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Important Facts & Rules about Day Trading

These are facts and common sense rules about day trading that all serious traders should know. One of the reasons why some traders lose money with stocks, currencies, futures, or anything else, is because they do not have a basic understanding of important concepts like these. Don’t let this happen to you. Even if these rules sound simplistic, they are essential.

You need $25,000 or more to trade stocks (by law in the US); You can day trade currencies with only a few hundred dollars.

A big advantage of trading currencies (also known as “Forex” or “FX”) rather than stocks is that you need a lot less money to start. In my opinion, trading FX is a lot simpler than trading stocks because there are only a handful of currencies you can trade.

Currencies are one of the only vehicles that you can still day trade with very little money if you live in the United States (If you are willing to give trading currencies it a shot, click this link to a live simulator and receive a free trading e-book and other useful tools to help you). To actively trade stocks in the US stock market (more than 8 round trip trades in a week) you need more than $25,000 in your account. This is because of a US law that was established in September 2001 (now with the platform that runs the simulator non-US clients can also day trade some US stocks with very little money as well).

What “day trading” really means.

The term “day trading” is a widely misused and misunderstood term. Real day trading means not holding on to your positions beyond the current trading day; in other words, not leaving any position open into the market close. This is really the safest way to trade because you are not exposed to the potential losses that can occur when the stock market is closed due to news that can affect the prices of your stocks. Unfortunately, many self proclaimed stock “day traders,” hold stocks overnight because of fear or greed, thus setting themselves up for the catastrophic elimination of their capital in an unforeseen (or “black swan”) event. When trading currencies, the term “day trading” changes slightly.

Since currencies can be traded 24-hours-a-day, there is no such thing as “overnight” trading. Thus, you can have open positions for longer than a day with active stop losses in place that can be activated at any time. Please note that using stop orders does not guarantee that you’ll be filled at your stop price – but it’s a precautionary measure nevertheless.

You must limit your losses when trading.

I feel this is one of the most important rules that a day trader should learn. There is no rule of thumb as to how an active trader should limit his or her losses, but there are basic steps that can be followed. I think that one of the main reasons people lose money day trading is because they do not limit their losses. For example, a person that claims to be “day trading” buys a stock and when the stock starts dropping, he says to himself, “I am going to wait because the stock is going to go back up.” The stock then continues to drop and he realizes that he could have sold it earlier, when he was losing less. When the traditional “closing” time (4:00 PM EST) of the stock market is near, he decides that he is going to hold the stock until the next day, when it will SURELY recover. News is released overnight that is negative for the entire market. When the market opens the next morning, all stocks are lower, including the stock of our alleged “day trader.”

At this point, the “day trader” is a lot more nervous and a lot less wealthy. His denial reaches such gigantic proportions, that he convinces himself that he is really not a “day trader, but an “investor,” and he is thus going to hold the stock as long as it takes to make up what he lost. As the stock plummets into oblivion, he loses his sleep and becomes severely depressed, convinced that day trading does not work and looking for someone, rather than himself, to blame for his pain and suffering. Don’t let this happen to you. Learn to limit your losses!

Trading is only for part of your money.

Don’t day trade with all your money! This rule means that you will only use SOME of your money for day trading. The reason being that you do not know for sure if you will be successful doing it or not. The bulk of your capital should be in very solid, fundamentally sound investments or, even better, managed accounts that were chosen for fundamentally correct reasons (unless, of course, you become an extremely successful and reliable day trader – then the rules change. I am always looking for talented traders to join my team).

Trading requires proper training and practice.

Day trading is like running any other business, in my opinion; it requires hard work and dedication on your part. A lot of people mistake the act of “sending” and order to buy  or sell a stock or currency to the market with “trading.” Sending an order to the market is very easy. Day trading can become easy, but it is not a sure thing and it certainly takes time to master. You have to be able to dedicate at least a few hours a day to do it (and practice first on a simulator). If you are not willing to dedicate the time required, don’t waste your time cutting corners.

The time it takes to learn how to trade varies.

The learning curve for day trading varies from person to person. One factor is the person’s investing and trading experience and knowledge. Some people can get started almost right away, while for some it takes a lot longer. It is important to note that some people will never learn to day trade correctly. This can be because of a series of different factors, like a lack of discipline, an uncontrollable fear of losing money, etc., etc. If day trading is not for you (for whatever reason), another option is to participate in a managed account or an auto trading program.

A direct-access broker is required for day trading stocks.

You cannot trade stocks effectively with an online or full-service broker. These brokers are just too slow and inflexible. True stock trading must be done with a direct-access broker, which I explain in Step 5 of “Steps to start day trading.” If you want to trade currencies instead (which I think are better than stocks), you can test-drive the trading simulator on this site.

Daily money goals are useless in trading.

Whoever says that you can “consistently make X amount of dollars” a day, week, month, etc., trading is not telling the truth. In trading everyone wins and loses. The amount you make or lose will depend on your discipline to limit your losses and apply what you learn. As a trader, your goal is to take from the market whatever is available on a particular day. Each day will be different. Most novice traders shouldn’t be thinking about specific daily money goals at all.

You do not have to trade every day.

This rule is related to the daily money goal rule. If you don’t want to trade for whatever reason, don’t do it. Maybe you are not feeling well one day or you feel uneasy about the market, or maybe you just don’t feel like it. Whatever the reason, you do not have to trade every day. If you force yourself to trade, you will lose, period!

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