How to Become a Day Trader
Becoming a consistently successful day trader can take years, but it’s possible.
- It’s extremely risky to make trades with anything other than disposable income.
- Becoming a profitable day trader can require years of thorough research.
- Commissions can cost a day trader thousands of dollars annually.
- This article is for those interested in day trading and the stock market, as well as those who are interested in day trading strategies.
Some people picture billionaires resting in beach towns while making trades when they think of successful day traders. Day trading isn’t as simple or rewarding as it might appear on the surface, and that truth is uncommon. Despite difficulties, some people choose to day trade as a part-time career or make it their full-time profession. You may gradually accumulate wealth through day trading if you have a plan and are knowledgeable in your field.
We’ll walk you through the process if you’re intrigued by the notion but unclear of how to become a day trader. We talked to professionals about the advantages and disadvantages of day trading, and they provided advice on how someone may enter the field.
What is day trading, and how does it work?
Day trading is the practice of purchasing and selling stocks and other financial instruments on the same day in an effort to turn a profit. A day trader will have closed all of their positions and realized any wins or losses at the end of the trading day.
The antithesis of a long-term investing strategy, which involves holding stocks or other securities in the belief that their value would increase over time, is day trading. Instead, buying on dips and selling high in the near term is the focus of day trading; the long-term prospects of a stock or investment are of far less importance than the current volatility.
Day trading can be risky. Day traders are inevitably going to lose money on trades, and it can be quite difficult to become a profitable day trader.
What is a swing trader?
A swing trader and a day trader are comparable but not the same. A swing trader executes deals over a number of days with the intention of benefitting from the stock market’s longer-term volatility. Swing traders could sell part of their stocks one day and purchase more the next, but the goal is to give the investment more time to experience peaks and troughs while still holding onto it. Swing traders often hold stocks for a few days or weeks. Although both day traders and swing traders engage in a specific sort of short-term trading, day traders don’t since they only possess stocks for one day.
Key trading terms
There are a few other key terms that day traders should know:
The foreign exchange market is referred to by this phrase. There are two markets where day traders frequently conduct transactions: the FX market and the stock market.
Professional day trader.
A person who day trades professionally is one who is authorized to trade and does it for a living. Make sure the brokerage business you work for is registered with the SEC if you want to become a professional day trader.
Pattern day trader.
A pattern day trader is one who “day trades (buys then sells or sells short then buys the same security on the same day) four or more times in five business days, provided the number of day trades is more than 6% of the customer’s total trading activity for that same five-day period,” according to the Financial Industry Regulatory Authority (FINRA).
It helps to understand margin trading in order to completely comprehend what a pattern day trader is. When trading, traders utilize money that they have borrowed from a broker. Margin trading is done via a margin account since there is risk involved. For pattern day traders, FINRA has additional restrictions in this regard. According to the company, “Any day that the client engages in day trading, the pattern day trader should maintain a minimum equity of $25,000.” Before engaging in any day trading, the account must have the necessary minimum equity. The pattern day trader won’t be able to day trade until the account reaches the $25,000 minimum equity requirement if it drops below that amount.
How to become a day trader
These tips could be helpful to day traders of all types, both experienced and new to the market.
Perform a personal audit.
You must be aware of the difficulties if you wish to pursue day trading. There will be times when you lose money. It will take some time to fully comprehend what you are doing. You might not be successful even after learning all the lingo and varied tactics. There is no assurance that day trading will bring in any money, and it is difficult.
“A lot of individuals think that being a day trader is a simple method to make money because it doesn’t require much experience—just a few button clicks will make you wealthy! But nothing could be farther from the truth, according to Deewana Angelo, managing director at Market Stalkers and Bartech. Day trading is a very challenging performance discipline, comparable to becoming a professional football player or mastering a musical instrument. You must have a natural skill initially, then practice for years.
Day trading is a challenging undertaking, according to Angelo, who has over ten years of expertise in the derivatives market. She claimed that it needs analytical thinking and that many of the successful individuals she has seen had come from fields that call for extensive training and experience. You will ultimately lose a lot of money if your goal is to start a day trading business and get wealthy overnight. To become a successful day trader, you need to put in the time and effort.
Having said that, there are instances of day trading success. You may succeed as a day trader if you comprehend a market and create efficient trading techniques.
According to Jason Bond, co-founder of Raging Bull, a trading, coaching, and mentoring service, “I have verified proof people can make the leap from their career to trading full time. I’ve trained multiple clients who’ve gone from cubicles with small trading accounts between $10,000 and $37,000 to successful, full-time day traders, making millions in just a few years.”
Research the market, strategies, and potential platforms.
Before starting a day trading business, you must have a thorough understanding of the market you intend to use, whether it be the stock market, the currency market, or another marketplace. There is a misconception that working as a day trader will enable you to get wealthy rapidly and spend the most of your time relaxing, but nothing could be farther from the reality. Being a successful day trader requires a lot of study and work.
Successful day traders can teach us a lot about market research and how to construct tactics.
The greatest method to become a successful day trader, according to Bond, is to see successful day traders in action. “There is a deluge of theoretical information on day trading on the internet, but nothing compares to learning from someone who is already successful at it.”
Find out more information about day trading laws and trading tactics specific to that market as part of your investigation. You may get thorough answers to your day trading regulatory inquiries on the FINRA website.
Once you’ve done enough research, it’s crucial to begin slowly, as Rotfeld said. Learning how to day trade takes time, and starting off by putting a lot of money on the line is risky. You should utilize money that you can afford to lose because day trading entails risk.
According to the SEC website, “Day traders often incur significant financial losses in their first months of trading, and many never advance to profit-making status.” These results make one thing very clear: Day traders should only stake capital they can afford to lose. They should never take out a second mortgage, utilize their student loan money for day trading, or use money they need for everyday living costs or retirement.
It’s a good idea to start cautiously and learn as you go since for many day traders, losing money is a necessary part of the learning process. Additionally, it’s critical to adhere to your chosen trading strategy. Making a well-thought-out plan just to utterly reject it in a hurried transaction is one of the worst blunders day traders make.
Day traders frequently make transactions since they are only sitting in front of a screen all day, according to Rotfeld. “A forced trade will typically result in a loss. Always adhere to your regulations.
Understand the risks and challenges of becoming a day trader.
It’s difficult to day trade, and novice day traders must conduct research in a number of sophisticated areas. It’s crucial to realize that day trading is not a get-rich-quick programmed if you decide to take the plunge and start trading every day. Along the road, you’ll experience financial loss, and not every trading strategy will produce the results you anticipate.
You must be prepared to invest in months or years of arduous labour to comprehend the markets, design a strategy, and constantly carry out your plan over time if you want to succeed as a day trader.
How to determine the best day trading stocks
Losses are the only guarantee in day trading. Still, a careful analysis of the market is critical if you hope to turn a profit. When analyzing a stock, consider the following methods.
Price-to-earnings (P/E) ratio
You may learn about a company’s growth potential in comparison to rivals in the same industry by looking at its P/E ratio. It is established by comparing a stock’s current market value to its 12-month earnings per share. One would consider a firm stronger than a rival with a stock value that is just two times profits if its present worth is ten times its earnings.
Price-to-earnings growth (PEG) ratio
You may learn more about a company’s potential future growth using the PEG ratio. It is calculated by comparing the stock’s P/E ratio to the anticipated earnings growth of the firm. The possibility for the firm to grow is inversely correlated with PEG ratio.
You may learn about a company’s growth potential in comparison to rivals in the same industry by looking at its P/E ratio. It is calculated using a stock’s current market value in relation to its 12-month earnings per share. A firm with a stock value that is 10 times its earnings would be considered more powerful than a rival with a stock value that is just 2 times earnings.
Price-to-earnings ratio (PEG)
The PEG ratio might assist you in determining how a firm might develop over the following one to two years. By comparing the stock’s P/E ratio to the anticipated earnings growth of the firm, it is calculated. The possibility for the firm to expand increases with increasing PEG ratio.
After tracking these stocks, consider the most important fundamental factors. Consider these elements first when analyzing any stock.
We found a few trading strategies that are commonly recommended or used by experienced day traders:
is used when there is a significant change in a stock price after it has been reasonably stable for a while. It may be a good moment to trade, for instance, if a stock has been trading between $30 and $31 for three weeks then all of a sudden you see it is either falling or increasing sharply. A day trader should find that volatility appealing.
The practice of selling your stock as soon as the deal becomes a profit. Regarding when to sell, this isn’t too difficult, and it’s a simple approach to start day trading. Because traders benefit from the discrepancy between the seller’s asking price and the buyer’s bid, scalping is also referred to as taking advantage of “the spread.”
based on current news and information is known as momentum. Day traders utilize news events to forecast increasing and falling stock prices, whether it be a fresh earnings report or other breaking news. Although doing well with this needs a lot of research, it’s still a decent alternative for novices.
Fading is behaving in opposition to the market’s apparent dominant tendency. It is a risky tactic that goes against accepted knowledge. Is everyone buying stock in a company you anticipate failing? Why not cut it off at its height? Of course, there is a risk that conventional knowledge might have a significant impact on the stock market.
There are many other strategies and nuances you can implement as you become more adept at day trading.
It’s crucial to find an online broker with comprehensive trading tools in addition to comprehending legislation and choosing a strategy. Day trading necessitates making several rapid judgements; therefore, you don’t want to be constrained by poor online resources, a sluggish internet connection, or any other technical difficulty. Depending on the online trading platform you use, commission fees may apply to your trades. The Motley Fool estimated that, using TD Ameritrade as an example, trading 30 times per day over 250 trading days would result in commissions of more than $50,000 per year.
You could need to make hundreds of dollars in profit to break even on your day trading, depending on the platform you utilize. When choosing the platform, you’re going to utilize for day trading, research is crucial. The top day trading platforms we discovered during our search include some of the following:
- Interactive Brokers
- TD Ameritrade
- Ally Invest
- Charles Schwab
- Trade Station
There is other more platforms that get positive evaluations and have a solid reputation. When choosing an online trading platform, it’s crucial to look for client evaluations and identify a reputable business that fits your requirements.
According to Merlin Rotfeld, an investment strategist and lecturer at Online Trading Academy, “I was a real gunslinger when I started day trading back in 1998, averaging 550 deals per day.” In addition to the fact that my broker was making a living off the commissions I was paying on all those trades, this drove me to be careless in the selection and execution of my deals. I’ve learned how significant a cost commissions are for the typical day trader over the years. There is other more platforms that get positive evaluations and have a solid reputation. When choosing an online trading platform, it’s crucial to look for client evaluations and identify a reputable business that fits your requirements.
According to Merlin Rotfeld, an investment strategist and lecturer at Online Trading Academy, “I was a real gunslinger when I started day trading back in 1998, averaging 550 deals per day.” In addition to the fact that my broker was making a living off the commissions I was paying on all those trades, this drove me to be careless in the selection and execution of my deals. I’ve learned how significant a cost commissions are for the typical day trader over the years.
What happened with GameStop stock?
An odd incident involving shares of GameStop, a physical retailer of video games, recently shocked the financial community. A number of hedge funds, notably Melvin Capital Management and Citron Research, shorted millions of dollars’ worth of GameStop stock last summer while it was trading at $4 per share, anticipating additional price declines.
When one party borrows stock from another party, it is known as a short. The borrower sells the stock right away with the intention of purchasing it at a lower price in the near future because they anticipate that the stock’s price will decline. The intention is to return the borrowed shares to the other party after making money from their appreciation. Short contracts stipulate a fixed duration; regardless of the stock price, the borrowed shares must be repaid by the end of that time.
Reddit saw Melvin Capital Management and others’ significant wager against GameStop, which was unfortunate for them.
When several Redditors on r/Wall-Streeters’ noticed that hedge funds were shorting more GameStop shares than were actually issued, they made the decision to take them to task. These internet investors started buying GameStop stock in large quantities using investment applications like Robinhood, which gradually increased the price. The stock was trading at $40 per share just two weeks ago as more people followed the trend. GameStop stock is now trading at $338 as of the time of this writing.
The hedge funds that made significant bets against GameStop will suffer from this. For instance, Melvin Capital Management sold its shares of GameStop after suffering 30% losses over the first three weeks of the year. In the wake of the GameStop trading frenzy, the hedge fund allegedly sought a $2.75 billion financial assistance package from Citadel and Point72 Asset Management.
Even if GameStop stock was up 80% as of the time of this writing, this situation deviates from the norm for day trading since such dramatic movement seldom happens in such a little period of time.
Day Trading FAQs
These are common questions asked by aspiring day traders.
When is the best time to day trade?
The largest activity often happens an hour after the market begins, at 10:30 a.m. ET. Usually, the market cools off and becomes less volatile later in the day. Since day traders profit by buying low and selling high, the more volatile the market, the less appealing it will be to them. Of course, each trading day is different, and there can be mitigating factors that cause afternoon volatility as well.
How much can you make day trading?
A day trader’s potential earnings are influenced by market changes and their positions. A considerable amount of money might be made or lost by day traders at any time. When making an investment in the stock market, especially in the hectic world of day trading, there are no guarantees of success.
How much money do you need to start day trading?
Theoretically, all you require is enough cash to buy one stock. Despite how improbable this hypothetical example is, if you were infinitely lucky, you could make a fortune off of just one stock. In actuality, day traders frequently experience financial losses before to gains. Therefore, it is better to only engage in day trading with your discretionary cash. It is never a good idea to day trade with borrowed money or retirement funds.
Day trader tools
Some of the most popular software and tools available to day traders include:
Although its platform has rather expensive costs ($6.95 per trade), it also offers consumers access to a thorough reporting tool that can be used to research equities and guide strategic investing choices.
Interactive Brokers offers a platform tailored particularly for day traders. Additionally, the site rewards day traders who are very active by providing discounts to the highest volume traders.
Robinhood is a stock trading platform that doesn’t charge commissions, making it ideal for novices who wish to steer clear of high transaction costs.
Webull is a no-commission platform with no required minimum deposits. Another excellent option for those just getting started, it is.
When new traders create an account with a $10,000 deposit, E-Trade will give them 60 days of free trading. E-commissions, Deal’s on the other hand, are $6.95 each trade, which makes them a little more expensive than those of certain rivals.