6 Rules for Day Trading Beginners
There are 6 must know rules for day trading beginners to follow in order to avoid blowing up.
Day Trading, especially in the current market conditions right now, could be the wild wild west, where you see monster 3000% gainers take off like a rocket, and then a heavy sell off on the stock to no bounce city.
As traders we must know how to protect ourselves and most importantly our trading accounts in these volatile markets. After trading for 7 years now, I have some very simple, yet extremely effective rules for trading that will help with your journey to become and stay consistently profitable.
The 6 trading rules I'm about to share with you can definitely help new traders form a very solid foundation in their trading discipline.
As you start day trading for a while you’ll realize that knowing these patterns or news of a stock is just half the story. It’s important to have a trade thesis, yes, but you can't just hit buy and go straight to chilling at the beach. No, trading is actually much more than that. Here the 6 rules for day trading beginners:
Rule #1: Always have a trading plan
This is the most important rule in my daily trading routine. Specifically a plan that includes entry and exit price and also the risk level for every trade.
Let’s say see this stock for a potential long. I can only buy the stock when I see it consolidate around certain support levels with volume and it has to have found the bottom for a level for me to risk off.
Yes, you might think I am limiting my earnings by not trying to pick the very bottoms or not trying to top tick the shorts, but honestly for beginner day traders waiting for confirmation and planning for entries with clear risk is going to make sure you profit from the meat of the move, and limit the risks at the same time.
Part of the trading plan is a potential risk reward of at least 3:1. That is 3 rewards to one risk. If the risk is more than that, or if the stock is just sideways and can’t give me a good reward, I'm perfectly fine leaving the stock alone.
On a side note, to plan your trade, I recommend beginner day traders to stay away from small cap penny stocks, and to just take them off your trading plans. Mid cap and large cap stocks are much friendlier for new traders and their support and resistance levels are easier to plan.
Now while you do need to follow a trading plan on whichever market cap stocks you trade, don’t permanently become fixated on old ways of trading, always be flexible and adapt to the market. What I mean here is that, yes, you do want to have repeatable strategies every day, but over time, you could mix things up, try out new set ups as you gain more trading experience and screen time.
Depending on the information you had on the stock, the current news or market sentiment, you could increase both the size and the trade period in the stock, especially if the headline could fundamentally influence the company's share value.
Is the company’s takeover imminent? A conference call coming up? Potential liquidation? Any of these fundamentally negative or positive news are worth potentially sizing in even more, and perhaps trying to let the winner ride a lot longer.
Another thing I factor in when creating my trading plan is the current market conditions. My plans usually correlate with the market. For instance, when small cap stocks are slower and large caps are more volatile. I try to be more flexible in my premarket trade planning and focus more on large cap stocks with range and news.
Instead, as you day trade over time, change your strategy every once in a while and use the state of the market as your guide.
Rule #2: Analyze stock news like your life depends on it
Rule number 2 in trading is to analyze stock news like your life depends on it because your trading account depends on it.
I analyze stocks and study the news before I buy or short any stocks, especially if the stock has made a significant drop. Most people are trained to buy any dip, but that's a practice that should be used in investing, not day trading.
It can be tempting to buy stocks when you see a huge drop in prices without having any information about the circumstances behind the crash. Buy the dip right? This has to bounce right? Well that strategy works well until the dips just keep on dipping and this is a very common new trader mistake.
Depending on the severity of the news, the stock may either bounce or just keep on crashing, especially if a potential fraud or lawsuit is involved. Picking bottoms on whatever drops is a very bad idea.
I did this once and I spent days paying for it in terms of regrets, sleepless nights, and broken dishes. Since then, I make sure to check the news and find catalysts for any stock I’m looking to buy or sell. Trust me, this extra 5 to 10 seconds of work is a game changer. I can do so really quickly on my Benzinga newswire.
Rule #3: Step away from the computer when you start feeling emotional
Next we have rule number 3 which is to step away from my trading computer when you start feeling emotional. Emotions and day trading are like small trading accounts and chat room alerts to buy at the HOD - they simply don’t work together.
If you get into a routine of planning your trade and planning your plan like rule #1, this eventually will allow you to be detached from the money, and keep your emotions in check. You see, it's not difficult to make money in day trading, but it is harder to keep it.
One thing that has helped me greatly with controlling emotions and hype when I was new to trading, was to avoid trading when the market opens. The reason is that the 10 minutes after the opening bell is usually extremely volatile. Stop losses are getting hit, market orders from hundreds of thousands of robin hooders are getting filled, lambos are raining from the skies. It's a hot mess out in the open.
If you are new, I strongly recommend you to avoid trading the opening. By doing so that will also give a new trader more time to analyze stocks, the news and price action, and plan out their trades like rule #1 & #2. Instead of blindly jumping in just they may jump into buying chat room alerts.
Most importantly, this will help with controlling emotions in trading. For many beginner traders, the hardest part is not becoming emotionally attached to a trade and not having one small loss leads to a string of beginner losses.
Rule #4: Be realistic about your trading profits
Rule number 4 is to be realistic about your trading profits. Take the meat of the move and do not out stay.
Besides analyzing a stock before jumping into a trade, you have to be realistic with the stocks upside intraday while you are day trading. You can't just buy a stock and expect a 100% run each time. I mean, sure you see some small cap stocks going up 1000-3000% on the day. But how often does that happen?
I don’t expect low float runners to squeeze and eventually go to the moon, you shouldn’t too. Okay unless it's Tesla stock. Did 1000% return already like it's nobody's business.
You shouldn’t regret making small wins on a stock, or FOMO on missing out and selling too early. You can always buy the stock back when it dips, and if the momentum and uptrend continues. Same thing if you are swinging or investing long term too. Stocks like AAPL, MSFT, AMZN despite their success, dip every once in a while. So, no need to panic that you are missing out on something huge.
For new traders, especially if you have a small account, do not aim for home runs, focus on controlling your risk, and look for base hits. Yes the profits are probably small, but taking these small wins are less stressful and they will add up to your account slowly and the growth is exponential.
Whining about missing profits, and jumping back into trades due to Fomo and the idea that “Oh I could have made so much more, this stock owes me now” is actually a very negative and dangerous emotion. Because eventually that will lead to new traders revisiting trades, and start revenge trading and giving back.
When you are realistic about a trade it helps you to ignore those dollar signs, and become too attached to the money. Let me ask you something: why do people get into day trading? It's mostly for the money, right? But ironically if you focus on just the money, you will fail in trading even before you take off.
If you are relatively new to the business, start trading with one or two stocks per day, take the meat of the move and be done. Don’t follow every single scanner alert and go for more stocks due to greed and FOMO.
Rule #5: Prioritize risk management
Rule number 5, and it's an extremely important one, is to always prioritize risk management. You see, most traders fail not because they don't have the winning strategies, or they’re using the wrong brokers, or they don't have locations too short.
It's because they focus too much on the shiny dollar signs, the money, like we just talked about. So much so that they ignore their risk and fail to see the potential downside.
Without risk management, it is going to be difficult to grow your account. Without stops, and without setting max losses for the day, the trader is likely to, first, try to make back small losses, then over trade, then start making mistakes, and eventually this is how many new traders blow up.
Day trading is risky. That's why you shouldn’t trade with the money you cannot afford to lose. If you use a margin account to short or have the cash settle within a day then that's great. But for new traders, please do not use the buying power you cannot afford to lose.
Make sure your trading funds are separate from the money for your emergency funds, and you have separate savings and investing accounts.
Managing risk is important but at the same time, you need to accept the fact that taking risks is necessary in day trading. Like I said, day trading is a risky business, so you will need to take calculated and planned risks, and at the same time manage them so you won’t go overboard.
Rule #6: Do your own research and do not blindly follow others
It doesn’t matter what the hype is, or what the stock analysts are saying, I do my own research and make my own judgement and not what my best friend says or other traders say online. Same as this blog you’re reading right now. These are just my opinions as a day trader, not advice.
It's important to, sure, take a look at what your friend or trading community brings up, but always form your own plan before entering a trade.
Long time ago, I had a friend who already got the hang of trading and made lots of money. I listened to some of his advice and found it didn’t exactly work with me. Do you know why? it is this simple: my situation and personality was very different from his.
We don’t follow the same day trading strategy, we never had a similar position size, and I had no idea of his stop-loss or target price or stop-loss. And this is why, you should never blindly chat room alerts.
Don’t let others' opinions and trade biases cloud your judgement in day trading. Ignore those rumors flying around especially in places like forums, StockTwits and social media platforms like Twitter and Facebook groups where day traders just bounce suggestions off each other. Develop and follow your own strategy, and trade your own plan, not someone else’s.
It's kind of funny because while we day traders are taking advantage & profiting from short term momentum, we must have a long term outlook on this trading business. And all the RULES rules I mentioned here are to protect your trading accounts, so it can stay green and continue to do so for the long term.
