Every daytrader should have a set of rules written down or memorized that they follow on a daily basis when they trade stocks. This list of stock trading rules is very important because it helps the stock trader focus on the right stocks to trade rather then blindly buying and selling stocks. Knowing certain stock trading rules can really be the deciding factor in profits vs losses. I have been asked to prepare a list of my most important stock trading rules for daytraders who want to be successful at trading stocks. Whether you are new to investing in the stock market or a veteran trader, these tips will guide you in the right direction and help you make better profitable trades. For new stock traders, check out my daytrading guide.
Trading stocks is not easy, it is very hard! If stock trading was so easy, everyone would be doing it. The key objective is to make money and not lose it. Below is a free list of stock trading tips/rules I think about before every trade I execute.
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Rule #1 – Leave Greed at the Door
Greed in the stock market is not good. If you bought a stock at $5 and you watch it go to $7 or $8 and you don’t start taking profits, you are bound to get hurt with that strategy sooner or later. No one has ever lost money taking profits! After all, the goal in trading stocks is to make money right? In some cases greed can make you a lot of money but eventually you will get burned bad. Take profits when you have them and re evaluate the stock again. If you want to be successful at trading stocks, force yourself to sell stocks when you have profits and move on to the next trade. Go for singles and doubles rather then homeruns and grandslams.
Rule #2 – Don’t Hold Stocks Overnight
Just another stock trading tip/rule that I go by. If you want to be successful at trading stocks, come into the day fresh and in cash. Stocks move on news and rumors. While holding stocks overnight can make you money, it can also lose you just as much money or more. A company can pre announce earnings, sell stock, get an analyst downgrade, or simply just go down with the overall stock market. These are risks I do not want to take! Everyday I come into the office with a clean slate and this is because I do not hold stocks overnight. I never worry about missing a stock break out because I know there will be a brand new hot stock or group of stocks the very next day. Holding stocks overnight for a daytrader can be very risky and if the stock ends up tanking on you, it can really screw up your trading day. Bottom line: If you are investing for the long term or swing trading, holding stocks overnight is fine. If you are daytrading, never hold stocks overnight.
Rule #3 – Never Try to Catch a Falling Knife
I occasionally break this rule because its easy to want to buy stocks that are going down. I’m here to tell you that while you may get lucky in some instances, never buy stocks that are going down because they are already doing what you don’t want them to do. Resist the urge to buy stocks on the dip but instead, follow my next rule about buying stocks when they are going up.
Rule #4 – Buy Stocks that are Going Up
Buying stocks that are rising is one of the most important stock trading rules. A stock that is going up is already doing what you want it to do. I scan the market for the hot stocks during pre market trading, I watch them, and get ready to stike when the opening bell rings.
Rule #5 – Buy Stocks Breaking Through their High of Day
One of the most successful stock trading strategies I know is buying a stock that is breaking out through it’s established high of the day. Especially between 10:00am EST – 11:00am EST. Stocks that break through their high of the day tend to attract even more buyers or shorts who need to cover because the stock is going up. Watch out for false breakouts however. The most volatile trading time can be right when a stock opens. Wait until atleast 9:35am to jump into a stock that is running to the upside. My ideal situation is a stock that opens at $3.50, sells off to $3.10, but by 10:00am EST comes back near the high of the day ( $3.50 ) and then breaks through. The volume will increase and the stock should begin rise up further. Keep in mind, this will not always work but I have had a high success rate. It is important to note that I always keep a tight stop. For instance, if the stock breaks $3.50 and runs to $3.65, I will either sell some or see if it has more room left to run but I will always sell if it breaks back below that original high of day level of $3.50 or whatever it is at the time. It is very important to get back out and avoid holding on if the stock turns back around on you and you didn’t take profits when you have them. If you are new to stock trading, test this strategy out on fake paper trades.
So there you have it, those are my top five rules that I try and follow……..to be continued with stock trading rules 5 through 10 when I get time!