Day Trading Rules For Rookies: Don't Play It By Ear!

By Prableen Bajpai AAA

The prospect of making quick money lures many to the world of day trading. The participants in this game, besides professional traders, can be retirees, executives, teachers, small business owners, housewives, etc. who try and make a fortune through their computer screens.  Remember, the profits which may draw you to day trading are virtual and it’s your trading style that can transform them into real gains--a daunting task, especially as a rookie.

There are rules for every game, even day trading! If you are a new player, it’s important that you are mindful of the basic set of rules. These rules are certainly not binding, but they can help you to make some crucial decisions and give broader guidelines.

1) Knowledge

“Knowledge is power.” Knowledge here includes information about the basic trading procedures and tools, information about stocks you plan to trade (like company financials, reports and charts), knowing the latest in the stock markets, keeping track of events that affect stocks, etc. Day trading can become more difficult and risky in the absence of knowledge. As a rookie, do your homework; make a list of stocks which are on your wish list, keep yourself informed about the selected companies and general markets, scan a business newspaper and visit reliable financial websites on a regular basis. An informed decision is a better decision.

2) Being Realistic

Being realistic about profits is important. As you gear up to trade, make sure that you don’t lose out on decent gains in the greed for more! Markets are tricky and it’s better to settle down for a smaller profit than ending up losing heavily. Don’t repent losing out on a chance. If required, you can always buy the same stock when it dips. Every small profitable trade will help boost your confidence and also give you a chance to try out the strategy again.

3) Margin Trading

Trading on margin means that you are borrowing money from a brokerage firm to trade. When used properly, margins help to amplify the trading results; amplification is just not of profits, but of losses as well, if a trade goes against you. As a rookie, keeping control on the amount of indulgence is vital and trading with cash-in-hand helps to achieve that. To begin with, indulge in day trading without using margin. The high margin requirements for day trading on margin also act as a barrier for many to trading on margin.  

4) Entry & Exit

Knowing the price at which you wish to enter at and exit can help you book profits as well as save you from a wrong trade caused by unnecessary confusion. Don’t play it by ear; you must have some pre-fixed levels in your mind for every stock you plan to trade. In case the markets are not favorable, exit to cut losses.

5) Number of Stocks

As a beginner, it is advisable to focus on a maximum of one to two stocks during a day trading session. With just a few stocks, tracking and finding opportunities is easier. If you simultaneously trade with many stocks, you may miss out on chances to exit at the right time.

6) Rush Hours

Many orders placed by investors and traders begin to execute as soon as the markets open in the morning, and thus contribute to price volatility. A seasoned player may be able to recognize patterns and pick appropriately to make profits. But as a novice, it is better to just read the market without making any moves for the first 15-20 minutes. The middle hours are usually less volatile while the movement again begins to pick towards the closing bell. Though the rush hours offer opportunities, as a novice it’s better to avoid that time to trade.

7) Set a Amount Aside

Day trading is risky and there is a high chance of losses. As a rookie, set aside a surplus amount of funds that you can trade with and are prepared to lose (which may not happen) while keeping money for your basic living, expenses, etc. This will ensure that you are not increasing the risk quotient by neglecting your day-to-day needs whilst day trading.

8) Time

Above all else, day trading requires your time. Don’t consider it as an option if you have limited hours to spare. The process requires a trader to track the markets and spot opportunities, which can arise any time during the trading hours.

9) Avoid Penny Stocks

Keep away from penny stocks as a beginner in day trading. These stocks are highly illiquid and chances of hitting a jackpot are often bleak. Don’t trap yourself in a trade which is difficult to exit!

10) Limit Orders

When you place a market order, it is executed at the best price available at the time of execution. Thus there is no “price guarantee” in a market order.A limit order, meanwhile, does guarantee the price, but not the execution. Limit orders help you trade with more precision wherein you set your price (not unrealistic but executable) for buying as well as selling.

11) Unreliable Sources

Don’t trust any SMS, mail, advertisement, etc which claim about super normal profits. It’s not that all such sources are bogus but authentication is required. As a rookie be sure not to be tricked by someone who for a commission lands you with a bad trade.

12) Emotion

There are times when the stock markets test your nerves. As a day trader you need to learn to keep confidence, greed, hope and fear at bay. The decisions should be governed by logic and not emotion. This may be hard for a beginner but only someone who can learn to control his or her emotions can be successful. Before plunging into the real time arena, it can be a good idea to try a simulation exercise. (Investopedia has a stock simulator here.)

The Bottom Line

Day trading requires time, skill and discipline. Skill is developed over a period of time as you participate in the markets and trade with discipline by devoting your time. A sound understanding of some good day trading strategies can provide a foundation to this endeavor.  Self learning is the best way to learn and as Jesse Livermore, a legendary trader said, “I know from experience that nobody can give me a tip or a series of tips that will make more money for me than my own judgment.”  

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