Financial Literacy

Day Trading Rules for New Stock Traders

Are you new to the day trading game but can’t wait to get started? I don’t blame you. Day trading can be an exciting and profitable venture. However, it’s best for the rookie trader to keep some important day trading rules in mind so that you can make the most of your opportunities without losing your shirt!

As a refresher, day trading is different from investing. When you invest in a stock like Amazon.com (Nasdaq: AMZN), you are riding the stock for the long term. You may be holding the stock for years, or even decades. Not so with day trading: A day trader buys and sells a stock within the same day (intraday trading).

The whole point of day trading is to get in, make a quick profit and get out. Over time, these profits will compound and can help you make a lot of money. Of course, don’t forget that you could also lose a lot of money if you aren’t careful. That’s why it’s good to know the day trading rules below to keep you out of trouble.

Day traders in an office making trades. But are they following these day trading rules?

Day Trading Rules You Need to know

When entering into a rewarding but risky venture, it’s always good to have some rules of the road to keep you out of trouble and on the path. Day trading for beginners is hard, but knowing these day trading rules can help things go smoothly.

Of course, these aren’t immutable laws of nature and you’re free to tailor them to your own needs. After all, day trading stocks is a little bit different for every investor and you may need to adapt these rules of thumb to your own practices and needs.

Finally, remember that these rules aren’t meant to be oppressive. Day trading should be a fun and exciting venture for you. After all, who doesn’t enjoy making a lot of money if they’re playing the market?

So let’s get started on the day trading rules for rookies:

The Five Day Trading Rules for Rookies

Rule 1: You Must Have a Plan

The absolute first day trading rule is that you must have a plan of execution. You cannot go into this blind or you’ll lose a lot of money in a hurry. As the old cliché goes, “Not having a plan is planning to fail.”

There are many day trading strategies, including:

  • Daily Pivoting
  • Fading
  • Movement Trading
  • Scalping

Day trading strategies are not static, and they evolve over time. Not to mention that there are many more than those I listed here. But you should still familiarize yourself at least with these most common day trading strategies, and then decide which one is best suited for you.

Rule 2: Learn Using Play Money

As day trading rule #2, I highly suggest that you don’t start out using real money. If you’re looking for a good stock trading simulator, my colleague Matt Makowski put together a great list of the best ones.

Day trading requires skill. You’re not born with these skills… they weren’t loaded into your brain. You need to teach yourself how to trade. The best way to do that is by placing trades with fake money and seeing what happens.

Once you start to cultivate your skills as a fake trader, you will be ready to slowly step from the kiddie pool into the Olympic-sized tank that is day trading. And you will do so armed with much-needed skills and knowledge that you lacked before.

Rule 3: Get In, Get Out, Make Money

For day trading rule #3, my advice to you is that with each and every position you take, you will need an entry plan and an exit plan. In other words, you should know what price you want to buy the security at… and at what price you want to sell it.

Of course, sometimes you’ll make mistakes. And these mistakes may lead you to lose some money. But if you generally keep to your entry and exit plans, you’re going to be much better off.

Another important thing to note: as a rookie trader, you should consider only taking on one or two positions maximum during any daily trading session, because you definitely don’t want to have too much on your plate. Tracking your positions so you can determine the right time to get out is essential, and having too many positions may make this process too overwhelming for a beginner trader.

Rule 4: Check Your Emotions at the Door

Every now and then, I like to watch a sad movie and have a good cry. That’s a good time to have emotions. You know what time isn’t good? When you’re making a stock market trade. Never trade with your emotions.

That’s one of the reasons why having an overall plan and, more specifically, an entry and exit strategy in place for each position becomes so important. It prevents you from trading from a place of extreme greed or fear. And that’s why checking your emotions at the door is day trading rule #4.

Instead, you use your rational, calculating brain to determine when to place a trade and when to get out. Sometimes, this won’t feel good. We’ve all taken our lumps in the stock market. But in the end, by trading from a place of reason rather than emotion, you will go a long way to being a successful trader… and not devastating your bank account instead.

Rule 5: Limit Your Losses

Day trading rule #5 is to limit your losses. Making money in the stock market is fun, but accruing huge losses can destroy a person. You don’t want to go through that, and you shouldn’t have to if you play the game right.

First things first: never trade with money you can’t afford to lose, especially in the short term. It’s not worth becoming homeless or starving in order to day trade. Pay your bills. Meet your basic needs. And then trade with whatever you want to that’s left over from there.

Another important point is this: there are strategies you can employ, such as issuing a stop-loss or other types of limit orders, that can prevent you from losing big on a trade. Familiarize yourself with these tools and use them as best you can.

A Bonus Day Trading Rule: Don’t Forget to Have Fun

As a kid, both of my parents were stock traders. I remember as a little boy my dad would bring me to the floor of his brokerage house and I’d be dazzled watching the men and women in suits place their trades all day long.

Day trading is serious business but you shouldn’t forget to enjoy the process while you’re doing it. Like with most of the good things in life, the endpoint does matter, but the journey is sometimes even more important. Don’t forget to enjoy the ride on the way.

Now that you have some good day trading rules of thumb at your fingertips, the time to start gaining some experience with play money on a simulator and developing the knowledge you need is now. Go forth and trade, my friend. And if you’re ready to move to prime time and start trading real money, may the odds be ever in your favor.


About

Brian M. Reiser has a Bachelor of Science degree in Management with a concentration in finance from the School of Management at Binghamton University.

He also holds a B.A. in philosophy from Columbia University and an M.A. in philosophy from the University of South Florida.

His primary interests at Investment U include personal finance, debt, tech stocks and more.

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