10 Laws of Daytrading

by Ben Taylor

Day traders enter and exit positions on stock exchanges and commodity markets quickly in the hopes of earning a profit in the extreme short-term. A reliable law or rule for daytrading does not steer a trader in one particular direction or another, but instead offers unbiased advice for approaching a market. Daytrading laws and rules help new and experienced traders create trading strategies and parameters for varying market conditions.

Practice Trading

Before executing live trades, execute practice trades to test your trading strategies and decisions. Practice trades will also help you keep the pace that is required of daytraders. Michael Sincere of MarketWatch.com recommends practicing with a realistic sum of money to maximize the educational value of the experience.

Keep a Journal

Keep a record of each of your trades and their results to help identify trends and avoid replicating unprofitable mistakes. Peter Reznicek of ShadowTrader.com recommends recording no less than the time, size and price of each trade, as well as whether the trade resulted in a profit or a loss.

Know Your Sectors

Understanding the reactions of different sectors to certain events can shape trading strategies that account for volatility and systemic risk. Reznicek recommends beginning sector analysis by noting which sectors are extremely strong or weak; doing so will unearth trading opportunities. Strong sectors will present opportunities for long positions; weak sectors will present opportunities to short a stock.

Study Market Indicators

Market indicators are events that signal a trader to enter or exit a position. Indicators, such as the stock's trading volume and breadth, can signal to buy or sell a stock. A stock's breadth indicates how many shares of its stock are being sold and how many are being bought, according to IndexIndicators.com; it is expressed as a ratio.

Begin With Partial Positions

Diversification is an important consideration for daytraders. Opening a new trading position with only a part of your capital helps to minimize your losses should the security not trend in your favor. Should the trade trend in your direction, you can always invest more money.

Avoid Going All-In

Investing all of your available cash in a particular security can be disastrous if the trade does not trend in your favor. Investing all of your resources might be advantageous if you time your entry and exit precisely, but such precision is difficult to ascertain, according to the DayTrader Hotline website.

Use Limits and Stops

If you are trading several open positions at once, effectively managing each position is difficult. Limit orders allow you to set price limitations for your position in a stock, according to Sincere, which can ensure profits and cut losses if you aren't able to manually enter or exit a position.

Know Your Limits

You should always have a buying and selling plan when you begin trading. In addition to knowing at what price you will buy or sell a security, determine how much money you can afford to spend on a position. Consider every risk associated with a position, and set your investing limits accordingly.

Cut Your Losses

Though a stock might temporarily reverse its position, Reznicek estimates between 40 and 50 percent of all trades don't go exactly as planned. Market indicators and your trading journal are both useful in helping determine when you are in a losing position and should cut your losses.

Interpret Patterns and Trends

Over time, market indicators, your trading journal and the behavior of the markets in which you trade will reveal patterns and trends. If you anticipate stocks in a market to trend downward, enter a short position to profit from that trend; if the market will trend upward, enter a long position.