In this blog we will discuss top 10 day trading rules suggested by market wizards. Listening to what the most successful traders and investors have to say, adopting ideas that helped them overcome their struggles and following their advice can be of great value. At least for me I can say that incorporating their ideas into my own trading made a huge difference. This is why in this blog I am going to share with you 10 important lessons you must learn from market wizards, to help you improve your trading performance.
Day Trading Rules 1- Do not anticipate and move without market confirmation
"Being a little late in your trade is your insurance that you are right or wrong" - Jesse Livermore
A market specialist always waits for his trade to be confirmed before the entry. Before ever making a trade you need to have your trade plan ready. Not only the reasons of why you want to enter the trade, but also when you should exit it. You must be meticulous in your research and make sure the trade fits with your strategy. So you need to create a trade plan for each trade that you want to make. After your trade plan is ready, don’t rush into the trade. Let the market confirm your bias. And wait for the trade to expose itself to you.
Day Trading Rules 2 - Taking calculated risk
"Risk comes from not knowing what you are doing" - Warren Buffett
It’s so easy to disregard the importance of risk management when it comes to trading. Even if you’ve been enjoying a high rate of success in trading, you could easily lose a high proportion of your gains in just a couple of trades, if you don’t understand the risk. Becoming a consistently profitable trader over the long term boils down to being able to professionally manage the risk. Rather than stumbling into a trade with no strategy and mostly guessing, this is all about serious planning.
You must learn to guard against the unexpected, just in case things don’t go as you anticipate. So by planning your trades and having a proper risk management strategy, you should know your potential profit and maximum loss before you embark on any given trade.
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Day Trading Rules 3 - Understanding the market
"The market can remain irrational longer than you can remain solvent" - John Maynard Keynes
The market is irrational because is made of people with conflicting knowledge, opinions, and intelligence. If market price moves against you when open a position, you may easily be tempted to hold that position in the hope that the situation will reverse itself. And of course, you could then easily find that you rack up even greater losses. This situation often occurs when someone is fighting a trend. Trends always seem to last longer and go further than seem reasonable.
Moreover, if you are not using stop-losses, or you read somewhere that PROs use metal stops or like to hunt stop losses, it’s only a matter of time when a large losing position will get out of control and wipe out most of your trading profits, eventually even your entire account!
Day Trading Rules 4 - Learn to take losses
"The most important thing in making money is not letting your losses get out of hand" - Marty Schwartz
Regardless of how good you are and how much analysis you have done, you can never be 100% certain how the trade will go. Therefore, as much as you want your every trade to be a winning trade, you should be prepared to lose. If you are serious about staying in the game in the long run and growing your trading account, it’s necessary to use stop-loss orders in every single trade you’re taking.
Losses are an integral part of any trader’s life. Losses are not the problem, it’s the ignorance of risk and money management and letting your losses get out of control that is. So, in order to avoid losses, you must first understand and respect them. But more importantly, you need to mentally accept them. Successful traders think more about protecting what they already have. That is always more important than making more money. Again, it’s all about stop losses. The stop-loss prevents emotions from taking over and will limit your losses.
Day Trading Rules 5 - Prepare an exit plan
"Always know where you’re getting out before you get in" - Bruce Kovner
Bruce Kovner is stressing the importance of having an exit plan on each trade you take. Many traders spend hours fine-tuning their entry strategies but then blow out their accounts taking bad exits. In fact, most of beginner traders lack effective exit planning, often getting stopped out at the worst possible price. That’s why it’s so important that you have a plan for getting out of a trade.
There is a vital difference between a trader who has an exact exit plan or none at all. It doesn’t matter if the positions are in a profit or going down in flames, as a trader you really need two exit strategies: one to handle profits and another to handle losses. And when dealing with profits, you also need to know how to protect them. Therefore, exit planning covers a stop-loss strategy to get out of bad trades, a profit-protection strategy to exit winning trades, and another strategy to save your neck in case of unexpected risks.
Day Trading Rules 6 - Trading Psychology
"Psychology is by far the more important element, followed by risk control, with the least important consideration being the question of where you buy and sell" - Tom Basso
When you break it down, trading is all about buying and selling, but without the right mindset and risk management skills, many things can go wrong. Emotional stability and discipline is the foundation upon which you must build your trading methodology. Without the ability to control your emotions and the impulsive trading decisions emotions cause, the best trading system and the best risk management approach are useless. At the end of the day, you are the weakest link in your trading system. It is impossible to become a successful trader if you lack one key attribute – the trading psychology.
The trading psychology is basically the right mindset and the ability remain disciplined and exercise control over your emotions even when the market is going against your expectations. Markets are constantly testing traders, and anyone without the right psychological mindset and the ability to control his emotions will have a hard time making the right decisions. Aside from having the right mindset, you also need the discipline to stick to your trading plans and strategies regardless of what the market throws at you. Constantly increasing your knowledge is one of the best ways of improving your trading psychology. The more you know about the markets and their behavior, the better you will become at making decisions.
Day Trading Rules 7 - Patience
"Money is made by sitting, not trading" - Jesse Livermore
Especially as a new trader, you are eager to be active in the market. You are actively looking for trades and even forcing trades. Livermore stressed the importance of staying out of the market, as you don’t need to trade every day. You need to learn not to force trades and only pick the trades that you have the best odds to make you money. At the end of the day, placing a trade is straightforward and simple, but you have to do your analysis to make sure that the trade has a high success rate. Analysis and patience make up for 99% of the work, while placing a trade the remaining 1%.
Day Trading Rules 8 - Trading in the zone
"The typical trader wants to be right on every single trade. He is desperately trying to create certainty where it just doesn’t exist" – Mark Douglas
“Trading in the Zone” by Mark Douglas is considered by many traders one of the most important trading books ever written. Mark Douglas makes a very good point in his book: you should not put so much emphasis onto one trade. Douglas explains that the right way to think about trading is a game of probability. It’s better to look at each trade as a part of a ‘series of trades’.
Don’t risk heavy on one position, your size must be spread over a series of trades to increase your probabilities of success. Douglas says there’s a random distribution of wins and losses over any sequence of trades. Learning to think in probabilities releases your expectations from trades because you are focused on the results of the overall series of trades, not on the result of any given trade.
Day Trading Rules 9 - Don't watch market too closely
"Dangers of watching every tick are twofold: overtrading and increased chances of prematurely liquidating good positions" - Jack Schwagger
This means you don’t need to watch the market too closely. You’ll only end up trading too much, which is risky, and close good positions too early. Either way, you’ll lose money. If you find yourself overtrading as a result of being bored, feeling a need to be in the market or trying to force trades, then you’ve likely got to work on revising your trading plan to manage this habit. Watching every tick and getting impatient will also lead to exiting trades too early.
If you are over-involved with your trades, sitting there all day and night staring at the charts, you’re probably going to end up messing up the exits. Eliminating the mistake of early trade exits isn’t that difficult, it really just takes a bit of education combined with some good old fashioned self-discipline.
Day Trading Rules 10 - Make best trades
"The goal of a successful trader is to make the best trades. Money is secondary" - Alexander Elder
It’s hard not to get wrapped up in the money sometimes. After all, that’s why we’re trading. We want to fill up our accounts with cash, be profitable and trade full-time. Anyone can have a great trade, but the question is can you replicate this performance in the future in the long term? If you are in this for the long term, focusing on making the highest probability trades possible is a more sustainable way for a future success. Money is the reward, an outcome of a successful trade. But only concentrating on the reward will cloud your judgement. That’s why focusing on making the right trades is the most important aspect.
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