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4 Golden Rules of the Market

4 Golden Rules of the Market
July 24
16:56 2012

In day trading there are a few fundamental principles that are the core of any trading strategy. These principals can’t be negotiated but must be adhered to at all cost.

Refusal of these principals will result in a very short trading career.

Rule 1: Trade with the trend

This is the golden rule. In order to trade with the trend day traders must be willing to follow the market movement. Following the market can be difficult for some because human beings have a natural desire to be unique which in other careers can be very rewarding but in the world of trading the desire to unique can mean financial suicide.

Trading with the trend is always more profitable as the trader can hold onto positions much longer than the trader who is constantly trying to outsmart the market. Traders who are willing to follow the trend on the chart and not the hype on the street will do well because they are willing to trade what they see and not what they think.

Rule 2: Identify patterns

Markets trade in patterns and even in the most volatile markets there is a method to the madness. Day traders must gain an understanding of what the major market patterns are such as double top, double bottoms, head and shoulders, stair step, etc. Having a good grasp of these patterns will help traders to identify points of entry and exit.

Rule 3: Follow the news

News, whether fact or fiction, moves the market. Day traders can often get caught off guard when there are dramatic changes in the market because they do not pay attention to what is going on in the news. For example, a popular company that releases new gadgets every quarter may be loved by consumers but the stock may fall on the day of announcement of the new gadget.

If a day trader fails to recognize when this kind of news is being released they may enter into a position and find themselves confronted with volatile movements in the market that they were not prepared to handle.

Rule 4: Manage risk

Day traders must always be aware of how much risk they have put on the table. Risk is measured by looking at the potential for loss in an individual trade in relation to the size of the trading account. Quantifying risk for every trade is important because it prevents traders from taking a few renegade trades that wipe out their account. The general rule of thumb for managing risk and maximizing profit is to aim for small losses and big gains.

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