Do you want to learn day trading rules for beginners or pros? Or you are just curious about day trading and how it works in general? Then this post is for you.
In this post we will take a look at day trading rules for beginners and how you can enhance them to have better trading performance
Table of Contents
What is day trading? A short and simple explanation
First of all, let’s explain what day trading is and how it works. Well, the action of buying and selling securities in a trading is called day trading. Day traders don’t hold positions overnight and are obligated to rules such as the Pattern day trading rule.
If you want to know more about what day trading is we have a full guide at: Ultimate Beginner’s Guide to Day Trading.
which covers all the things you need to know as a beginner day trader.
Day Trading Rules for Beginners
Now, let’s cover some of the most known day trading rules that most beginners need to know before starting.
Increase knowledge about Trading
First and foremost day trading rules for beginners, you need to educate yourself on how day trading works and what are some different strategies of day trading. Trading is risky, so if you are not educated enough, you can lose a lot over time.
Start building a strong base on how you can become a better day trader every day. Stay updated and learn new things even if you are an experienced trader.
These are the topics that you need to master before entering day trading:
- Market Basics
- Trading Strategies
- Technical Analysis
- Risk Management
- Psychology of Trading
- Market Research
- Familiarity with trading platforms and Softwares
- Backtesting and Paper Trading
- Trading Plan Development
- Continuous Learning
Using Limit Orders
As a beginner, it is always advised to use limit orders to prevent any unwanted loss over any kind of trades.
A limit order is the instructions you give to your brokers to buy or sell a security at a specified price or better. Many believe that using a limit order is like using a “Blank Check” because you don’t know where your trade will get filled. That makes it difficult for you to play out your strategy with precision.
Of course, there are rules, like regulation NMS, that stop market makers from giving you a worse price than the National Best Bid and Offer (NBBO). But remember, it’s your money on the line.
Limit Order Example
Let’s say you want to buy Stock Z, and right now is being offered for sale at $12 per share. If you place a limit order to buy at $12.1, it means you’re willing to pay a bit more to ensure you get your order filled quickly. In this way, you’re ahead of the curve and other traders who are offering to buy at a lower price.
However, depending on the liquidity of the market and volatility you might want to change your limit order as putting only one penny above the price might not be enough.
Also, many traders might prefer “passive” limit orders to “aggressive” ones. In passive limit order, you’re offering to buy at a lower price than what’s currently being asked. This can sometimes earn you rebates from Electronic Communication Networks (ECNs), and data suggests it can work out better overall. But this all depends on your trading strategies and style.
Multiple Income Sources
Before starting your trading journey, you will need to have a primary income source other than trading. It will be very hard if you depend on a set of skills that you are not remotely good at, to make you profit from.
Also having another income source will give you the flexibility to take chances and learn with the curve of trading over time. The primary income source reduces risk and provides stability If day trading doesn’t work out.
We advise you to have trading as a side project at least for the first 3 years. In this case, if trading wasn’t for you, you will have room to change your perspective and goals and at the very end, move on.
Have a Trading Strategy
One of the most important day trading rules for beginners is having a trading plan and strategy. There are many different day trading styles that you can follow, such as scalping, swing trading, position trading, and so on.
Start educating yourself on each one and choose the best one that works with your trading style and meets the needs of your goals. Without a strategy and a plan on how to execute that strategy for each trade, it becomes very easy to mentally follow your trading goals. This will end only in losses and will mentally destroy any trader.
A strategy sets clear guidelines for when to enter or exit a stock and when to stay out entirely. For instance, a very basic and straightforward strategy could be “buy when the 10-day moving average crosses above the 50-day moving average, and sell when the reverse occurs.”
Try Margin Accounts
Margin accounts can be a big help, especially if you are a novice trader. With a margin account, you can borrow money from your broker to trade with. When used correctly, margins can enhance trading outcomes. However, this situation does not only apply to profits but also to losses if a trade moves against you.
As a rookie who follows day trading rules for beginners, you need to keep control of how much you use your margins. That is why before having any margin account, you need to try trading with a cash account. There is no margin in those accounts, and you will learn how to control your losses and gain profit with your own money over
Scatter Your Wealth Across Different Securities
It is good to start scattering your budget into different securities, as a day trading rule for beginners. Try different markets such as stocks, bonds, or others.
In this way, you will manage any risks that might affect one market by having a backup plan for another.
Also, even though day trading is a quick profit-making solution, doing this will give you long-term growth and long-term wealth accumulation.
Here is how you can effectively do this to achieve these day trading rules for beginners:
- Understand how much money you want to invest and how you can do it to achieve your goals.
- Know the basics of stocks (like owning parts of companies), bonds (like loans to governments or companies), and other options like real estate or savings accounts.
- After understanding what options you have, start spreading your money on the markets that you need to.
- As your investments start to grow, make sure to check them regularly and be updated about each market’s situation.
- Don’t put all your money only on one investment, to prevent any sudden losses.
- Start learning with small investments until you get the hang of each market and can perform on a beginner scale.
Number of Stocks for a Beginner
As a beginner, you need to only focus on a maximum of 2-3 stocks for day trading. With just a few stocks, tracking and finding opportunities is easier and simpler than with multiple stocks. If you simultaneously focus on many stocks, as a beginner day trader, you may have a hard time managing your trades.
Having a trading rule on how many stocks to trade is essential especially if you haven’t built up enough knowledge or experience before starting. If you are not sure where to start, or what is best for you in this journey, you can have a FREE DISCOVERY CALL with us at Meta Trading Club. In this call, we will break down your trading goals and give you tips on how you can start your journey or whether you need a tutorial to start trading.
Avoid Rush Hours
A professional trader might start their trading session the moment the market opens in the morning. When the market opens, many investors and traders place orders, which can lead to massive price swings and experienced traders may be able to spot patterns and seize profit opportunities.
On the other hand, as a beginner trader, it’s wise to observe the price action without trading for the first 15–20 minutes. During midday trading days, markets are often calmer, but activity picks up again towards the closing bell. While busy times offer chances, novices are better off avoiding them.
Avoid Penny Stocks
As day trading rules for beginners, we suggest avoiding penny stocks for now. These stocks are not illiquid, and chances of hitting the jackpot for a novice trader are often slim. Don’t trap yourself in a trade that is difficult to exit and you don’t even know how to.
Penny stocks are only suggested for seasoned traders who know what they are doing or have been in the penny stock market for a while.
Setting Stops
At the end of the day, the difference between a professional trader and a beginner trader is the ability to minimize their losses. There are many traders that enter trades with a well-thought-out plan: an entry price, a stop loss, and maybe even a profit target. But once they’re in their trading session, emotions can cloud their judgment, leading them to adjust their orders.
It is always best to have control on our decisions and make them with logic. In this way, we can gain many good opportunities that we thought would be impossible in the long run.
Don’t trust unreliable sources
We suggest you avoid any SMS, mail, advertisement, etc. which makes claims about above-normal profits. Remember if it sounds too good to be true, then most likely it is not true.
Instead, do your research from reliable sources and websites that are known by professional traders such as Investopedia, Bloomberg, etc.
Controlling Emotions
Emotions like fear or greed in many scenarios can cloud a person’s judgment and lead them to make bad decisions. That is why there is a whole other field called trading psychology that we can’t cover fully today but will post about very soon.
In trading psychology, the general idea is that traders overcome their cognitive biases and emotional biases, and lean toward a rationalized decision. These biases, in the long run, can have a huge impact on a trader and lead to poor outcomes.
But the good news is that traders can overcome these biases by enough education and wisdom, objective research and analysis and other professionals perspectives. Also, novice traders can reduce emotional decision making by establishing trading rules for beginners, practicing discipline and implementing risk management techniques.
Last Words
In this post, we took a look at what are some day trading rules for beginners and how you need to follow them to achieve your trading goals.
Here are the key takeaways:
- Educate yourself on trading before doing anything.
- Avoid liquid markets as a beginner trader.
- Learn about trading psychology from the very first step.
- Never trust any unreliable sources and always do your own research.
- Invest in more than one market to avoid any unwanted damages.
- Stick to your trading plan and trust the process.
Frequently asked question
Well, some of the basic needs to become a good day trader are: education, self confidence and discipline, understanding of markets, risk management skills and so on.
Novice traders should focus on strategies that are easy to handle and perform such as trend following or breakout trading.
Well yes, there are many rules that beginner traders can know about such as Pattern day trading or day trade buying power rule(Also known as DTBP). In DTBP , if you have less than $25,000 in your trading account, you can only trade with the money you have available at the start of the trading day. You cannot exceed this amount in a single day unless you generate additional funds by closing out positions during that day. Remember, both DTBP and PDT are specific to the regulations of the United States market only.
While using leverage can have potential profits for traders, it also significantly increases the risk of losses, especially for beginners. It’s generally advisable for beginners to avoid using excessive leverage and focus on building a solid foundation of trading skills and experience first.
Day trading demands a significant time commitment, as well as discipline, patience, and a willingness to continually learn and adapt. So, at the end of the day, it all depends on your trading goals and the set of skills you are learning as a trader.
While options and futures are securities that can offer additional trading opportunities, they also come with their own set of risks. As a beginner trader, you should thoroughly educate yourself about options and futures trading before incorporating them into your day trading strategy.
Keeping detailed records of trades, that include entry and exit points for your trade, trade size, profits, and losses, is essential for evaluating performance, identifying strengths and weaknesses, and refining trading strategies. Look at it as a progress chart that shows you how far you have come, and how you can better yourself in the long run.
By developing a routine and disciplined plan, and sticking to it for a while, you can stay focused on a trading day. It’s also important to take breaks, manage stress effectively, and avoid making impulsive decisions based on emotions.
