When money is at stake and pressure is high, it is only a predefined set of rules that can help you make a wise decision. If you’re a day trader that wants to generate profits consistently, you cannot continue trading without defining your trading rules. According to Kimberly Torres, day trading without a strong set of rules is nothing but a gamble, where you’re more likely to lose money instead of earning profits. Having well-planned rules help traders make fast optimal decisions during crucial trading hours.
Kimberly Torres is a professional day trader that has clocked over 7-figures in profits since she started day trading. She has shared some experience-backed day trading rules that can help you earn better in 2021. Check out the top five day trading rules that can help you become a better day trader this year.
1. Know the Catalyst
When trading stocks or other financial instruments, you should be aware of the factors influencing its prices. You should always trade stocks that have the potential to move upwards. Check a company’s earnings reports, recent press releases, and other significant factors that directly or indirectly influence the prices, or give you some idea about it.
2. Avoid FOMO & Overtrading
The fear of missing a big move often makes many traders lose a good entry. Instead of chasing stocks out of FOMO, a trader should always stick to its trading plan for the best results. Additionally, it is best to define your edge in the market instead of going all out. If you’re a beginner, avoid trading aggressively. Knowing what to trade and what to avoid contributes significantly to one’s day trading profits. Trading aggressively, considering it will help you make more profits is a myth.
3. Never Do Trades Without a Strong Trading Plan
Have you prepared your entry strategy or decided on the entry price and stop-loss price before trading for the day? If no, you shouldn’t start trading without it. As Kimberly mentioned earlier, day trading without a strong plan or set of rules is nothing but gambling, where you risk losing more money than earning.
To make the most from day trading, work on creating a robust trading plan. While preparing your trading plan, pay special attention to the trade setup, entry price, stop-loss price, risk appetite, profit target, position size, entry strategy, profit taking strategy, and trade thesis.
4. Pay Attention to Positive Risk/Reward Ratio
As a day trader, you should focus on achieving a 3:1 positive risk/reward ratio. It implies you’re ready to risk $1 for every $3 you’re planning to earn from the market. Analyzing support price levels and resistance price levels can help you assess an optimal positive risk/reward ratio. A golden rule to follow is to enter positions close to support price levels, with the resistance price levels being three times away. It will ensure stop losses are much smaller when compared to a day’s trade target.
5. Going “ALL -IN” Will Cause More Harm Than Good
The worst mistake a new day trader can make is to go “ALL-IN” on a single position or a single trade. Doing so also includes maxing out the margins. While a win percentage is important, nothing will work if you mess up the position sizing. If you hold large position sizes, a golden rule to swear by is sticking to tighter stops and shorter holding periods. Also, diversifying positions will help spread the risk.
Kimberly Torres has spent several years day trading various instruments and understanding the markets. It is only after rigorous testing that she found these golden nuggets that can help anyone do better in day trading. Now that you know some golden day trading rules followed by experts, be sure to follow them in 2021 for maximum benefits.