6 Day Trading Rules to Step up Your Game

Last Updated on December 6, 2019

Don’t go seeking day trading advice from long-term billionaire investor, Warren Buffett. He certainly didn’t make his fortune in a fortnight. That doesn’t mean you can’t be a successful pattern day trader. It’s a skill that’s still alive and robust, now more than ever, despite the market crash of the late 2000s and near systemic risk.

But for you to make it in this murky finance world, you’ll need to be an avid securities trader, not a hobbyist.

Run your daily trades with a solid plan just like you would day-to-day corporate business operations. Moreover, use technology (as well as your wit) to make all the right moves in bull and bear markets.

And if you feel like the odds are against you, check out the following day trading rules, and hopefully, you’ll feel more optimistic.

Day Trading Rules

1. Prerequisite Day Trading Knowledge

Imagine being blindfolded while playing dodgeball.

You’d probably have zero chances of hitting the opponent, right?

In the same way, why would anyone buy financial assets without the foundational skills of financial investment, let alone day trading?

You know, they don’t call day traders “gamblers” and “bandits” for nothing. The term was coined by the buy-and-hold strategy of investors due to the abnormal profits (or losses) synonymous with day trading. See our guide on the fear and greed index for a more in-depth look at how the market operates in the long term.

Financial investment skills are a must: believe that, even if you plan on having a managed day trading account. If you are a securities investment ‘twit,’ how do you keep track of your capital gains, tax efficiency, and asset positions? It may be risk capital, but it’s your hard-earned money. Keep a close eye on it lest greedy day trading account managers engage in churning (unnecessary asset turnover) to earn more in commissions and management fees.

And for the individual traders, the year isn’t ‘97 and day trading won’t magically make all your financial troubles go away. You can’t rely on the “technology boom” ideology in today’s markets. Know (at least) the basics of financial investments, have a knack for market analysis, and a precise interpretation of technical indicators. It’s the only surefire way to predict price movements, fight irrational speculation, and come out unscathed.

2. Smart Day Traders Thrive on Volatility

Volatility is a day trader’s strength. The more buy-sell transactions of securities daily traders do, the more money they make. Consistent price movements—in whichever market you trade daily—enable profitable intraday arbitrage. That’s a big plus, especially for day traders who specialize in trading one type of asset.

Volatility also favors scalping (leveraging the bid and ask spread). Financial asset prices fluctuate when markets are volatile, triggering adjustments, which in turn loosen up tight spreads. Keen day traders can exploit the bid/ask margins and carry out several trades to scale the small profits into significant daily returns.

3. As a Day Trader, What Is Your Go to Market?

Apart from volatility, day traders must deal with liquid assets to stay afloat. Assets can be converted to cash relatively faster without much effect on their price levels. Liquid assets are associated with high volume sales and multiple trading activities in a single day. Securities that top the list of liquid assets include currencies, stocks, and futures.

Futures are derivatives, meaning there’re underlying assets or commodities tied to them. An excellent example of commodities is petroleum products (gas, oil), agricultural produce, precious metals, etc. Of course, there are other financial assets (and markets) for big risk appetite day traders. You have the exchange-traded funds (ETFs), cryptocurrencies, options, and contracts for difference (CFDs). The list can be longer depending on the region and economic level.

Your guiding principles should be volatility and liquidity, regardless of the market.

A word of advice: always prioritize currencies and stock markets. You have a real shot at making better dollar returns in the foreign exchange market as wells as day trading penny and blue-chip stocks.

4. Treat Day Trading Like a Business and Develop a Trading Plan

Day Trading Rules

When it comes to tax considerations, who pays more taxes, day traders or investors? If you guessed the former, you’re right. Day trading gains can be taxed as much as 35 percent, not to mention the commissions and transaction fees charged by brokers. With all this day trading expenses biting into your overall profits, there’s a need to conduct and carry day trading as a serious profession like any other.

Before making day trading your main income stream, you must come up with a business/trading plan. In the plan, have a strategy for your initial capital and risk or margin capital. Work out an estimate of daily or weekly returns that you want to earn. Align the income expectations to your trading strategy.

Set up shop: buy a mid-range computer and sign up with a reliable internet service provider. Make long-term goals and break them down into short, manageable ones. Target specific markets (remember the volatility and liquidity model), establish trading hours and days. Test the Monday Effect and see how trading 15 to 30 minutes (volatility and volumes are higher) after the opening bell impacts your day trading. Above all, be a disciplined day trader: stick to your trading routine.

5. Use a Blend of Trading Strategies

You already know about scalping. Cashing in on price differences from the flow of market or industry information is pretty self-explanatory. But what do you know about contrarian trading and short selling? Technology makes day trading a whole new ball game. Robots oversee well over 50 percent of trades executed in day trading—automated systems, bots, and algorithmic programming.

Innovators and traders are teaming up to use artificial intelligence to teach computers how to trade. You need to get in on this action before it’s too late. Learning about this novice trading method reduces the pressure of having to analyze charts and price patterns constantly. Work with service providers and delegate that task to the machines.

Old is gold. Don’t replace tried and tested methods just yet. A grasp of day trading fundamentals can see you gain from short selling. Check regulatory obligations within your target market jurisdiction and abide by the law. For instance, the uptick restriction holds for selling short single stocks in the US.

Always close asset positions: don’t hold assets overnight. The maintenance margin on a leverage account can fall below the required minimum only for you to wake up to a margin call. Besides, the federal and state minimum margin trading requirements are probably higher when assets are held overnight to compensate for additional downside risk.

6. Work with the Right Broker

What makes a good broker? Can you open a demo account with your current broker and gauge your day trading strategy before depositing real currency? Do they offer both cash and margin accounts? What are their margin rates? Is there a referral program? How about incentives such as discounts on the first top-up? Do they have an account hierarchy, for example, bronze silver and gold rank? If they do, are the perks (such as daily market research and reports, trading signals for forex, and so on) that come with higher rank accounts helpful?

The above are some of the questions you should ask while you compare your current broker to alternatives. A broker must have the essentials for them to qualify as the best. For starters, their electronic communications network (ECN) must be resourceful. It needs to have sufficient tools to enable traders to leverage even the smallest of price changes. Because seconds or minutes could make all the difference in day trading.

The day trading rules applicable in one market may not be as effective in other areas. Day traders who engage in international markets must have a grasp of statutory controls permitted in Asian, African, European markets, and the Americas. For instance, you need a minimum of $25,000 to make five-day trades under a margin account in the US. But you can also day trade with a margin account having a minimum balance of as little as $1000 for brokers not operating under the Securities and Exchange Commission.

Holding stocks for more than a day beats the purpose of day trading. Efficient markets reflect real-time information flawlessly, and this has the potential to crush you. Don’t tempt the market unless you have an account with TD Ameritrade, where you can trade ETFs and listed indexes for 24 hours a day. Economies and financial markets are now more dynamic thanks to the rise of Fintech (financial technology). Hopefully, these developments will result in a more simplified and pleasant day trading experience.

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