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.
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
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.
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.
Rule 5: Avoid trades that have high probability of failing
Trading is all about probabilities. Traders make decisions and execute trades based on what they believe to be the probability of the trade working or failing. Good risk management strategy requires that traders understand when the market is most likely to produce trading signals that have a high probability of failing. There are three scenarios when the market is most likely to fail.
The first is around the release of news. News, or rumor, creates uncertainty as the market makers and other major players react and then place their bets. The market can be very volatile during these moments and will break every rule of logic. It is best to be flat when news is being released.
The second scenario is when traders attempt to trade against the trend. This is very tempting to do especially in a highly volatile market where the pullbacks in the price can be pretty substantial. However, when the market has taken a clear direction it is much easier to follow. When trading against the trend there is a really high chance that the market will not follow through in the counter-trend trade.
The third scenario is when the market has no trend. Without a direction the choppy, sideways movement of the market is unpredictable and can be very costly. During this churning stage it is best that traders keep their money out of the market and wait for it to take a direction.