Friday, June 5, 2009

Day Trading Rules

Like any other endeavors in life, there are certain rules needed to be aware of in day trading business. Regardless which market you are participating, be it forex trading, stock trading, or futures trading, or which day trading strategies you are applying, be it trend trading, swing trading or scalping, these rules need to be followed by the pixel to get ahead in this tough business. On their journeys to achieve consistency, lots of day trader pleaded guilty to break some of these day trading rules listed below,

Rules #1 Trading on the Edge

The first and most important day trading rules is always trading on the edge. No matter how experienced you are or how confident you are about a specific trading setup. Day trading is a profession incurring substantial financial risk. Market can and surely it will do whatever it likes at anytime. Day trading is kind of like swimming in the shark infested water. So day trader should always be alert. Even experienced pros can't afford to let their guards down. Market seems have a magic power to catch people whenever they are pants-off. Most day trader have paid their tuition and learned this lesson in a hard way. It's much better to be prepared upfront to psych up with the merciless reality of day trading.

Rules #2 Preserve Precious Capital

When talking about trading, most people heard a lot about "cut loss short, let profit run". What exactly does that mean? It precisely captures the essence of preserving precious capital. There is a quote in Reminiscences of a Stock Operator which gives us a vivid example of applying this rule in real trading, "I did precisely the wrong thing. The cotton showed me a loss and I kept it. The wheat showed me a profit and I sold it out. Of all the speculation blunders there are few greater than trying to average a losing game. Always sell what shows you a loss and keep what shows you a profit."

Rules #3 Trading with An Edge

In Art of War, Sunzi said, "Every battle is won before it is ever fought." Everyone evolved in the market wants to win that's for sure. In a tough arena like day trading, it is believed that only 5% of people consistently taking money out of the market. Day trader definitely need an edge to surpass the rest 95%. So what exactly is a trading edge? Generally speaking, whatever can get you ahead of the game to achieve consistency that's your edge, be it technical, fundamental, psychological, or physical. For example, if point and figure charts helps to make your forex pips, then PnF is your technical edge.

Rules #4 Know Yourself - Know the Market

Obviously this rule is borrowed from the Art of War - "know your enemy, know yourself, and you will win the whole 100 battles". The first half of this rule is to know yourself. Before the starting of each trading session, before initiating a new transaction, after each trade, by the end of each trading session, there are certain questions to ask yourself - Did I remain COOL & CALM & DETACHED? What a professional trader would do under the same circumstance? Did I follow my rules? What might be done differently? What did I learn from today's trading? This self-analysis process will help day trader to stay at their peak performance by avoiding negative self-sabotage psychological trap. The other half of this rule is to know the market. Cause different market situations require different approaches, it's vital to know what the market is doing now - uptrend, downtrend or sideways. It's a wild dream to achieve 100 victories in a row, but by mastering yourself and the market will definitely put odds in day trader's favor, hence significantly help to improve their trading performance.

Rules #5 Plan the Trade, Trade the Plan
Day Trading is a serious business. Like any normal business, day trader need a complete business plan to succeed. Specifically, they need a daily battle plan to operate their small business day in and day out. A trading Plan is day trader's map to success.

Rules #6 Trading at the Present

The only truth in the market is the current PRICE. That's the only information professional day trader need to make a trading decision. So forget about the news, forget about other people's opinions, and forget about any personal biases, and Trade what you see not what you think.

That's the end of the first part of day trading rules. The second part of another six rules will be discussed in the next post.


Anonymous said...

excellent reading!

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