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7 Day Trading Rules You Need to Know

7 Reglas Del Trading Intradía
9 minute read
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There are a lot of free online resources and great books to learn about the fundamentals of day trading. Nonetheless, much of that good advice could be boiled down to some common sense approach to trading. Let’s review 7 of the most basic day trading rules that you need to know in order to become a successful day trader.

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Day Trading Rule 1 – Have a Plan to Exit Before You Enter the Market

As the saying goes, hope for the best, but plan for the worst. You should always assume that the trade you are about to enter the market with will likely lose regardless of how high probability, you think, it has to be a winner. It may sound cliché, but when it comes to day trading, not having a detailed plan outlining when you should exit if the trade goes against you as well as when you want to exit with some profit is equivalent to having a plan to fail.

The plan to exit the market should come before you decide at which price you will buy or sell the asset you are trading. Moreover, the plan should not be based on a whim and there should be some sound reasoning behind why you want to enter and exit a trade. That’s why having a detailed trading strategy that is well tested and proven to work in various market conditions is the key to become a successful day trader.

Most day traders apply technical analysis-based trading strategies because short-term time frames are not suitable for fundamental analysis that plays out over days or even weeks. Hence, day traders like to draw horizontal support and resistance lines based on historical price action to know where a trend might find an obstacle in the near future.

One way to plan an exit even before entering a trade is to find the nearest support and resistance levels. Once you have a basic idea about where the trend might start a retracement, you can plan your entry and exit more accurately.

Figure 1: Entry and Exit Plan Based on Historical Support and Resistance

In figure 1, we can see that the EUR/USD was range-bound on the hourly time frame. If you are a price action-based day trader, you might have wanted to trade after the bearish pin bar formed. In this example trade, your exit plan would be above the previous resistance, at 1.1230, if the trade turned against you. By contrast, you would reduce your exposure to the market or completely exit the market with some profit once the price would reach the well-defined support level around 1.1165.

Day Trading Rule 2 – Practice Your Trading Plan and Strategy with a Demo Account

If you are reading this article, then there is a good chance that you are just starting out as a day trader. As a novice trader, you need to understand that day trading is a serious business. Some of the best and brightest minds in the world end up trading in the financial markets and it is a very competitive place to be in.

You might be pretty good at your chosen profession, but if you suddenly wake up one day and decide to do some day trading to pay for the kitchen remodeling or taking that dream vacation, it might not work out as you planned. To consistently beat the market, first, you need a detailed trading plan or strategy that works. Then, you need to master that strategy and practice trading for several months before you should even consider opening a live day trading account.

  • Open a demo trading account and paper trade the rules of your trading strategy meticulously.
  • Learn to place entry orders only when all the conditions of your trading strategy have been met.
  • Become proficient in ending the trade with either small losses or enough profits.

To practice, you should open a demo trading account and paper trade the rules of your trading strategy meticulously. Learn to place entry orders only when all the conditions of your trading strategy have been met and become proficient in ending the trade with either small losses or enough profits.

The key problem novice day traders face is the age-old dilemma of submitting to fear or becoming too greedy. Day trading with a demo account should help you learn how to cut your losses short, according to your strategy and money management rules. Furthermore, it should make you understand that you should exit the market with ample profits once the reward to risk ratio of your trade has met, which should be already predefined in your trading strategy.

Demo trading will also help you get familiar with the adrenaline rush of the trading environment. A lot of day traders end up overtrading as the experience is often addictive. However, to become a successful day trader, you should learn to differentiate how to be a healthy trader who follows the strategy and what constitutes the behavior of a gambler. After all, the vast majority of day traders end up gambling their precious capital because the short-term excitement of trading becomes dominant over long term profit motives.

Learning the concept of when you have earned enough profit and when to stop trading for the day will serve you well as a day trader in the long run. There is no better way to achieve this objective then to trade with a demo account.

Day Trading Rule 3 – Knowing How to Trade is Great but Also Know When to Trade

The global currency market remains open 24 hours a day and 5 days a week, but when it comes to trading futures, you should stick to trading only when major futures exchanges are operating.

Figure 2: Global Financial Centers on the World Map

That said, there is the pre-market for futures trading around 30-minutes before the actual market open hour, and on the other side the after-hours futures markets remain open even after the official cash markets are closed. However, the pre-market and after-hours futures trading usually lack price volatility due to low trading volume. Furthermore, if you trade during the off-market hours, you will probably have to deal with a lot of price gaps and large price spikes.

To earn profit from day trading, there should be ample volatility in the market. Without major price movements, you will not have the opportunity to buy or sell and make a profit. That’s why knowing when to trade is crucial to becoming a successful day trader. Depending on which time zone you are located, and your availability of time during a workday, choose a block of time that is in sync with one of the major financial centers around the world.

For example, if you are trading currency futures, trading when the Chicago Mercantile Exchange (CME) is operational would help you find more trading opportunities compared to off-market hours. After all, it has an average daily trading turnover over $100 billion, making it the second-largest market for foreign exchange only after the interbank global spot market.

Day Trading Rule 4 – Keep a Trading Journal and Regularly Review Your Trading History

We can only learn from our experience if we have a detailed memory about what happened in the past, right? Well, when you are making ten trades a day, it is easy to forget what circumstances you opened the trade or even why you made any profit or loss from it.

When most day traders think about keeping a trading history, they think that it should only consist of the entry and exit price. Maybe they add the stop loss and potential profit target into the mix.

But that is not how a proper trading journal should be written. On top of the basic pricing information, you should also write down what was going on in your mind when you decided to trade. Write how you felt about a particular trade. Also, write down all the details that justified risking your hard-earned capital on that trading idea.

Once you have placed the order with your broker and the trade is in progress, write down how you reacted when it tested a support or resistance level. Did you feel like taking the profit instead of letting the winner run? Or did you feel like moving your stop-loss order further to give more breathing room to your trade? Small details like this will help you understand how your mind reacts to the market situation and will help you guide yourself to become a more disciplined trader who sticks to their trading strategy.

Figure 3: Keeping a Trading Journal in Microsoft OneNote

Using free software like Microsoft OneNote or even a Google Doc file with charts and annotation would do just fine. At the end of every week, make a cup of coffee or get your favorite beverage, sit down and read your trading journal a few times and write a summary of the week. The summary should include what are the major mistakes you did last week. Once you’ve done so, also write down how you should have reacted to rectify the situation.

The market moves very fast when you are day trading and you have to make split-second trading decisions. The stress along with the possibility of losing one’s mind can prompt us to become irrational. The point of keeping a trading journal is to train yourself how to stick to the trading strategy under pressure. If you can master the art of writing and reviewing a trading journal, you can reduce your learning curve and become a successful trader much faster.

Day Tradin Rule 5 – Forget About Market Orders, Use Limit Orders Instead

Once you have mastered keeping a trading journal, you will understand why it is not worth it to chase a trade. Instead, you will be more patient and let the trading opportunities come to you. When you first encounter the chaos of day trading, you will feel that you need to be a hunter. You will feel that you need to be a go-getter and actively look for trades and jump the gun the moment you find an opportunity.

However, experienced traders know that there is no point chasing the market. If you miss an opportunity, there will be another opportunity very soon. Hence, it is much wiser to stick to your strategy. You will realize that you should only enter the market at the price point that offers you the highest reward to risk ratio that you have written down in your trading strategy.

As a novice day trader, you are used to placing market orders to open new positions. The problem with a market order is that it is an instruction to your broker to open a position at “market price.” Since prices move fast in the market, you have no idea what price your order will be filled by your broker.

Let’s say you wanted to buy 20 CME December 2019 contracts of CME Euro FX contracts at the price of 1.1550 and sell it at 1.1600. So, each $0.0001/€ change in price would result in a $12.50 profit. At 125,000 Euro for each Euro FX contract, your profit would have been, $0.0050/€ x 125,000 x 20, $12,500.

However, if you use a market order and your broker filled it at 1.1552, you would lose out around 4 percent of the profit, which would be around $500. The only way to rectify such a situation, in the long run, is to use limit orders only. Sure, you might miss a trading opportunity once in a while, but the performance of your strategy would go up significantly if you only use limit orders.

Day Trading Rule 6 – Never Abruptly Switch Your Trading Strategy

Before you start day trading, you should back test then forward test your trading strategy to a point that you know for certain that it works. No, you should not expect the strategy to work 100 percent of the time, no trading strategy will produce winners all the time. However, you should be able to have faith in your strategy that over a course of 100 trades, you will win enough to offset the losers and still have some profit to show for your effort and hard work.

Once you have such a strategy, test how many losers it produced in a row and keep a note of it. For example, your strategy might have produced 6 consecutive losses during forward testing. When you started trading the strategy in a live account, you might lose 3 trades in a row. Naturally, you would start to doubt the validity of the strategy. After all, who wants to throw good money after bad money and keep trading a strategy that is not working?

  • Keep in mind no strategy works 100% of the time.
  • Over a course of hundred trades you still should have some profit to make it worth your while.
  • Keep a record of your losing streaks.
  • When you are in doubt (you lose 6 or more in a row) find trades that are in line with your strategy.
  • In case of longer losing streaks (10-15 in a row) examine the market structure and check your strategy again.
  • Never discard a proven strategy after a few losses and start testing different ones every day.

When you face such a dilemma, do not throw the baby out with the bathwater. Instead of switching strategy, review your trading journal to see if you followed all the rules and try to find trades that are in line with your strategy.

If you keep losing after 10 to 15 trades, then start evaluating if the underlying market structure has changed or figure out what went wrong. Maybe you were curve fitting when back testing or had exceptionally good luck during forward testing. Go back to the drawing board and figure it out. But, under no circumstances should you discard a proven strategy after a few losses and start strategy hopping and end up trading 5 days of the week with 5 different strategies.

Day Trading Rule 7- Never Trade with Money You Cannot Afford to Lose

This is a no-brainer and should not require too much convincing for the idea to sink in. If you risk money that you need for next month’s rent, you will make irrational trading decisions. If you have a 30 pip stop loss, the loss aversion psychology will prompt you to move your stop loss to -300 pips. Because the moment you close the trade you will realize the loss and you cannot accept taking a loss with money you really need to survive.

Trading is a business and it is not a get rich quick scheme. You should only trade after you have enough money to sustain your current lifestyle for at least several months. Moreover, meet all of your financial obligations, fund your retirement account, and be financially secure before considering becoming a day trader.

Unless you are financially secure and only invested money that will not affect your sleep if you lost it, you will never be able to become a disciplined trader and end up losing the little money you have saved up. So no, never trade a dime that you might need within a short period of time. Only invest what you can consider as something you can take risks with.

The Bottom Line

Day trading has become popular over the last decade as the advent of Smartphones and mobile trading apps allowed millions of retail traders to earn a little extra on the side outside their day jobs. However, according to trading records, over 90 percent of retail traders end up losing money. The reason is that while a lot of retail traders start their journey without a solid understanding about financial markets, the majority of day traders jump the gun too early and start trading with their hard-earned capital without much preparation.

If you are just starting out as a day trader, know that it will be a long road before you will become a profitable trader. However, these 7 rules will certainly help you jumpstart your career. Once you are ready, take the next step and start The Gauntlet Mini™ here to prove your trading skills and become a professional trader.

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