Day trading rules

The book Trading Rules is one of the best classics, traders should not miss. This book contains fifty rules for day trading, which William F. Eng filtered through long years of experience. Each rule is a chapter in this book and the rule is explained using examples from author’s personal experience.

This book is about how you handle the trade, the principles and practical concepts of trading but this is not a how to trade or how to set up a trading account book. In this hub, I will give a few examples from his list of rules.

This is a basic rule but many traders easily miss. If you want to buy a household item like VCR, you do our research, read material and ask your friends and acquaintances. But in case of day trading, the home work is hardly done. The author gives three differences between these two (a) In case of buying a household item, you have lot of time at your disposal, which does not exist in day trading (b) In case of VCR, people easily get advice but when it comes to stocks, it is difficult to ask or take advice (c) Generally a household can be returned within a reasonable period of time, which is not applicable for trading in stocks. Because of these differences, one should be even more care full in stock trading.

Speculation involves taking a calculated risk on short term changes in stock price. Investment is to provide a return on the capital in a time much longer than trading. Experienced traders never mix these two approaches. Even the techniques to select stocks in these two are different. In case of day trading, which is speculative, technical analysis is more appropriate and incase of investments, a fundamental analysis is a must.

This is an obvious one agreed by every one but difficult to implement in actual practice. In order to implement this one need to evaluate the possible risk in a trade in the beginning itself and should be managing the stop loss process throughout the trade.

Because of the nature of trading, which depends upon margin, it is very easy to ignore this point. The fact is if there is no capital, there is no trading. Implementing this rule involves limiting the risks at the capital level. In another rule Eng suggests to divide the capital into 10 parts and never put more than one part into any one trade (that is ten percent of the trading capital).

It is easy to get tempted when the price seems to be low, but low and high are relative in trading. So the important question becomes on how to identify whether a stock price is low or high. Eng explains that we need to do this using technical analysis for example, using Elliot wave and price volume charts.

The great value of the book 'Trading rules' is not just in the list of rules but in the lucid explanations of William F Eng with examples from his experiences. Each rule has a detailed explanation along with information on how to apply them correctly. This is a book that can benefit both a beginner and a professional.