10 Rules for Successful Day Trading

Day trading or Intraday Trading is the most popular style of trading. On hearing the word “Trading”, most people associate it with Intraday or Day Trading when in fact there are other types of Trading as well such as Swing and Positional Trading. In fact most aspiring traders want to be Intraday Traders as well
Such is the popularity of Intraday Trading, which comes from a typical mindset that is observed in many aspiring traders. They wish to execute their trade in the morning, exit with profits in the afternoon and enjoy their money in the evening. But in reality that is not the case. Many aspiring Intraday Traders get slaughtered in the fast and aggressive price movements and hence they just keep on losing money in the long run.
Intraday trading requires a distinct personality which includes qualities like discipline, self-control, speed and technology savvy, quick decision making, following trading rules, dedicated screen time etc.
Let us discuss 10 important rules an Intraday Trader must follow to get an edge over the others -

Rule number 1: Trade only in liquid stocks

Most of the times new traders get caught into illiquid stocks where there is a huge spread between the bid and the ask. Intraday trading requires precision if the spreads are huge and it is very difficult for traders to capitalize on the entire profit. There will be an invisible loss in the form of slippage. The profits earned in day trading are quick and small and this small profit should not be further affected by slippage. Hence, carrying a liquid basket of stocks is a must for Intraday Trading.

Rule number 2: Have speed and precision in execution

Unlike Swing and Positional trading which is done on a higher time frame, Intraday Trading is done on a shorter time frame. The shorter the time frame is, the time required to make and execute trading decisions gets shorter as well. In comparison, a positional trader has the whole day to decide on a trade as he may execute his trades on the basis of daily candle, but an Intraday trader on the other hand may execute his trade on 5, 10 or 15 minutes candle, so the speed at which he must work out his plan and execute it flawlessly should be quick. An Intraday trader must develop this skills so that he does not miss out on quality trades.
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Rule number 3: Pre-defined Capital and Risk

Intraday trading can be a dangerous venture for traders who do not understand and implement Risk and Money Management techniques. A single moment is enough to wipe out the profits earned over few months if traders breach this rule. A wise trader would never allocate all his capital to day trading. Instead he will have a percentage allocation for all forms of trading as per his skill set, time availability, cash requirements and risk appetite. Also he will have a pre-defined amount of risk, either per trade or per day, after which he would no longer trade and will stop for the day. This creates a control and ensures that he does not lose all his capital in a single day. The trading business requires capital to sustain and hence this rule is very important to be followed.

Rule number 4: Stoploss should be in the system and not in mind

Stoploss is one of the most important risk management tools which helps traders to get out of the trades when sometimes the anticipation goes wrong. It also helps traders decide on the position size of the trade. The most common mistake that a novice trader does is not using this tool to its optimum. Most of the times, novice traders plan their trade entries but do not keep their stoploss order within the system. Instead they keep it in their mind saying, ‘ I will get out once I see my stoploss exit price’. Many might argue that there is nothing wrong in this method, but as we know, Intraday trading movements are fast and aggressive. A single piece of news or information can make the prices fluctuate so wild that the trader may get paralyzed to react and exit the trade. Hence it is very essential to keep the stoploss order in the system to avoid unnecessary consequences.

Rule number 5: Intraday trades should never become Investments

A common mistake made by many Intraday traders is that they get attached to some of the stocks. This may be due to branding or the product confidence they have in that company etc. Traders start their day as an Intraday trader and are firm initially about exiting the trade on the same day, but as they see losses, they tend to find and connect random pieces of information that are positive for the stock in the long run and they just stay invested even if the price of the stock is going down day by day. This is how Intraday traders become Investors and after a few years, they get fed up and exit the trade once they achieve breakeven. An Intraday trader should always cut his position on the same day irrespective of the loss because this will bring in the quality of being disciplined which is an essential trait while trading.

Rule number 6: Accepting losing days

Trading is a game of probability, there will always be a mix of losing and winning days. It is impossible for a trader to win daily over a long run, the only thing that he can control is his exposure when he losses and when he wins. Accepting losing days is the biggest challenge a trader faces, but he needs to understand that it is just a normal day. His job should be following a profitable strategy which has a probabilistic edge in the long run and gauge the performance over time to optimize the efficiency. The bottom line is no system is 100% efficient, so the earlier a trader accepts this fact, better will be his executional efficiency.

Rule number 7: Controlled screen time dedication

Most traders have a perception that Intraday trading means first order should be at 9:15 am and the last order around 3:15 to 3:30 pm and because of that mindset, they are just glued to the screen and observe each and every candle that is forming. A professional Intraday trader has a plan in place and will enter the trade ONLY when his entry price comes. He will exit the trade as per his set rules and he is done for the day. Dedicating time on screen does not mean that a trader is working hard or efficient.
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Rule number 8: Never try too many strategies in a single time period

A novice Intraday trader will always expect quick results in a short period of time, so he keeps on jumping from strategy to strategy. There is no end to this as there are thousands of free strategies available on the internet. Trying too many strategies at the same time will pressurize the mind and affect the trading psychology. Thus, a trader must stick to one particular strategy till the end, give the time required for testing and keep his calm.

Rule number 9: Be professional in your approach

Although this seems like an out of syllabus rule, it is very important to cut down the noise and build on your discipline. The main difference between the human brain and a computer is that computers do not have emotions. Thus, it is necessary to have a professional approach while day trading which includes time dedication, not doing multiple things like watching news while trading, getting too engrossed in social media etc. As humans we are emotional creatures and these activities can bring a shift in emotions, thereby affecting the trades.

Rule number 10: Stay mentally fit and strong

You must have realised by now that most of the rules for successful Intraday Trading revolve around trading psychology rather than indicators or trade setups. It is very important to stay fit mentally. Mental Health is a relatively unspoken topic but is of the highest importance. It is very important to engage in activities that boost your mental health like taking timely breaks, going on holidays and engaging in various other activities that improve mental health. Trading is a business of the mind and staying mentally fit and strong is your biggest asset in achieving the trading success you deserve.
Intraday trading is a lucrative business, if done properly with a systematic plan. The rules mentioned above will make sure that as an Intraday trader, you have armed yourself in the best possible way to tackle the markets. Above all, it is very important for a beginner to have a mentor and lean on their experience in all aspects i.e. Technical Study, Risk Management, Money Management, Trade Planning and most important of all - having the right Trading Psychology.

Smita Parekh
Ms. Smita Parekh is a seasoned expert in Technical Analysis and a trader in the cash and derivatives segments and a passionate mentor.