The Top Three Secrets to Successful Day Trading

Now there's an exultant boast if I ever heard one. And yet, understanding the key components to successful trading will help you develop a proven strategy that can produce strong profits in most any market environment.

Rules, of course, are the indispensable guidelines that foster good self-discipline. Without rules, traders would be prey to an unending array of market vicissitudes that can devour their trading capital faster than a $5 slot in a Las Vegas casino.

Here are my top three day trading rules:

Rule 1:  When day trading cut your losses as quickly as you can

Most traders believe this is the cardinal rule for making money in the stock market, and it cannot be overemphasized. I repeat, it cannot be overemphasized. Day trading is only obliquely related to your percentage of winners. In fact, many traders rarely earn money on more than 50 percent of their trades. What’s crucial is keeping your losses small. That means you protect your trading capital to do battle some other day.

Rule 2:  Maximize your profits

This is the flip side of Rule 1. In simple language, it means allowing your winning trades to ride. This is important to your trading model since your wining stocks must win more than your losing stocks lose. For example, you might want to place a sell stop at 25-cents when you enter, and when the stock rises two-bits above your entry price, use a trailing stop until the market forces you out of the trade.

Keep I mind there’s nothing magical about 25-cents. It all depends on the stock you’re trading and its prevailing price. Holding Google (GOOG) to a 25-cent fluctuation is foolhardy. It’s an expensive stock and you’ll be stopped out almost as fast as you enter.

Rule 3:  Smart traders keep tabs on a small group of stocks and trade them successfully again and again

The reason why is simple:  Individual stocks have their own peculiar behavior patterns depending on a variety of components, including a stock’s price, it’s beta, the stock’s float, and generally how active the stock trades each day. In a “down” market, for example, a certain stock may fall rapidly at the open, only to recover about 30 minutes into the trading day. Another stock that you follow religiously may behave just the opposite. It’s all in the knowing. 

In any event, when you follow your group every day, you become an expert at spotting typical trading scenarios, breakouts, and other trading opportunities. This is the kind of expertise, when combined with Rules 1 and 2, that makes for successful trading.