10 Day Trading Rules Learned from 6 Years of Experience
Hey, what's up, everybody? Welcome back to another article on my channel. I hope you've been enjoying all the content I've been able to produce so far.
Today, I'll be covering the 10 rules that I've developed over the last six years of my day trading experience. These rules have been instrumental in my day trading career, and I believe they can greatly benefit your own trading journey. So, let's dive right into them.
Rule 1: Prioritize Risk Management
Rule number one is perhaps the most crucial principle that all traders can unanimously agree upon, and that's risk management. It's imperative to approach the markets each day with a well-defined strategy to manage risk effectively. Doing so not only allows for a sustainable return on your investments but also ensures longevity in the markets and in your trading career.
You've probably heard of the 90-90-90 rule, where 90% of traders lose 90% of their capital within 90 days. The implementation of a robust risk management strategy is precisely what prevents us from falling into that 90% category.
Furthermore, I've learned throughout my trading career that account flipping is not a sustainable practice over the long term. While you may achieve quick gains in a matter of weeks or even a quarter (three months), without a solid risk management system in place, you are likely to wipe out your account. It's a common pitfall to believe that after a few consecutive losses, the next trade will be a winner, leading to larger positions and even bigger losses. Our objective in the markets is to prioritize sustainability and consistently generate returns on our investments, be it on a monthly, quarterly, or annual basis.
Rule 2: Maintain a Trading Journal
Now, let's dive into rule number two, which closely follows risk management and is equally crucial: maintaining a trading journal. It's essential to keep a record of your trading performance through this journal.
It doesn't matter whether you prefer a handwritten journal, a program like EdgeWalk, or a more automated solution like TrackFX the key is to have a consistent method for maintaining your trading journal.
Within your trading journal, you should document both your successes and failures on each specific trading day. This practice helps you identify and avoid making the same mistakes repeatedly. Even if you only make two or three mistakes a year, these can translate into substantial financial losses, depending on your capital size.
By diligently eliminating as many mistakes as possible and addressing any bad habits you identify in your journal, you can potentially increase your profits in the long run.
Additionally, your trading journal should help you identify the strengths and weaknesses of your trading strategy. This insight allows you to make informed decisions about position sizing for specific trading setups you encounter in your journal.
Some traders focus primarily on high-probability setups, typically two or three specific setups with known success rates. By analyzing your journal, you can determine which setups are more profitable. For instance, if you notice that setup A results in four losses out of ten trades but wins six out of ten, you may choose to trade it with caution. On the other hand, if setup B has produced seven winners and only three losers, you might consider trading it more aggressively and increasing your position size for such setups.
Rule 3: Never Give Up on Your Goals
Alright, let's move on to rule number three, which is more of a psychological guideline, but it's a rule I set for myself, especially early in my trading career: never give up.
You should never abandon your goals or dreams. Just as you can see in the background with my McLaren 600LT, which is another car I once dreamed of and worked tirelessly to acquire. I knew that achieving this goal was only possible by adhering to the principle of never giving up. So, that's rule number three for you all.
One mantra I constantly repeated to myself as a new trader was, "The only traders who fail are the ones who quit." This is a harsh reality because everyone has their own timeline for finding success in the markets. Johnny might achieve success in the first year, while Steven might take three or four years, and someone else might require a decade to find success.
You'll never truly know when you'll achieve success. That's the nature of the markets, especially if you give up prematurely. By quitting, you're essentially imposing a potential limit on what you can achieve in the markets. Never give up, never abandon your goals and dreams – that's a rule that applies to any field.
Make it a steadfast rule for yourself to never give up. You should explore every possible avenue and work as diligently as you can to attain success in the market.
Rule 4: Start Small and Scale Gradually
Now, let's discuss rule number four, which emphasizes the importance of starting small.
Trading is not a process where you enter the markets and immediately make tens of thousands of dollars with every trade. There will be days when you make just $100, and that's perfectly fine. It's crucial not to rush the process.
Trading is akin to a marathon, not a sprint, as you've likely heard before. Begin with small goals, such as aiming for your first $100 trading day, and gradually scale up your efforts. Your progression might look like this: $100 to $200 to $300 to $400, and so on, eventually reaching $1,000, $10,000, $50,000, $70,000, and even $100,000.
Scaling your trading over time allows you to comprehend what leveling up in trading entails and how to navigate the psychological challenges associated with it. Remember, the trader who can't effectively manage a $1,000 account must learn to manage $10,000 before advancing to $15,000, $20,000, and beyond. This process requires patience and an understanding of the learning curve.
Trading is indeed a marathon, not a sprint. Be cautious when comparing yourself to others on social media who may appear to be trading larger positions. It can be tempting to push yourself beyond your current skill level, which can be destructive. Instead, consider the journey and experience required to reach those larger lot sizes.
Keep in mind that as you increase your position size, you encounter different psychological barriers because the numbers change rapidly. When you enter a trade, the spread becomes a significant factor. The difference between a few dollars and a few hundred or thousand dollars depends on your position size. Gradually scaling your trading from one lot to two lots, then three lots, and so on, helps you achieve a sustainable return on investment each month. The goal is to see a steady equity curve that reflects consistency in your trading results.
Rule 5: Establish Clear Trading Rules
Now, let's explore rule number five, which is quite straightforward: you need to establish a set of rules within your trading plan. These rules are essential to prevent overtrading and overleveraging.
You must define rules for various aspects of your trading, such as:
- Limiting the number of trades you take in a day
- Determining specific trading hours
- Outlining rules for pre-market and post-market analysis
- Setting guidelines for risk management
- Establishing rules for trade entry and exit
These rules are crucial to make your trading as business-like as possible. Keep in mind that when you're trading, you are essentially a self-employed individual. Unlike in a traditional job with a boss to hold you accountable, as a day trader, you must hold yourself accountable for your actions and adhere to your established rules.
Consider this scenario: if you were employed by a large corporation and repeatedly violated their policies or rules two or three times a year, you could potentially cost that company tens of thousands of dollars annually. In such a case, you'd likely find yourself out of a job once the company becomes aware of the financial impact of your mistakes.
As day traders, we lack a boss to oversee our actions, so it's imperative to hold ourselves accountable. Even minor rule violations can have significant financial consequences. You want to avoid situations where breaking your own rules costs you tens of thousands of dollars and jeopardizes your trading career.
To illustrate, here are some example rules you could establish:
- Limiting yourself to a maximum of two trades per day with a one or two percent risk per trade
- Setting a minimum target for trades at twice the amount of your risk
- Choosing specific trading sessions, like London or New York, or the London to New York crossover
- Scheduling post-market analysis at 5 pm market close and pre-market analysis at 6 am pre-New York session
These are just examples; every trader may have different methodologies and preferences. You should create rules for your trading strategy, including timeframes, entry and exit patterns, and any other critical aspects. Establishing a comprehensive set of rules is essential for disciplined and successful trading.
Rule 6: Develop a Structured Trading Routine
Now, let's delve into rule number six, which revolves around establishing a trading routine. This is similar to setting rules but focuses on specific times for market involvement, analysis, and review.
Your trading routine should include distinct time slots for different activities:
- Pre-Market Analysis: This is the time when you plan your trades and prepare for the trading day ahead.
- Active Trading: The period during which you execute your trades.
- Post-Market Analysis: This is when you review your trading day, assess your performance, and update your trading journal.
These two analysis periods, pre-market and post-market, are crucial components of your routine. Your post-market analysis typically occurs a few hours after the trading session concludes. To ensure consistency and discipline, you must set specific times for both pre-market and post-market activities.
Rule number six underscores the importance of having a structured trading routine, which includes designated times for pre-market analysis, active trading, and post-market analysis.
Rule 7: Maintain a Balance in Life
Now, let's delve into rule number seven, which stresses the importance of balance in your life as a trader.
As traders, our goal is to trade to live, not live to trade. Achieving a balance is essential because it helps you separate yourself from the constantly moving markets. This separation is crucial for your psychological well-being, as trading can be incredibly stressful and emotional, especially on losing days. It's common to feel bitter or even take out your frustration on others when you've incurred losses due to breaking your rules.
Speaking from my experience, taking significant losses in the past could ruin my entire day. To avoid the destructive habit of overtrading, it's crucial to step away from the charts when you've had a tough day. You can go to the park, swim in the pool, walk your dog, or engage in any activity that helps you disconnect from the market.
Overtrading is a dangerous behavior that can escalate your losses. When you're on a losing streak, you may be tempted to take impulsive trades that deviate from your trading plan, compounding your losses.
Having a balanced life means allocating time not only for work but also for your trading activities. Whether you trade part-time or full-time, you should establish specific timeframes for trading. This includes your pre-market analysis and active trading, which often occur simultaneously. Your post-market analysis can take place later in the day, allowing you to reflect on your trading performance, update your journal, and prepare for the next trading day.
Remember, balance is essential in all aspects of life. No matter what you do, it's crucial to be able to step away from the charts, take a break, and return to trading with a fresh perspective on the next trading day.
Rule 8: Focus on Price Action Strategy
Now, let's dive into rule number eight, which underscores the importance of adopting a price action strategy.
Regardless of the specific trading strategy you choose, one fundamental truth remains constant: a strategy built solely on indicators or tools like Fibonacci retracement is not as reliable as one based on price action. When you concentrate on price action, you can read and analyze the market more effectively.
In my own trading journey, I've centered my approach primarily around reading and interpreting price action. I aimed to keep my trading as simple as possible while still being able to interpret the valuable insights provided by price movements and patterns. It's a straightforward rule, yet an incredibly effective one.
Rule number eight reminds us to focus on price action and avoid becoming overly fixated on indicators. By prioritizing price action, you can gain a clearer understanding of market dynamics and make more informed trading decisions.
Rule 9: Seek Guidance from a Mentor
Now, let's explore rule number nine, which emphasizes the significance of having a mentor. It doesn't matter whether you choose me as your mentor or someone else, but having a mentor is crucial.
A mentor serves as a valuable resource with whom you can consult to review your trading practices, identify areas where you might be going wrong, and discover ways to enhance your trading skills. Individuals like me have already traversed a significant learning curve in the market, acquiring knowledge about what mistakes to avoid and which bad habits to steer clear of.
Something as simple as having a mentor can substantially expedite your learning process. While it's entirely possible to venture into trading independently, having a mentor can make the journey smoother. They can help shorten your learning curve and teach you the ropes of profitable trading.
Rule 10: Explore Funding Opportunities
Now, moving on to number 10, which is a relatively new concept in trading: get funded. Many traders today lack the capital required to generate substantial profits and support their lifestyles. Pursuing funding is a strategy worth exploring, and you should reinvest the profits earned from funded accounts into your personal live trading account. This approach can help you build your trading capital.
It's important to note that maintaining at least a part-time job to cover your expenses is a wise decision. This way, trading can be as stress-free as possible. Imagine achieving consistent profitability in your trading journey, only to add unnecessary stress by quitting your job prematurely and relying solely on trading to cover your bills.
With a funded account, let's say you have access to $200,000, and you consistently make a 10% monthly return. That's $20,000 a month, and you typically get to keep 80% of those profits. I highly recommend reinvesting these profits into your personal live account so you can benefit from both worlds.
Getting funded is a step I strongly advise all of you to consider.
Conclusion: 10 Simple Rules for a Successful Trading Career
These are the 10 simple rules I wanted to share with you, derived from years of experience. While I could continue discussing various aspects of trading, I aimed to provide you with these fundamental principles to assist you in your trading career.
With that being said, I hope you found this article enjoyable and informative.