If you plan to trade in the financial markets and try to compete with other participants through day-to-day trading, it is important to keep in mind a few basic rules that could be of great benefit to you.
In addition to these rules, in daily trading, where positions are opened and closed every day, discipline is also needed. This is what Michael Sinser, author of several books on the subject, including Start Day Trading Now, Understanding Options and All About Market Indicators, teaches us in a commentary on MarketWatch.
Sometimes, when the situation really gets heated, traders abandon the rules and play, relying on their instincts, which often leads to catastrophic consequences.
Although there are many rules, the following 10 are the most important, Sinser advises:
- The rule of “three e’s” (enter, exit, escape) – entry, exit, escape
Rule number one is to set an entry price, an exit price and an escape price if things go wrong. It is no coincidence that this rule tops the list. Before pressing the “Enter” key to confirm a trade, you need to know when to open and when to close your position, as well as what to do if the market does not move as you expected.
Running away from a stop-price position is key if you want to minimize your losses. Knowing when to enter and when to exit a position will help you ensure a profit and protect you from a possible accident.
- Avoid trading for the first 15 minutes after the market opens
These first 15 minutes of market activity are often full of panic deals or fulfillment of orders set at the end of the previous session. Beginner traders should avoid trading during this period and should be vigilant to reverse the trend.
If you want to make a quick profit, it is better to wait for a small amount to be able to identify a good enough opportunity. Many professional brokers also avoid trading when opening
the stock exchange.
- Use limit orders, not market orders
The market order instructs your broker to buy or sell at the best possible price. Unfortunately, this is not always a winning tactic. The shortcomings of the market orders were revealed during the mysterious “flash crash.” – the market crash of 6 May 2010, when the Dow Jones lost 1000 points in minutes before recovering.
On this day, many sales orders were fulfilled at prices well below expectations.
However, the limited order gives you control over the maximum price you will pay and the minimum price at which you will sell. You define the parameters and that is why limited requests are recommended.
- Newcomers should avoid using margin
If you use a margin, you borrow money from your broker to finance part or all of your trading. A daily margin of 4: 1 is usually allowed. For example, if you have $ 30,000 in your investment portfolio, you may have $ 120,000.
When used wisely, margin can give you leverage – an opportunity to increase your potential profits. The problem is that if the market turns against you, the margin will increase your losses.
One of the reasons daily trading gained a bad name a decade ago was the use of margins. The end of the bull market in 2000 led to the failure of many day traders. The bottom line is that novice investors must first get used to trading without margins.
- You need to have a sales plan
Many novices spend most of their time planning which stocks to buy without thinking about when to sell them. Before you open a position, you need to know in advance when you will close it, at a profit. Relying on your senses is not a selling strategy. As a day trader, you need to define your goal, both in terms of price and time.
- Keep a transaction log
Many professionals do it. Keeping track of when you did the right thing and where you went wrong will help you grow as a trader. Not surprisingly, you will learn more from your mistakes than from your successful deals.
- Try a day trading simulation of a “demo”
Although not everyone agrees that such exercises are important, this can be quite helpful for many. If you make a virtual wallet, play with realistic amounts.
It will not help you to pretend that you are trading millions of dollars, when in fact you have only 30 thousand. If you do, try to learn something and do not just take it as a game.
- Never rely on information thrown in by uninformed sources
Most professionals know that buying stocks based on rumors from ill-informed acquaintances almost always leads to bad deals. It is not enough to know which stocks to buy. You also need to know when to sell.
Legendary broker Jesse Livermore says: “I know from experience that no one can give me advice or a series of tips that will bring me more money than I will make if I use my own judgment.”
If you can’t trust your own judgment, it may be best to avoid day trading.
- Limit your losses
Loss management is key to survival in day trading. Although you want to leave your winning positions open for a long time, you can’t afford it for too long.
Hitting the right balance is an art rather than a science, but learning to control losses is key. Once again, never forget the “three e’s” rule.
- Be prepared to lose before you win
Although many traders can manage profitable positions, controlling losing stocks can be difficult. Many novices panic at the first sign of loss and make a series of impulsive deals that cost them money.
If you practice day trading, you should be prepared to accept some losses. The main thing is – you need to have a preliminary plan in case the market turns against you.
Although anyone can learn daily trading, few have the discipline to accumulate steady profits. What slips a lot of people are the emotions. That is why it is so important to create your own rules, the purpose of which is to get the best out of every deal.