Day trading can often feel like a game you never know how to win. It is a fast-paced form of investing in which individuals buy and sell securities on the same day. The holding period can vary from seconds to hours as traders aim to capitalize on small and sudden price fluctuations. Without knowing the ins and outs of trading, you might end up facing losses. Whether you are a novice or an expert trader, here are three day trading rules you should follow to earn profits.
1. Understand the Pattern Day Trader (PDT) Rules
If you are trading in the United States., the first thing you need to understand is the Pattern Day Trader (PDT) rule. Enforced by the Financial Industry Regulatory Authority (FINRA), it designates a trader as a pattern day trader if they execute four or more trades within five business days, and those trades represent more than 6% of their total trading activity. As a pattern day trader, you’re required to maintain a minimum account balance of $25,000 at all times. In case of violations, you can be restricted from making any further trades until your account is funded. The purpose of the PDT rule is simple: Prevent traders from taking excessive risks and making sure they have enough capital to handle any sudden shifts in the market.
2. Use Limit Orders
One of the most important day trading rules is implementing limit orders. A limit order allows you to set the exact price to purchase or sell a financial security, such as stocks. This gives you more control over your entries and exits. In comparison to market orders that execute instantly at the best possible price, limit orders are only executed if the price meets the order qualifications. New day traders are especially recommended to use limit orders, as they are more likely to make emotional trading decisions. By pre-setting your buy or sell price, you reduce the chances of panic selling, a common challenge faced by day traders.
3. Stay On Top of Market News and Trends
“Knowledge is power.” Expert day traders have pretty much internalized this idea (in a good way). They stay on top of everyday trading-related news, tools, updates, and strategies. You should also keep track of financial news, economic reports, earnings announcements, and geopolitical events. In the fast-paced world of day trading, what seems like a minute policy change can trigger sharp price movements. Even a trade from a CEO can change the trajectory of the market. Remember: You can’t trade in a vacuum. Market news can give you an edge and help you stay ahead.
Conclusion
Day trading is highly volatile. The market dynamics quickly change, and traders must adapt to earn profits. If you’re trading in the U.S., familiarizing yourself with the Pattern Day Trading (PDT) rule is of utmost importance. Moreover, implementing limit orders and staying on top of market news are the two most important rules you must follow when day trading.
