Day Trading Rules and Facts

These are facts and common sense rules about day trading that all serious traders should know. The reason why some traders lose money with stocks, currencies, futures, or anything else, is because they do not have a basic understanding of important concepts like these. Don't let this happen to you. Even if these rules may sound simplistic, they are essential.

What "day trading" really means.

The term "day trading" is a widely misused and misunderstood term. Real day trading means not holding on to your stock positions beyond the current trading day; in other words, not holding any position overnight. This is really the safest way to do day trading because you are not exposed to the potential losses that can occur when the stock market is closed due to news that can affect the prices of your stocks. Unfortunately, many people who claim to be "day trading," hold stocks overnight because of fear or greed, thus setting themselves up for the catastrophic elimination of their capital. When day trading currencies, the term "day trading" changes slightly. Since currencies can be traded 24-hours-a-day, there is no such thing as "overnight" trading. Thus, you can have open positions for longer than a day with active stop losses that can be activated at any time.

You must limit your losses in day trading.

Limit your losses! This is one of the most important rules that a day trader must learn. There is no rule of thumb as to how a day trader should limit his or her losses, but there are basic steps that can be followed. One of the main reasons people lose money in day trading is because they do not limit their losses. For example, a person that claims to be "day trading" buys a stock and when the stock starts dropping, he says to himself, "I am going to wait because the stock is going to go back up." The stock then continues to drop and he realizes that he should have sold it earlier, when he was losing less. When the traditional "closing" time (4:00 PM EST) of the stock market is near, he decides that he is going to hold the stock until the next day, when it will surely recover. News is released overnight that is negative for the entire market. When the market opens the next morning, all stocks are lower, including the stock of our alleged "day trader." At this point, the "day trader" is a lot more nervous and a lot less wealthy. His denial reaches such gigantic proportions, that he convinces himself that he is really not a "day trader, but an "investor," and he is thus going to hold the stock as long as it takes to make up what he lost. As the stock plummets into oblivion, he loses his sleep and becomes severely depressed, convinced that day trading does not work and looking for someone, rather than himself, to blame for his pain and suffering. Don't let this happen to you. Limit your losses!

Day trading is only for part of your investment money.

Don't day trade with all your investment money! This rule means that you will only use SOME of your investment money for day trading. The reason being that you do not know for sure if you will be successful in day trading or not. Consequently, most of your investment money should be applied to longer-term investments that should be managed in a completely different way. The bulk of your investments should be in very rock-solid stocks that were selected using "fundamental analysis," or in real estate or other investments that were chosen for fundamentally correct reasons.

Day trading is like running any other business; it requires hard work and dedication on your part. A lot of people mistake the act of "sending" and order to buy or sell a stock or currency to the market with "trading." Sending an order to the market is very easy. Day trading can become easy, but only after you have had the proper practice. You have to be able to dedicate at least a few hours a day to do it (and practice first on a live day trading simulator).

The time it takes to learn day trading varies.

The learning curve for day trading varies from person to person. One factor is the person's investing and trading experience and knowledge. Some people can get started day trading in about one month, while for some it takes anywhere from three to six months. It is important to note that some people will never learn to day trade correctly. This can be because of a series of different factors, like a lack of discipline, an uncontrollable fear of losing money, etc., etc.

A direct-access broker is required for day trading stocks.

You cannot day trade stocks effectively with an online or full-service broker. These brokers are just too slow and inflexible. True stock day trading must be done with a direct-access broker, which I explain in Step 5 of "Steps to start day trading." If you want to day trade currencies instead, you can test-drive the system I use for 30 days (www.fibonaccitrader.com).

Daily money goals are useless in day trading.

Whoever says that you can "consistently make X amount of dollars" a day, week, month, etc., in day trading is not telling the truth. In day trading everyone wins and loses. The amount you make or lose will depend on your discipline to limit your losses and apply what you learn. Your goal is to take from the market whatever is available on a particular day. Each trading day will be different.

You do not have to trade every day.

This day trading rule is related to the daily money goal rule. If you don't want to trade for whatever reason, don't do it. Maybe you have a stomach ache one day or you feel uneasy about the market, or maybe you just don't feel like it. Whatever the reason, you do not have to trade every day. If you force yourself to trade, you will lose, period!

Source: http://members.cox.net/bobbyspageinfo/daytradingrulesandfacts.html