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« Day Trading Rules And Risk Management | Main | Important Day Trading Rules | Stocks - Futures - Options »
Monday
May202013

Day Trading Rules Part 2

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

 

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

 

In Part 1 of  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.


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Emini Podcast for Monday 05/20/13

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