Trading Rule #1 – Remain faithful to Your Trading Plan
Many traders begin their day disciplined and willing to execute their trading strategy in line with the rules but often times after they experience a few losers or this market doesn’t do what they anticipate will happen they forget their trading plan and begin trading based on emotions and also pure feel. This is a recipe for disaster and occurs more frequently than you can ever imagine.
What I do each day prior to opening bell is prepare 5 worst case scenarios and I write down each of these so if any of these occur, I know exactly what I can do and how I need to react. This will prevent you much undue stress and can provide confidence in difficult market circumstances.
Just last week I observed a veteran trader completely disregard his exit strategy and lose several thousand dollars in a few quick minutes. Don’t let this happen to you, follow your trading plan accordingly and make contingencies for situations which have been not likely to happen. More often than not traders lose their discipline whenever they are faced with unforeseeable circumstances. Prepare for worst case scenarios to ensure if and when it transpires you won’t be caught off guard.
Trading Rule #2 – Know the Temporary Fundamental News
Most day trading tactics depend on technical analysis and momentum techniques, with that being said many traders completely ignore the fundamental news and reports which have been related and relevant to the stock or market they are trading. This is one of the greatest mistakes beginners make because marketplaces are driven by emotions and short-term fundamental news provides clues about what is driving the market at any present time.
For example if a stock is developing earnings after the closing bell, it will trade very differently than using a typical trading day or if economic reports will be released within the hour the index futures market will go through a choppy range bound period prior to announcement.
Another good example is abnormal volatility that typically occurs on stock option expiration that comes about the third Friday of each month.
These are just three basic degrees of fundamental news that can have major have an effect on the financial markets that traders have to know about ahead of time.
Most professional traders look at economic calendars as soon as the closing bell and before the opening bell so they know all potential and foreseeable factors that could influence the market during the subsequent trading session.
While I’m not suggesting suddenly you become a fundamental guru and start off calculating next year’s corn crop production costs, I do think it’s a good idea to know what players in today's market environment are thinking at any moment.
Trading Rule #3 – By no means Enter Trades Without Placing Protective Stop
You probably heard this rule hundreds of times but you may not follow it all the time. The problem occurs after the entry is positioned, the mind has a smart way of talking us out of performing thing that are good for us so make sure you figure out your stop loss level and place your protective stop order when you get your entry fill. After you practice this exercise it's going to become second nature, kind of like wearing a seat belt.
Avoiding stop loss orders is the biggest reasons why small losers become large highly unmanageable positions that could turn your trading career right into a nightmare quickly. Don’t take huge risks and always protect the positions with protective stop damage orders.
Trading Rule #4 – Constantly Perform Relative Strength Analysis Just before Entering Positions
Relative strength analysis is simply comparing the instrument that you would like to trade with the same instrument. For example if you are trading semiconductor stocks you'll compare the stock you would like to trade with other stocks from the semiconductor industry group or if you need to trade e-mini futures contracts you must compare the e-mini NASDAQ to the e-mini SP futures contract. Relative strength will give you a strong indication of exactly how strong or weak your stock or market is in comparison with other related stocks or different markets. This offers you some very important clues about what related stocks or other markets are doing and will give you important information concerning the stock or market that you need to trade.
If you are going long you almost certainly want to pick the strongest stock out from the industry group and if that you are trading short you would probably desire to pick the weakest stock for the reason that industry group. Relative strength provides you with the tools to analyze marketplaces and compare gauge comparative durability or weakness between two associated instruments.
Most professional traders rely on relative strength analysis on a daily basis and I suggest you begin doing the same if you need to become a professional trader.
Trading Rule #5 – Avoid Market Entry Late Within the Day
There is only a lot time in the session everyday and there is only a lot ground prices can cover for the reason that time. You must understand that market entry late from the day reduces your profit potential greatly and reduces the odds of trades working out to your advantage because they simply don’t have the time to work through. Unless you are scalping which involves taking numerous small profits each and every several minutes, I don’t recommend initiating positions after the afternoon Eastern Time.
Next time I will disclose some more day trader rules that could improve your profit potential and reduce your stress level.