Day Trading Rules and Facts

These are facts and common sense rules about day trading that all serious traders should know. One of the reasons 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 sound simplistic, they are essential.

You need $25,000 or more to trade stocks (by law in the US); You can day trade currencies with only a few hundred dollars.

A big advantage of day trading currencies rather than stocks is that you need a lot less money to start. In my opinion, day trading currencies is a lot simpler than trading stocks because there are only a handful of currencies you can trade. Currencies are one of the only vehicles that you can still trade with very little money via a forex mini account. If you are willing to give trading currencies it a shot, click this link to a live simulator and receive a free trading e-book (you can also register for one of my new practical, live training sessions with an experienced day trader). To day trade stocks (more than 8 round trip trades in a week) you need more than $25,000 in your account. This is because of a law that was established in September 2001.

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 positions beyond the current trading day; in other words, not holding any position overnight into the market close. 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. Please note that using stop orders does not guarantee that you'll be filled at your stop price - but it's a precautionary measure nevertheless.

You must limit your losses in day trading.

I feel this is one of the most important rules that a day trader should 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. I think that 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 could 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 by limiting your losses.

Day trading is only for part of your money.

Don't day trade with all your money! This rule means that you will only use SOME of your money for day trading. The reason being that you do not know for sure if you will be successful in day trading or not. The bulk of your capital should be in very solid, fundamentally sound investments or managed accounts that were chosen for fundamentally correct reasons (unless, of course, you become an extremely successful and reliable day trader - then the rules change - if you do, I am always looking for talented traders to join my team).

Day trading requires proper training and practice.

Day trading is like running any other business, in my opinion; 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 it is not a sure thing and it certainly takes time. 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). If you are not willing to dedicate the time required, don't waste your time trying to trade.

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 or more. 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. If day trading is not for you (for whatever reason), another option is a managed account.

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 day trading simulator on this site.

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. Most novice traders shouldn't be thinking about this at all.

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 are not feeling well 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!

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