to pick the weakest stock in that industry group.

Relative strength provides you with the tools to analyze markets and compare gauge comparative strength or weakness between two related instruments.

Most professional traders rely on relative strength analysis on a daily basis and I suggest you begin doing the same if you want to become a professional trader.

Next time I will show you some more day trader rules that will improve your profit potential and reduce your stress level. For more on this topic, please go to: How To Learn Day Trading and Is Day Trading Or Swing Trading More Profitable

Till next time,

Roger Scott
Senior Trainer
Market Geeks