Here you go;
(By the way, those rules that Clint E. posted were obviously written about 60 or 70 years ago. It's too bad he did not credit the author. I agree heartily with the majority of those rules, and disagree strongly with some of them. They are good reading, for sure. Things don't appear to have changed much, eh? The point, of course, is that everyone should have their own rules. I think the specific rules are less important than the fact that one HAS rules for trading ans sticks to them.)
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The Rules of Day Trading
© 1998-1999 by cOUSIN SHORTY.com may not be reproduced without permission
A trading plan is essential for success. It is utterly impossible to succeed at trading without a concrete plan. The following are suggestions, some general, some specific, which I believe will assist the partnership's trader in achieving the goals of the partnership.
GENERAL POINTS
Homework: The study of specific equities and their relationship to the overall market is essential. It is suggested that the trader work at least one hour outside of market hours on familiarization with stocks that could be traded the next day. This can be done on the Internet. Also suggested is "Nightly Business Report" on PBS. As time goes on, the trader will have greater understanding of the widely traded stocks, and will be able to better judge information for potential opportunities. In addition, the trader should spend time every day honing his craft; studying trading techniques, refining his ideas, etc. Weekends require at least 2-3 hours of study to setup for the following week. The trader should be prepared to spend a minimum of 12 hours a week outside market hours on this planning and study.
Schedule: A standard schedule is essential. The trader should arrive a the trading center 45 minutes (or more) before the market opens and plan on being there all day.
Before the market opens: The trader should have a list of potential trading stocks from his homework from the prior evening. He should look at these as to how they traded intraday the day before, and draw conclusions as to whether or not he will follow them when the market opens. Also, he should observe CNBC at the trading center for breaking news, and keep an eye on the Dow news wire for news. The trader should have his attention on the market, and on nothing else, be rested, and be ready to attack the market. If there is some outside influence that could take attention off the market, the trader should cease trading until the situation is addressed and handled, and he can trade without external influences that could have a detrimental effect.
SPECIFIC RULES
Taking heat: This is the term used for watching a trade go the wrong way. It is the number one reason why traders lose money. Losses are inevitable. Nobody makes money every day. The key to winning overall is to limit the losses and offset them by winning trades. The trader should never take more than a set limit of heat. In my personal experience, it is extremely difficult to set a number limit on how much heat, such as one-half a point, etc. An easier way to define the problem would be in terms of dollar value loss on the trade. For example, a dollar loss on 500 shares loses more tha a dollar loss on 200 shares. Under ordinary circumstances, 3/8 should be a maximum amount of heat. The trade has gone the wrong way, and 3/8 is usually enough to prove it. The trader should never, under any circumstances, take more than 5/8 of a point heat on any trade. The trader should never take more than a $250.00 loss on a trade.
Rule #1: Under most circumstances, 3/8 point maximum heat. Under no circumstances more than 5/8 heat. Under no circumstances more than $250.00 heat.
Maximum Shares per Trade
This, in my experience, is the second most violated rule. Traders with little experience get wiped out in short order by trading large amounts of shares. Until the trader is making money consistently, i.e. 10 trading days in a row with no losing days, the number of shares should be limited to a maximum of 600. Most good, professional traders limit the share size to less than 1000. There are situations where more shares than 600 may be traded with relative safety, but the rule must be:
Rule #2: Maximum shares traded on one trade is 600. If the trader is taking a multiple position on one stock, the maximum is still 600. Stick to 300 shares except in cases where the trader's opinion is very strong. Trade over 600 shares in rare and exceptional occasions only.
Mistakes
Traders make mistakes. The most common mistake is to sell when one wants to buy, and vice versa. The computer can go down, the feed to the exchange can be interrupted. There are a lot of things that can go wrong. The trader must assume full responsibility for any mistake that occurs. Open positions should be exited immediately (almost always at a loss) when a mistake occurs.
Rule #3: Exit instantly upon the execution of any mistake. No exceptions.
Number of Trades Per Day
Trading too much in one day is the third reason why traders lose money consistently. There is absolutely no reason to trade more than 15 trades per day. The maximum number of trades should be limited to 15 per day.
Rule #4: Maximum 15 trades per day.
Trading Times
Trades are consistently more successful before 11:00 a.m. and after 2:00 p.m. Trades are consistently less successful between 11 and 2. There is only one exception; if a particular stock is "in play" (being traded heavily due to some factor such as a big news announcement), this rule can be broken with relative safety. But trying to "find a trade" between 11:00 and 2:00 is almost always a bad move, and should be avoided by the trader. It is safer to miss a few opportunities than to consistently lose money when the market is slow. Also, under most circumstances, initiating a trade after 3:45 is too dangerous, and should be avoided. Never initiate a trade before the market opens or after it closes.
Rule #5: Initiate trades only between 9:30 a.m. and 11:00 a.m., and between 2:00 p.m. and 3:45 p.m. The only exception is a "hot stock" and these are rare; perhaps one a week at most.
Maximum Positions at One Time
The trader should try and limit himself to one open position at a time. Two positions is acceptable, but three is not.
Rule #6: Maximum two open positions at any one time.
Holding Overnight
Holding overnight is usually done to try and avoid a loss. It is stupid. Holding overnight for an expected gain is too risky for the trader.
Rule #7: Never hold a position overnight.
Consecutive Losing trades
It can occur that the trader makes several bad trades in a row. After three, it becomes clear that the trader has done something to consistently lose money, and needs to re-evaluate his thinking processes. This should be done prior to the next trade. Negative emotions or other non-survival influences may have entered into the trader's regimen, the overall market may have gone the "wrong" direction, the trader may have broken several of these rules, etc. If the 4th trade is a then loser, the trader should stop and seriously evaluate whether or not to continue for the day. He would probably be wise to stop and wait till tomorrow.
Rule #8: If there are 3 losing trades in a row, the trader must stop and examine what is going wrong. He should start trading again only after understanding what really went wrong. If the next trade, (the 4th) is then a losing trade, the trader needs to stop until he fully understands what went wrong. It would be wise to stop for the day at that point.
Breaking the Rules
All rules are made to be broken. All rules can be safely broken under certain circumstances. But in my experience, breaking more than one rule is a grave mistake and reduces the possibility of success to less than 25%. It should not be done.
Rule #9: Never under any circumstances break more than one rule on a trade.
Sophisticated Trading Techniques:
Boxing, simulated long and short positions, hedging with options, etc. have no place in the trader's regimen. These should be avoided. The simple trading plan should be adhered to.
Rule #10: No boxing, simulated long or short positions in two accounts, options hedging, or other "tricks" should be employed. Stick to the basics, and follow the plan.
Trading Regimen
Every trader has a regimen; a style or set of rules that he follows to choose trades. For example, most day traders use technical analysis as part of their personal regimen to form conclusions. The personal regimen would include the specifics of what indicators are used and why. These regimens are constantly being refined and polished, due to the fact that the market changes all the time, and what worked 6 months ago may not work now. The trader must have a personal regimen, a specific set of rules or guidelines that he follows. This must be in writing. These guidelines must be his own, in other words, he must not use another trader screaming, "Buy Hollywood Global Internet right now" as a buy signal, or some "hot tip", or some computer program, or anything else, to make his FINAL decisions. He must make his final decisions himself, and he can't do it without a personal regimen. No personal regimen means the trader is open to the vagaries of whomever or whatever is making the decisions around him. The trader himself must make the call, not something or someone else. This is a most important factor in success. If the trader makes a decision himself, he is in control. If he lets someone else make a decision, he is not in control from the start. Not being in control of a trade is a mistake, and violates Rule #3. The personal trading regimen helps the trader refine his skills and learn what works and what does not. He can change his regimen at any time, of course, but he must have something to change.
Rule #11: The trader must have a personal regimen in writing so he knows what personal rules he must follow.
SUMMARY OF RULES
Rule #1: Under most circumstances, 3/8 point maximum heat. Under no circumstances more than 5/8 heat. Under no circumstances more than $250.00 heat.
Rule #2: Maximum shares traded on one trade is 600. If the trader is taking a multiple position on one stock, the maximum is still 600. Stick to 300 shares except in cases where the trader's opinion is very strong. Trade over 600 shares in rare and exceptional occasions only.
Rule #3: Exit instantly upon the execution of any mistake. No exceptions.
Rule #4: Maximum 15 trades per day.
Rule #5: Initiate trades only between 9:30 a.m. and 11:00 a.m., and between 2:00 p.m. and 3:45 p.m. The only exception is a "hot stock" and these are rare; perhaps one a week at most.
Rule #6: Maximum two open positions at any one time.
Rule #7: Never hold a position overnight.
Rule #8: If there are 3 losing trades in a row, the trader must stop and examine what is going wrong. He should start trading again only after understanding what really went wrong. If the next trade, (the 4th) is then a losing trade, the trader needs to stop until he fully understands what went wrong. It would be wise to stop for the day at that point.
Rule #9: Never under any circumstances break more than one rule on a trade.
Rule #10: No boxing, simulated long or short positions in two accounts, options hedging, or other "tricks" should be employed. Stick to the basics, and follow the plan.
Rule #11: The trader must have a personal regimen in writing so he knows what personal rules he must follow.
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BEGINNER'S DAY TRADING MISTAKES
© 1999 by cOUSIN SHORTY.com, may not be reproduced without permission
Day trading is not for everyone. In fact, it's not for most people. You can get hurt badly, very quickly. Everyone is different, everyone has a different trading style. Some people can see good short opportunities. Some can see good longs. There are only a few ways to make money, there are a lot of ways to lose it. I'll let somebody else get into how to make the money. Before you do that, you have to learn how not to lose it, because if you lose it, you are gone.
Here are a few things that a BEGINNER can do wrong:
1. Mistake: start trading before you have practiced. I would be very familiar with the setup and I would trade on a simulator for at least 2 weeks, a month would be better. If you are trying to make a living at it, and are trying to day trade instead of some other way of making money, you will probably fail. Have another source of income. Take enough time to completely understand the trading system you are using, because you don't want to learn it when you are long a stock that is going down one point every 10 seconds.
2. Mistake: start trading by trading 1000 shares. I guarantee this is suicide. Start by trading 100 shares or 200 shares. The first time you short some stock 1000 shares and it spikes up for 3 or 4 points and you can't get your buy cover off, you will learn this the hard way. The easy way is to trade 100-200 shares until you get good. Good means 5 winning days in a row in real life.
3. Mistake: trade light volume stocks. If you do this, you will get hurt, I promise. Trade stocks that have a daily volume of a million shares or more until you are consistently successful.
4. Mistake: trade a stock that has more than an eighth spread. Don't do it. If you are on the wrong side on a trade with a quarter spread, you will be down a half in a heartbeat. Hollywood Global Internet Potato is up 14 points in 2 minutes? It's 65 x 66 1/8? Why not just have Mike Tyson bite your ear, it's less painful.
5. Mistake: watching a losing trade get worse. Decide what your limit for the loss is and get out if you see that limit. Decide BEFORE you make the trade. A reasonable limit would be around 3/8 - 1/2 on a short term trade for a beginner. If the trades goes 3/8 against you, get out. If it turns around and goes your way, after that, that's OK. You made the right call at the wrong time. Work on your entry point, and try to do the next trade at the right time.
6. Mistake: exiting a winning trade at the wrong time. You want to sell into strength and buy into weakness when you exit. If you have a long position and the stock runs fast, it's easy to wait till it stops and reverses. Your winning trade will turn into a losing trade and you will not be happy. Conversely, exiting a winning trade too soon is annoying. But not nearly as annoying as losing money. While you are learning, learn to take a profit. You can fine tune Profit Taking later on.
7. Mistake: averaging up/down. Once you learn the game, you can do this, but not when you start. If you made a bad call, get out of the trade. Just get out of the trade and move on.
8. Mistake: trying to trade like someone else. The person you learn from is successful. So, you need to mimic that, right? Yes and no. Everyone is different. The person who is teaching you AVOIDS MISTAKES, but they are not your mistakes because you are two different people. If you are being taught by someone who is not trading right now, you are being taught by the wrong person. Learn from someone that is doing it, not someone that is teaching it. If you are learning from someone that just had three losing trades in a row, get off the bus, you are on the wrong bus.
9. Mistake: holding something that went against you "till tomorrow". You will probably do this and learn the hard way. In the beginning, just get out of your bad trades. One day will turn into two weeks and your buying power will be gone and if you are very lucky, the stock will come back to where you originally had it and you will get out for no gain. After you get out, it will go your way, but not before.
10. Mistake: holding a winner overnight. Don't do it when you start. It's a bad habit. Don't do it.
11. Mistake: trying to make up for a bad trade with another trade on the same stock. Doubling your position on the second trade to make the money back you just lost. This is gambling. Let the trade come to you. You screwed up, so clear your head and let the next trade come to you. Let your strategy fit the trade, don't try and massage the trade to fit the strategy.
12. Mistake: chasing a short down. This is a really good way to get char-broiled. Sometimes it works. Most of the time it doesn't. If you wanted to short the stock at 40 and it goes to 39, you missed it. Let it go, Luke. You are not a Jedi yet. After you have been trading, you might be able to do this, but not when you start.
13. Mistake: chasing a long entry up. Same thing. You wanted to go long at 40 and the stock is at 41. You missed it. Don't chase it. Chase a girl instead. Especially don't chase it if the volume picks up, because you are late for the show, and the easy money is selling it to you, Zippy. That's why they reverse before you get your confirmation.
14. Mistake: trying to find a trade after you just made 3 losing trades. If you just made three losing trades in a row, you need to take a walk and relax. Maybe you need to stop until tomorrow. 3 losers in a row = stop. Figure out what is wrong and either correct it or stop for the day.
15. Mistake: being in two trades and looking for a third. If you start day trading and can watch 2 winning trades and look for a third, you will be a millionaire soon, but I doubt that you can. Why not just watch one trade at a time. ONE TRADE or two at the most at the same time when you start.
16. Mistake: not asking for help if you run into trouble. You bought a stock and then you bought twice as much instead of selling your original position? It happens. You are long, and the machine says you can't sell because there is no downtick? It happens. Don't sit there like a deer in the headlights, scream! Someone will hear you. Don't let a mistake take your money away while you sit and watch like a zombie. It's OK to be wrong if you have to pay more to be right.
17. Mistake: getting emotional because you lost money/exited at the wrong spot/missed a trade/etc. This is the best way to lose every penny you have. If you get emotional, you will get nuts, and if you get nuts, you will get scared, and when you are scared you will lose money every time. The people with more money than you count on this one single factor to make money short term. That is their secret. Don't tell anyone I told you.
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