Top Rules for Day Trading Success


Are you a Trader or Risk Manager?

You’ve probably heard people say Day Trading is where gamblers go to lose all their money or that the markets are rigged so only the big banks make money.  The market is a hub where many personalities come together to buy and sell stocks.

You will find gamblers, day traders, short term investors, long term investors, conservative traders, and speculative traders.  What you will notice is that the traders that succeed to make a career in the markets all share one common trait.  They are excellent Risk Managers and follow strict day trading rules.

One evening I met a beautiful girl. She asked me what I did for work. I said I was a professional trader. She showed little to no interest. I went on to explain to her I was essentially a risk manager. She is now my wife. This weekend as I write this, my trading accounts reflect my discipline in risk management. I want to expand upon risk management and my most important rule on my list: The more stubborn you are, the more you will ultimately lose.

Complete list of Day Trading Rules:

1) Less is ALWAYS more. Stalk the market for your setup(s) and be patient

2) Trade what you see not what you want/Don’t trade for action, trade for the kill shot

3) The more stubborn you are, the more you will lose

4) Trade extremes: Buy/sell near the low/high of day

5) Have a stop & target in mind before entering trade

6) Obey your stops mental or hard

7) Avoid unconfirmed headlines, wait for verifiable news

8) Most price action occurs before 12pm EST

9) Shrug off losses – IF – all rules and guidelines are followed

I am a contra-trader. I like shorting strong, extreme upward moves,  as well as stepping into extreme moves down. Both require a specific technique because most trades that are taken against the herd have more risk.  When I begin taking positions in stocks making extreme moves I start with small size, adding into the squeeze, and taking full size as the first reversal indicators appear.

This results in making money over time, mostly due to the fact I don’t think like the majority of the crowd. Focusing on contra trend trading means that I am not as skilled at trading the high flying momentum names.  I’ve always found buying stocks that are running creates a higher level of downside risk vs upside risk.  That’s why I stopped chasing the runners and instead began stalking them for a reversal.

What Do I Mean By Risk Management?

Before I enter into any single trade, I have calculated the risk involved. This includes proper sizing, stop out levels, and target points all with an expectation in the back of my mind of a predetermined loss.

On March 5th 2015, I scaled into 3,000 shares short of $MR, having a final average of 32.44. I entered this trade after conflicting pieces of takeover news hit the wires. I confirmed that the news was quite speculative and did not justify the extreme upward move. After entering the trade my stop was just above $34, as a MENTAL STOP.

My thought process was if it broke back above $34 I then would piece out of my position and take the loss. I despise entering stop orders into the system as they are sitting ducks for the advanced, high frequency trading algorithms of today’s markets. Thus, mental stops with extreme discipline are my choice.

$MR continued to slowly drift for hours until it finally had cracked to the downside.

At this point, there are two options: One, I could take the profits because I like the look of my P&L, which I don’t like to do. Two, I move my stop to break even and risk ZERO. I had an original target of 30 for my cover and decided to cover the full position since my initial target was hit. $MR continued down to break through $30, then $29.

My philosophy on risk management and my contra trend style does lead to many break even stops. My winning percentage is actually less than my losing percentage because the losses I incur are small compared to the wins on trades just like $MR.

One other key aspect of risk management is NEVER add to losing positions. Let me put that into perspective. If I enter a trade with a half, quarter, or even eighth size and it begins immediately to turn against me, I without a doubt will add to the position.

That is quality risk management, and why I take my starter positions. However, if I am in a full position size and it’s against me I will never add. There are times when I will have a full position and it begins to turn against me and the slightest thought of adding pops up I have trained myself to exit the trade. Simply put, I was wrong on this trade and must move onto the next.

It is my strong belief that disciplined and quality risk management will lead to the consistency you need to take calculated risks and turn BIG profits.

This subject reminded me of a recent video post by Ross on his experience losing $30k in his first year trading.  For those who haven’t already seen it I highly recommend it.  The video is posted at the bottom of this article

Day Trading Rules – How I lost $30k and Recovered