Day Trading Rules Part 2

(QQQ)(DIA)(SPY)(GLD)(YHOO)

by DeWayne Reeves 

Day Trading Rules Part 2 | Stocks - Options - Emini Futures

In Part 1 of Day Trading Rules we covered the legal and practical sides of Day Trading. In Part 2 we want to move in and take a closer look at specific Day Trading Rules that will affect exactly how we operate our Day Trading business using rule based trading. Topics we will cover include, but are not limited to -

• how much capital we risk on each individual trade as well as establishing parameters for both our entries and exits.

Definitions

A Day Trader is defined by Webster as -

• a speculator who seeks profit from the intraday fluctuation in the price of a security or commodity by completing double trades of buying and selling or selling and covering during a single session of the market

Therefore, by definition, the primary Day Trading Rule is -

•  no positions are left open overnight. All positions whether they be in Stocks, Options, ETFs, Bonds or Emini Futures, must be opened and closed during the same trading session. 

Day Trading Hours Of Operation

As a rule, the New York Stock Exchange (NYSE) opens each morning at 9:30AM Eastern and closes at 4:00PM. The Commodity Markets in Chicago open at 8:30AM Central and remain open until 3:15PM Central. This is considered the "day session". However, Chicago markets reopen at 3:30 Central and continue trading until 5PM Central. The Chicago markets reopen again at 6PM Central and trade overnight. When Chicago reopens the second time, this is considered the start of the new day. The NYSE also offers pre-market and after hours trading in select stocks. 

As an example, when the market reopens at 6PM on a Monday evening in Chicago, this begins the Tuesday session. This is also referred to, as the "Globex Session".  With the recent advent of true global markets, traders who would have once been considered "day traders" may now find themselves working the night shift or even the swing shift.

For the purpose of our topic; Day Trading Rules, we will consider day trading to mean all trades that are opened and closed in one trading session regardless of where the sun shines. 

Day Trading Entry Rules

Each trader will develop a list of rules that define their own personal trade "setup". It can be as simple or as complex as you desire. From Bollinger Bands and Stochastics, to sophisticated algorithms and even High Frequency Trading (HFT). As the architect and engineer, you determine what goes in and what stays out. The only exception to this rule would be if you are using a setup that was created by someone else. Either way, the rules will be precise and must be followed flawlessly.

You will know exactly what your "entry" looks like before the market opens. You will have executed it numerous times in simulated trading. You understand every condition that must be met before the entry signal can be given. Your entry rules are designed to be crystal clear. There must be no ambiguity. 

Without clarity, you will find yourself hesitating when it is time to enter. Hesitation often leads one to chasing the market. Chasing the market begins to look like you have no rules at all. Before long, out of exasperation you will find yourself entering trades prematurely, afraid you might miss the big move.

This is simply human nature and every trader both big and small, must work their way through false starts and delayed entries. The most powerful ally is confidence and a rock solid, time tested set of Day Trading Entry Rules. 

Day Trading Management Rules

Once your criteria for trade entry has been met and you have executed your trade, now comes the part many traders find most difficult. Questions begin to arise and traders begin to second guess their best laid plans. Once again this is where your Day Trading Rules become indispensable.

There are many options available for trade management. With the use of a bracket order, "set it and forget it" can be a very popular choice. Unfortunately, market conditions that led you into the trade can easily change during the life of the trade. Many traders have Day Trading Rules which state that once a trade is entered, long or short, they will remain in the trade until one of 3 things happens. 

• They are stopped out.
• Their profit target is hit.
• The session ends.

Other options provide for more active hands on trade management. For instance, if the original conditions that led you to enter the trade no longer exist, the trade must be exited immediately. Other management options state that your stop loss will be adjusted to lock in profits as they are earned. Yet another option may have you not only decreasing your stop loss, but also scaling out of the position as price approaches either your final target or the end of the session.

The only absolute in the creation of your Day Trading Management Rules is that each rule is crafted away from the heat of the battle when emotions are not a part of the equation. This requires a scientific approach where you will sift through historic data to determine which method will best suit your personality and portfolio. 

Day Trading Exit Rules

Your exit rules are the culmination and crowning jewel of your entire body of work. This is where you get paid. Your Day Trading Exit Rules are not a standalone entity, but a holistic and integral part of the entire plan. Too often, traders are willing to sidestep their most carefully laid plans once a few points appear on the tote board. 

This can become a conditioned response to external stimuli if we are not careful. Once a trader has unrealized gains vanish more than once or twice, it becomes increasingly difficult to allow even our best planned trades to develop to maturity. This truly becomes a battle between our will and our emotions. Again, the place to solve this conundrum is in the boardroom, not on the battlefield.

Mark Douglas, author of Trading in the Zone suggests you should always pay yourself a little something whenever the market makes it available. This is yet another situation where your Day Trading Rules will dictate what action you take and how. Trend following can be one of the most difficult types of trading even when restricted to intra-day trading. 

Conclusion

You are now aware of just how critical your Day Trading Rules are to the success of your Day Trading Business. Without proper, carefully thought out and well executed rules, no day trading system can be successful long term. As you write your rules, remember this - these are the rules by which you must live. Do not create a rule simply because it makes sense or looks good on paper.

Much soul searching is required. Ask yourself if you will actually be willing to follow through in live trading with your own rule set. If you can't, don't, or won't, your self esteem and confidence will slowly begin to erode. Trading will no longer be a joy, it will become a burden. Create Day Trading Rules that you can embrace and enjoy both on good days and bad.

Over time, carefully thought out decisions at the drawing board, coupled with diligent follow through action in the market place and the use of high probability trade setups will transform your Day Trading Rules into positive equity curves.

Please feel free to contact the author with any questions. 
If you would like to share your thoughts, please use the comment box below.

Emini Podcast for Monday 05/20/13

Important Day Trading Rules | Stocks - Futures - Options

by DeWayne Reeves 

Day Trading Rules For Stocks - Futures - Emini Contracts

Are you an Active Day Trader? If so, there are 2 sets of day trading rules you must be aware of. One set of rules are issued by regulatory agencies such as the SEC / FINRA / NFTA / IRS. The second set of rules are ones you establish as the foundation of your day trading business. The first set are actual laws you as a Day Trader must abide by to avoid fines, penalties or criminal charges.

Most traders find it easier to follow rules dictated by others, even when they seem arbitrary or unfair. It's not simply the fear of prosecution, it's a conditioned response we carry with us from birth. From an early age we are told what to do and when to do it. As we grow older we begin to yearn for independence, fueled by a desire to make our own decisions. Let's address the "easy" list first.

Regulatory Agency Day Trading Rules and Guidelines

What is a Day Trade?

• The Financial Industry Regulatory Agency (FINRA) defines a "Day Trade" as purchasing and selling or the selling and purchasing of the same security on the same day in a margin account. This definition encompasses any security, including options. Also, the selling short and purchasing to cover of the same security on the same day is considered a day trade. 

Exceptions to this trading rule include:

•  a long security position held overnight and sold the next day prior to any new purchase of the same  security; or a short security position held overnight and purchased the next day prior to any new sale of the same security.

 Who is a Pattern Day Trader?

A pattern day trader is defined in Exchange Rule 431 (Margin Requirement) as any customer who executes 4 or more round-trip day trades within any 5 successive business days. If, however, the number of day-trades is less than or equal to 6% of the total number of trades that trader has made for that five business day period, the trader will not be considered a pattern day trader and they will not be required to meet the criteria for a pattern day trader.

A non-pattern day trader (i.e. someone with only occasional day trading), can become designated a pattern day trader anytime if they meet the above criteria.

If the brokerage firm knows, or reasonably believes a client who seeks to open or resume an account will engage in pattern day trading, then the customer must immediately be considered a pattern day trader without waiting 5 business days.

Day Trading Minimum Equity Requirement

What is the minimum equity requirement for a pattern day trader?

• The minimum equity requirements on any day in which you trade is $25,000. The required $25,000 must be deposited in the account prior to any day-trading activities and must be maintained at all times. 

Why is the minimum equity requirement for pattern day traders higher than the current minimum equity requirement of $2,000?

• The minimum equity requirement of $2,000 was established in 1974, before the technology existed to allow for electronic day trading by the retail investor. As a result, the $2,000 minimum equity requirement was not created to apply to day-trading activities Rather, the $2,000 minimum equity requirement was developed for the buy-and-hold investor who retained securities collateral in his/her account, where the securities collateral was (and still is) subject to a 25 percent regulatory maintenance margin requirement for long equity securities. 

Do these day trading rules apply to Options? 

• Yes. Pattern day trade rules and margin requirements apply to Equities, Options, Bonds and Electronically Trade Funds (ETF).

 Internal Revenue Service (IRS) Guidelines

Special rules apply if you are a trader in securities, in the business of buying and selling securities for your own account. This is considered a business, even though you do not maintain an inventory and do not have clients. To be engaged in business as a trader in securities, you must meet all of the following conditions:

• You must seek to profit from daily market movements in the prices of securities and not from dividends, interest, or capital appreciation.
• Your activity must be substantial, and
• You must carry on the activity with continuity and regularity. 

The following facts and circumstances should be considered in determining if your activity is a securities trading business:

• Typical holding periods for securities bought and sold.
• The frequency and dollar amount of your trades during the year.
• The extent to which you pursue the activity to produce income for a livelihood, and
• The amount of time you devote to the activity. 

If the nature of your trading activities does not qualify as a business, you are considered an investor, and not a trader. It does not matter whether you call yourself a trader or a “day trader,” you are an investor. As with dealers, a taxpayer may be a trader in some securities and may hold other securities for investment. The special rules for traders do not apply to the securities held for investment. A trader must keep detailed records to distinguish the securities held for investment from the securities in the trading business. The securities held for investment must be identified as such in the trader's records on the day he or she acquires them (for example, by holding them in a separate brokerage account).

Traders report their business expenses on Form 1040, Schedule C (PDF), Profit or Loss From Business. The Schedule A limitations on investment interest expense, which applies to investors, does not apply to interest paid or incurred in a trading business. Commissions and other costs of acquiring or disposing of securities are not deductible but must be used to figure gain or loss upon disposition of the securities. See Topic 703, Basis of Assets. Dividends, interest from securities, and gain or loss from the sale of capital assets are not considered proceeds from self-employment income unless received by a dealer in stocks and securities in the course of their business. Review the Form 1040, Schedule SE Instructions, Self-Employment Tax. Source:IRS.Gov

Personal Rules For Trading Stocks Futures And Options

This is the difficult list. This is the list no one will attempt to enforce. You are about to realize just how alone you really are. When temptation comes knocking, your only defense is self-discipline. Most commodities can be bought and sold on the open market. Self discipline is far too rare. You can't buy it, rent it, borrow it, you can't even steal it. It comes from within. It is the very thing that creates the statistics our friends and family throw in our face.

How is it that even your gardener knows 90% of Daytraders fail within the first year? Probably because he tried it and was smart enough to spend his last $200 on a weed whacker and hedge clippers. Self-discipline comes from within and for most of us, it doesn't come easy. If watching all the Karate Kid movies doesn't do the trick, welcome to the real world. 

Your strategy, the one you've festered over for the last year(s), is probably the least important factor in building a successful trading business. The one thing that will move you out of the 90% and into the 10, is your ability to think, make decisions and act, void of emotion. You will need nerves of steel and a cast iron stomach, but most of all.. you need discipline.

Dennis Gartman is famous for many things, one thing is his Rule of 22. We neither endorse nor follow all of these rules, but some of them do make good sense.

1. Never, under any circumstance add to a losing position.... ever! Nothing more need be said; to do otherwise will eventually and absolutely lead to ruin!
2. Trade like a mercenary guerrilla. We must fight on the winning side and be willing to change sides readily when one side has gained the upper hand.
3. Capital comes in two varieties: Mental and that which is in your pocket or account. Of the two types of capital, the mental is the more important and expensive of the two. Holding to losing positions costs measurable sums of actual capital, but it costs immeasurable sums of mental capital.
4.  The objective is not to buy low and sell high, but to buy high and to sell higher. We can never know what price is "low." Nor can we know what price is "high." Always remember that sugar once fell from $1.25/lb to 2 cent/lb and seemed "cheap" many times along the way.
5. In bull markets we can only be long or neutral, and in bear markets we can only be short or neutral. That may seem self-evident; it is not, and it is a lesson learned too late by far too many.
6. "Markets can remain illogical longer than you or I can remain solvent," according to our good friend, Dr. A. Gary Shilling. Illogic often reigns and markets are enormously inefficient despite what the academics believe.
7. Sell markets that show the greatest weakness, and buy those that show the greatest strength. Metaphorically, when bearish, throw your rocks into the wettest paper sack, for they break most readily. In bull markets, we need to ride upon the strongest winds... they shall carry us higher than shall lesser ones.
8. Try to trade the first day of a gap, for gaps usually indicate violent new action. We have come to respect "gaps" in our nearly thirty years of watching markets; when they happen (especially in stocks) they are usually very important.
9. Trading runs in cycles: some good; most bad. Trade large and aggressively when trading well; trade small and modestly when trading poorly. In"good times," even errors are profitable; in "bad times" even the most well researched trades go awry. This is the nature of trading; accept it.
10. To trade successfully, think like a fundamentalist; trade like a technician. It is imperative that we understand the fundamentals driving a trade, but also that we understand the market's technicals. When we do, then, and only then, can we or should we, trade.
11. Respect "outside reversals" after extended bull or bear runs. Reversal days on the charts signal the final exhaustion of the bullish or bearish forces that drove the market previously. Respect them, and respect even more "weekly" and "monthly," reversals.
12. Keep your technical systems simple. Complicated systems breed confusion; simplicity breeds elegance.
13. Respect and embrace the very normal 50-62% retracements that take prices back to major trends. If a trade is missed, wait patiently for the market to retrace. Far more often than not, retracements happen... just as we are about to give up hope that they shall not.
14. An understanding of mass psychology is often more important than an understanding of economics. Markets are driven by human beings making human errors and also making super-human insights.
15. Establish initial positions on strength in bull markets and on weakness in bear markets. The first "addition" should also be added on strength as the market shows the trend to be working. Henceforth, subsequent additions are to be added on retracements.
16. Bear markets are more violent than are bull markets and so also are their retracements.
17. Be patient with winning trades; be enormously impatient with losing trades. Remember it is quite possible to make large sums trading/investing if we are "right" only 30% of the time, as long as our losses are small and our profits are large.
18. The market is the sum total of the wisdom ... and the ignorance...of all of those who deal in it; and we dare not argue with the market's wisdom. If we learn nothing more than this we've learned much indeed.
19. Do more of that which is working and less of that which is not: If a market is strong, buy more; if a market is weak, sell more. New highs are to be bought; new lows sold.
20. The hard trade is the right trade: If it is easy to sell, don't; and if it is easy to buy, don't. Do the trade that is hard to do and that which the crowd finds objectionable. Peter Steidelmeyer taught us this twenty five years ago and it holds truer now than then.
21. There is never one cockroach! This is the "winning" new rule submitted by our friend, Tom Powell.
22. All rules are meant to be broken: The trick is knowing when... and how infrequently this rule may be invoked!

There you have it. Rules to keep you out of trouble and rules to keep you solvent. The first list of Day Trading Rules is the law so there really is no discussion there. Like it or not, you just have to do it. The second list is obviously somewhat subjective and one man's opinion. 

If you plan to become a day trader, I mean really become a day trader, you have to make your own rules. To make your own rules, you will need enough information to make intelligent decisions. Fortunately, information is something you can buy. Shop around. When you're done... give us a call.

Emini Podcast for Monday 05/07/13

Emini Futures Most Frequently Asked Questions (FAQ)

(QQQ)(DIA)(SPY)(GLD)(SLV)

by DeWayne Reeves 

Emini Futures - Top 10 Most Frequently Asked Questions

The following FAQ List has been compiled from information made available by participating regulatory agencies and major brokerage firms. You may submit additional questions to the author.

1) How do Emini Futures Contracts differ from their full size counterpart?

• Emini contract values are 1/5th the size of the pit traded contract.
• Emini contracts are traded electronically as opposed to open out cry.
• Tick increments are smaller as well. Example: Emini S&P = $12.50 Large S&P = $25.00
• Margin requirements are substantially higher. 

2) What are the margin requirements for trading Emini Futures? 

• S&P 500  $3,850.00
• Dow        $2,750.00
• Russell    $5,280.00
• Nasdaq   $2,200.00

3) Are reduced "Day Trading" rates available?

• Yes, most brokers offer reduced rate for trades placed between the opening bell (9:30AM Eastern) and the closing bell (4:15PM Eastern). Rates vary, but can be as low as $500 per contract traded. Trades which are not closed by the end of the session are subject to full margin requirements which may result in a margin call or liquidation of open trades. 

4) What hours are Emini Contracts traded?

• Sunday Night - The week begins at 6:00PM Eastern.
• Weekdays - Each new daily session opens at 6PM Eastern and trades until 4:15PM Eastern the following day. At 4:15PM Eastern the market closes for 15 minutes and then resumes the current session at 4:30PM Eastern. The daily session ends at 5:15PM Eastern and remains closed for 45 minutes. 

5) Is there sufficient liquidity to trade overnight on Globex?

• The S&P500 Emini enjoys almost 24-hour liquidity for all but the largest of traders. Other Emini Contracts have limited liquidity outside of their corresponding open out-cry, pit sessions. Market conditions are subject to change. Volume figures are available via the CME, CBOT and ICE. 

6) Are their educational or special licensing requirements to trade Emini Futures?

• If you are an individual trader who will be trading your own account there are licensing requirements. Brokers and CTA's (Commodity Trading Advisor) are subject to both educational and licensing requirements. 
• As an individual trader it is recommended that you pursue some type of formal training program before you begin trading outside of a demo or simulation account.

7) Are Emini Traders subject to Pattern Day Trader Rules set forth by the SEC?

• No. Pattern Day Traders are defined by Exchange Rule 431 as any customer who executes 4 or more round-trip day trades within 5 successive business days.  However, this rule does not apply to Emini Futures Trading.  (Source: Wikipedia)
• Pattern Day Traders are required to maintain a minimum $25,000 account balance. Emini Futures Traders are allowed to open and maintain an account with as little as $2,000 on deposit. 

8) Is Short Selling allowed? Does the Up-tick rule apply?

• Emini traders are allowed to sell short both to open and close positions. Unlike equities, there is no uptick rule, nor is there a negative stigma associated with short selling in Emini Futures. 

9) Is there sufficient volatility available to make Emini Trading  a full time job?

• Daily ATR (average true range) for the S&P 500 Emini Futures averages 20 points per 24 hour session. Each point has a dollar value of $50 per contract traded. Full time income is based on a Traders ability to capture a portion of the ATR as well as trade multiple contracts. 

10) Are profits taxed as income or short term capital gains? 

• Emini contracts are taxed differently than stocks, bonds, ETFs and mutual funds. 
• Section 1256 of the U.S. tax code states that Futures contracts fall under the 60/40 rule. 60% of gains are treated as long-term capital gains while 40% are treated as short-term capital gains. 
• Tax savings and reduced record keeping can be quite significant for active traders.
• Always consult with a licensed tax professional.

Trading's Not Easy - But It Can Be Simple!

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Questions?

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Emini Podcast for Monday 05/06/13

Emini Coach - 5 Ways To Reduce Trading Stress

(QQQ)(DIA)(SPY)(GLD)(SLV)

by DeWayne Reeves 

5 Ways To Reduce Stress

Let's face it, Trading can be very stressful. In fact, a certain amount of stress is even normal. From the fight or flight mechanism built into us, to helping us acheive under pressure, our bodes were designed by the Creator to handle stress on a regular basis in small doses.

However, we were not designed to run in "emergency mode", 8 hours a day. Living life on the frantic edge will quickly take its toll not only on Traders, but on mere mortals as well. Left unchecked, excessive stress can result in serious physical as well as mental health problems. 

Stress is not only dangerous, but expensive as well. 

• Stress is recognized as the number one "killer disease* in America today. The American Medical Association reports stress is the primary cause of more than 60 percent of all human illness and disease.

• It is estimated American businesses lose approximately $200-$300 billion dollars because of stress each year. This is due to lost productivity and spiraling treatment costs. 

You became a Trader for 2 good reasons - Time and Money.  Here are some tips to help you make the most of both while reducing stress and learning to enjoy the Good Life!

Stress Buster #1 - Learn to recognize when you are stressed.

• Ways to overcome: Sit down close your eyes and take several long breathes letting out the air slowly, this will slow things down and allow you to center yourself.  This a fast way to re-group mentally and physically.

Stress Buster #2 - Look to reduce your daily demands, don’t over commit.

• Ways to reduce: Set the time to complete the "to-do" list so it's realistic to complete and give yourself extra time. You will feel better on completion than not. Avoid over-committing yourself.  Get good at saying ‘No’ if it’s more than you can handle. Ask for help to lighten your load. Give yourself extra time to deal with the unexpected. Reward yourself with down time to just relax when the job is completed; a nice walk, cup of tea, read a chapter in a book. 

Stress Buster #3 - Create effective time management.

• Ways to reduce: Work on determining the proper amount of time it takes for each task.  Give yourself room should something unexpected pop up. Take a deserved break when a task is finished and feel good about what you've accomplished. 

Stress Buster #4 Life has to be fun.

• Ways to reduce: What gives you pleasure?  What makes you feel relaxed? What gives you that good feeling over and over?  Include in your day something that emits pleasure for you. Give yourself enough time to enjoy it, relish it and takes your mind off “THE To-Do LIST”. When you look forward to these times the areas that create stress are reduced. 

Stress Buster #5 - Keep your thoughts positive.

• Ways to reduce:  The easiest way to stay positive is to think the reverse of the negative thought. You may say.” But If I do that, it will not feel congruent.”  Here is where you do the “Fake it till you make it” strategy. If you do something over and over again it will eventually become real.  Another way is to ask this question if something is going wrong or doesn't feel good: “What’s great about this?”  There has to be SOMETHING in there that is good. Again the goal is to reduce stress.  The best is saying to yourself “I am just going to LET GO!” it’s not worth getting upset about.”

Robin Dayne - "The Trader's Coach"  

 Individual Traders, Hedge-Funds, Brokers,

 Call for info 702-616-3744

Trading's Not Easy - But It Can Be Simple!

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Questions?

Call us toll free @ 866-928-3310 during normal business hours.

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Coaches Corner w/ Robin Dayne | Episode #16

Weekly Chart Roundup

(QQQ)(DIA)(SPY)(GLD)(FB)

by DeWayne Reeves 

Emini Charts | Define The Setup - Capture The Move

All time highs that just can't stick... The S&P 500 has established a new all time high in the cash market but we are still a few ticks away from a new high in the futures market. The market has presented decent volatility of late with two sided action.

For an Emini Futures Trader, it's not important which way opportunity flows.. what matters is that there is a flow. We have seen 20 point ATR's (average true range) of late coming into this week. I tweeted our followers (@CFRN) Sunday night to prepare for a week of low volatility and tight ranges. The good news is the market still has two days to prove me wrong and it also hasn't been as tight as it could have been.

It's been a few days since we posted charts of our Emini Trade Setups or Emini Tweets, so let's take a closer look at what has happened over the past few days. 

S&P 500 Emini Tweet - 7 Points Up / 6 Points Down

S&P 500 Emini Tweet - 20 Points Potential / 2 Stage Trade

S&P 500 Emini Tweet - The "Infamous" Necktie Pattern©

S&P 500 Emini Tweet - 8 Points Straight To The WTZ

S&P 500 Emini - Friday Afternoon Cliff Hanger

S&P 500 Emini Tweet - Sunday Night Globex Open

Suday Night Soybean Tweet - 35 Cents Over 2 Days

We have more Emini Charts and Setups to share, but let's save those for tomorrow. If you missed today's broadcast, you can click the head phones above to listen, or the video below to watch.

CFRN Live Emini Daily Radio Broadcast

Live Emini Broadcast 05/01/13

Trading's Not Easy - But It Can Be Simple!

---

 

Questions?

Call us toll free @ 866-928-3310 during normal business hours.

After Dark - email support@cfrn.net or call 415-857-5654

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Emini Podcast for Wednesday 05/01/13