Day trading is the practice of buying and selling stocks within short time frames, as opposed to hanging onto them for extended periods of time, such as years at a time. You make a buy of an asset at a lower price and then unload it at a higher one when the price begins to rise again.
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Trading during the day requires competence if you want to avoid losing money rather than making it. Beginners in day trading have a lot of ground to cover in terms of education. Not only will you need to pick what to trade and how much capital you will need, but you will also need to decide when to trade, buy the appropriate equipment and software, and of course, figure out how to manage your risk. All of these things will need to be done.
As you embark on this journey, the following are some pointers that will point you in the right direction.
- While determining which assets to buy and sell, day traders utilize a variety of trading tactics. While some may trade several times a day, others may only do so once a day.
- You can start trading foreign currency with as little as $500, and you can start trading futures with as little as $1,000.
- Before you start using your own money to buy and sell assets, it is recommended that you first use a practice account to develop a profitable strategy.
- If you want to be successful in day trading, you need to learn how to effectively handle the significant amounts of risk that are involved.
The Fundamentals of Day Trading for Novices
It makes no difference to a day trader if the broader market is going up or down because they only worry about their personal trades. You are examining the various assets individually to determine which ones you want to trade. You have the potential to make money so long as the stock market is experiencing both gains and losses.
There are some day traders who are extremely active. As they buy and sell different types of securities throughout the day, they might conduct dozens of different trades. Some traders may only make a single transaction throughout the entire trading day.
What you actually decide to do will be determined by a number of different factors, the most important of which are the movement of prices on that particular day and your overall trading strategy. Price charts are the primary tool utilized by the vast majority of day traders when determining when to place a trade, which is then carried out through a brokerage account.
A day trader who engages in pattern day trading completes at least four “day trades” within a span of five business days.
Day trading is a challenging and potentially emotionally taxing activity, particularly if you anticipate incurring a loss of capital. Because of this, you shouldn’t get into day trading without first doing some serious research. There is no easy path to financial success here. On the other hand, you won’t have to put in the effort of years of preparation. You should plan on devoting anywhere from three to six months to planning and formulating a strategy. You’ll need to educate yourself on the following:
- The process behind various trades
- When to purchase and when to sell
- Day trading tactics that are commonly used
- How to read and interpret a price chart as well as identify patterns
- How to cut down on the amount of money you lose in a trade
After you’ve had a few months’ worth of practice and reached a point where you’re comfortable with your trading strategy, you’ll be ready to start trading with actual money.
How Much Can You Make As a Day Trader?
Trading during the day won’t help you become wealthy overnight, but if you give it your full attention, it has the potential to bring in a lot of money. The amount of money that can be made from day trading is highly variable because it is dependent on a large number of factors, including the following:
- Your experience
- How self-controlled you are in the execution of your trading strategy
- How effectively you can limit your losses
- The initial sum of capital with which you begin trading.
When comparing day traders who work for a bank or hedge fund to private day traders who trade with their own money, there is another distinction to be made. Private day traders trade with their own money.
Day traders who are salaried don’t have to worry about spending their own money, which means their income is more stable. In February of 2022, the average salary for a day trader was $80,081, although many day traders also receive bonuses or commissions in addition to their base salary.
How to Get Started Trading the Day Market With $500 or $1,000
Every market has the potential to yield a profit. Therefore, the question of how much capital you need to get started is frequently the deciding factor. Do not attempt to dominate every market at the same time. This will cause you to have divided attention, and it could take you longer to make money as a result. Choose just one industry to learn about so that you can concentrate your efforts. When you have mastered making money in one market, it is much simpler to apply those same skills to other markets.
Day trading can be started with $500.
On the foreign exchange market, you can open a day trading account with as little as $500 if you want to get started trading right away. The foreign exchange market is another name for this.
Trading currencies on the foreign exchange market, such as the euro and the U.S. dollar (EUR/USD), is what you do. Although the minimum deposit to open an account here is only $100, it is strongly recommended that you start with at least a little bit more. This is a good place to begin if you have a starting capital of only $500 and are interested in observing the results.
Start Day Trading With $1000
The futures market does not have a minimum equity requirement that is legally defined, but brokerages can set their own house minimums. You may be able to open an account and get started with as little as $1,000 in capital, depending on the brokerage firm that you decide to work with.
The market for futures contracts offers trading in a diverse range of underlying assets. The value of these is typically determined by a commodity, such as crude oil or gold. They could also be determined by the movements of indices like the S&P 500, for instance.
Trading stocks on a day-to-day basis requires a minimum investment of $25,000, making this a more capital-intensive choice. If you are just starting out, day trading stocks might not be the best option for you given the higher initial capital outlay that is required.
What You Need To Start Day Trading
When you’ve decided what you’ll be trading, the next step is to gather the essential tools you’ll need to get started.
Computer or Laptop
It is recommended to use two monitors, but doing so is not required. When you run your trading program on the computer, there should be no lagging or crashes because the computer should have sufficient memory and a processor that is fast enough.
You don’t absolutely require the most advanced computer, but you also don’t want to skimp on quality either. Because both software and computers are subject to ongoing evolution, you need to ensure that your computer is current at all times. When day trading, having a computer that is too slow can cost you money, particularly if it crashes while you are in the middle of placing trades or if its slowness causes you to get stuck in trades.
Connection to the Internet that is Reliable and Fast
When you have a spotty internet connection, day trading is not something you should attempt. It is recommended that you utilize an internet connection of at least the cable or ADSL variety. Because the speeds of these various types of services can vary, it is important to select an internet package that is at least in the middle of the available options.
It’s possible that the slowest internet speed that your service provider offers will be sufficient. However, if you have a number of web pages and applications open at the same time, you may find that the information on your trading platform does not update as quickly as it should. If your internet connection is frequently unreliable, it might be worthwhile to pay a little bit more for a service that is more dependable or for a connection that is faster.
A Trading Platform
Download a few different trading platforms to compare their features. Because you are just starting out, it is unlikely that you will already have a well-established trading style. Choose a few different paths from the available choices that your broker gives you, and determine which one appeals to you the most.
Bear in mind that during the course of your trading career, you may find it necessary to switch trading platforms on more than one occasion or to make adjustments to the way the platform is configured in order to accommodate your growing trading needs.
Futures traders and forex traders frequently use NinjaTrader as their day trading platform of choice. There is a wide variety of software platforms for trading stocks.
Using the NinjaTrader Replay feature, which allows you to trade historical days as if you were trading in real-time, is one of the most effective ways for forex and futures traders to hone their trading skills through practice.
Your broker acts as a middleman between you and other traders and, in exchange, collects a commission or other fee from the trades that you execute. Day traders should give priority to brokers that charge low fees because high commission rates have the potential to destroy the profitable potential of a day trading strategy.
Having said that, it’s not always best to go with the broker with the lowest fees. You want a broker who will be available to provide support in the event that you run into a problem. It is well worth paying a few cents more on a commission if the company can save you hundreds or thousands of dollars in the event that your computer experiences a meltdown and you are unable to get out of your trades.
Although major banks do provide trading accounts, these accounts aren’t always the most advantageous choice for day traders. Larger banks typically charge higher fees, while smaller brokerage firms are likely to provide day traders with fee and commission structures that can be tailored to their specific needs.
Trading Strategies for Day Traders
After you have determined the assets that you will be trading and have your trading equipment prepared, it is time to begin training, making plans, and formulating a trading strategy. The following is a list of some advice that will assist you in getting started with day trading and managing the risk that is associated with it.
When you initially begin day trading, you should start with more modest sums of money that you can comfortably afford to lose. For instance, depending on the type of trading you decide to engage in, you might find it beneficial to start with either $500 or $1,000.
Because it is common for novice day traders to suffer financial losses in the beginning, you should avoid taking chances with money that you require for day-to-day living expenses. When money that you can’t afford to lose is disappearing, not only can this be distressing, but it can also contribute to poor decision-making. You can limit your losses and reduce the likelihood that you would trade rashly in response to those losses if you begin with a little amount of capital.
Usage Limit Orders
You are able to establish a specific price for either purchasing or selling with a limit order. If you place a limit order to buy, your purchase will be completed at the limit price or below (to ensure that you do not overpay). If you place a limit order to sell, your order will be filled at the limit price or higher (to ensure that you don’t lose too much money).
You did this through your brokerage firm to get the order started. The transaction will be carried out mechanically as soon as the stock reaches the price that you specified. This can protect you from suffering significant financial losses. 7
Refrain From Reacting Emotionally
While day trading, it’s easy to let your emotions get the best of you and make rash decisions in response to either positive or negative news. On the other hand, this may cause one to make decisions that are not prudent. Instead, when it comes time to decide whether to buy or sell, you should stick to your approach. In day trading, making decisions based on logic rather than emotion might result in greater profits.
Be Sure to Time Your Transactions Properly
As a day trader, you are not required to trade continuously throughout the day. If you limit your trading time each day to two to three hours, you will probably discover more stability. What you are trading will determine which hours of the day are most important for you to focus on.
The first one to two hours after the market opens are ideal for day trading stocks, while the last hour before the market closes is the finest time to trade stocks. You should strive to become an expert trader between the hours of 9:30 and 11:30 am Eastern Standard Time (EST) because this is the most volatile time of the day, providing the largest price moves and the greatest opportunity for profit.
During the final hour of the day, between the hours of 3 and 4, there are also some significant moves that take place. Trade throughout the morning session if you only have an hour or two to dedicate to the market.
When day trading futures, one of the best times to trade is around the market’s opening. Because there is always some level of trading activity in active futures, the prospects for profitable day trading often begin a little bit sooner than they do in the stock market.
Pay attention to the trading that takes place between 8:30 and 11 am Eastern Standard Time. The official closing of futures markets can occur at a variety of different times, but the final hour of trading generally presents opportunities to profit from significant price movements.
During the week, trading in the foreign exchange market occurs nonstop at all times. The most commonly traded currency pair during the day is the euro to dollar. When the London markets are open, normally the trading volumes for this currency pair are at their highest between the hours of midnight and noon Eastern Standard Time. As a general rule, the most significant price shifts occur between the hours of seven and ten in the morning Eastern Standard Time (EST), when both the London and New York markets are open for business.
Practice Your Strategy
Practice your trading strategy on a demo account before you invest real money in whatever market you want to trade in. This enables you practice all day if you wish, even while the market is closed. No two days are the same in the markets, thus it takes practice to be able to spot the trade setups and be able to execute the transactions without hesitation. Practice for at least three months and get to the stage where you can consistently make a profit before you transfer to live trading.
A day trader’s job is to locate a repeating pattern (or that repeats sufficiently to make a profit) and then exploit it.
Most traders observe a decline in performance when they go from demo trading to live trading.
Demo trading enables you experiment and find out if your strategy is a good one. It can’t mimic the actual market. It also doesn’t produce the emotional upheaval many traders encounter when they put actual money on the line.
Hence, if you find that your trading isn’t doing very well when you start to live (relative to the demo), realize that this is natural. Stick with your plan, avoid trading emotionally, and you’ll gradually see your results increase.
Avoid the Penny Stocks
When you are first beginning as a day trader, you will want to hunt for attractive offers. Penny stocks may look tempting because of their low prices. However they can be difficult to trade fast, which makes them a lousy choice for day trading. They may also be suddenly delisted from major stock exchanges if their price drops too low. Unless you are a very skilled day trader, you should avoid these stocks.
Strategies for Day Trading
When you’re selecting whether or not to buy an asset, you will want to look at three variables.
- Liquidity helps you to enter and exit a stock rapidly and at beneficial pricing. Greater liquidity means more ability to buy and sell at a profit.
- Volatility is how much the price of an asset will move on a particular day. Greater volatility equals more potential profit, but also more danger.
- Trade volume is how many trades of an asset there are in a day, which reflects how much demand there is for an asset. A higher trade volume suggests there is more interest in that asset.
Knowing when to quit a position in order to generate a profit is also a vital aspect of effective day trading. You will want to investigate different tactics for when to sell assets to locate the appropriate one for you.
1. Trading the news: Good or negative news regarding a country or stock can produce great volatility in the market, which can lead to high profits and losses. If you employ this method, you will short sell when news is negative and buy when it is good. After you’re more experienced, you may be able to predict global and economic developments and, for example, sell before terrible news is announced.
2. Scalping: Scalping is a trading method that makes use of minor price gaps in the bid-ask spread. To do this, you’ll need to enter a position and quit it fairly immediately, usually within a few minutes or even seconds.
3. Contrarian investing: If you anticipate that a rising price will eventually reverse and collapse, you can utilize this method. You will buy when prices are decreasing and sell when they increase.
4. Following trends: If you think that trends will continue, you will want to follow them. You will buy when a price is increasing and sell when it is falling if you think it will continue in the direction it is already moving.
While you practice in your demo platform, experiment with these diverse tactics. You’ll find the one that works best for both your trading style and risk tolerance. Many day traders may utilize a combination of these tactics, depending on the behavior of the market and the type of assets they are trading in.
Is Day Trading Like Gambling?
Trading during the day exposes one to the possibility of incurring financial loss. No matter how well thought out your strategy is or how well prepared you are, sudden shifts in the market could cause you to lose a significant amount of money despite your best efforts.
Due of this, it can be helpful to think about day trading as being somewhat analogous to gambling when you are just getting started in the industry. Never risk more money than you can realistically afford to lose.
In point of fact, the majority of individuals who participate in day trading wind up incurring financial losses. They don’t have a good enough strategy to manage the ups and downs of the market, they don’t spend enough time practicing, and they don’t understand the dangers that are involved.
It is imperative that you get an understanding of risk management before moving on any further. Day traders need to keep their risk under control in two different ways: trade risk and daily risk.
Trading risk refers to the amount of money that you are willing to lose on any individual trade. In a perfect world, you should only risk one percent or less of your whole capital on each trade. This is accomplished by selecting an entry point and then establishing a stop-loss, which will allow you to exit the transaction before it goes too far against you if you set it up correctly.
You should be aware of how to calculate the appropriate position size before trading stocks, foreign exchange, or futures. The size of the position you take has an effect on the level of risk you are exposed to. No one transaction should expose you to more than a one percent loss in capital when taking into account the size of your position, the price at which you entered the market, and the price at which you intend to cut your losses. 10
In the same way that you don’t want a single trade to cause a significant amount of harm to your account (which is why the 1% rule exists), you also don’t want a single day to ruin your week or month. As a result, limit the amount of weight you lose each day.
You also have the option of putting it at 3% of your total capital. If you are only willing to risk 1% on each trade, you will need to experience a losing streak of at least three transactions in order to incur a loss of 3%. If you take a thoughtful approach, you shouldn’t have to deal with that very frequently. After you reach the limit for the day, you should stop trading for the day.
If you have reached a point where you are routinely profitable, you should set a daily loss limit that is equivalent to your usual winning day. For instance, if you frequently make $500 on winning days, you are allowed to lose $500 when you have a losing day.
This is because you have earned the right to do so. You should exit the market if your losses exceed that amount. The reasoning for this is that we want to limit the amount of money that we lose on a daily basis so that it may be quickly made up for by a typical winning day.
Best Apps for Day Trading Beginners
It is not ideal to day trade using an app on your smartphone. The majority of day traders have multiple windows open so they can multitask and take in more information. Trying to recreate that experience with a smartphone would be extremely challenging, if not downright impossible.
Yet, there are applications that might be of assistance to you throughout the day trading procedure. Some programs, for instance, may let you set up price alerts whenever a certain price is reached. Some will let you swap tiny quantities while you’re just starting out. Consider downloading these useful apps if you’re just starting out:
Moomoo is a mobile trading app that does not charge commissions, making it a more affordable platform for traders who are just beginning their careers in the financial markets. A number of features, such as advanced charting, tools for research and analysis, and free quotations up to Level 2, are included in this product.
Stock Alarm gives you the ability to set alerts for numerous assets, which can speed up the process of executing transactions and responding to unexpected fluctuations in the market. Stock Alarm gives you this ability. You have the ability to define alerts for over 10,000 distinct assets, and you can base those alerts on over 50 different attributes.
You can trade forex, futures, stocks, and options using the TD Ameritrade mobile brokerage program. TD Ameritrade is a mobile brokerage service. Additionally, it enables access to markets all around the world. You are able to carry out trades whenever you choose, five days a week, thanks to the platform’s accommodating scheduling.
Because Robinhood makes it possible for anyone to get started in day trading, this platform could be useful for novice traders. Its no-fee platform and zero-dollar starting requirement make getting started with it more affordable. But, you should still take your trades seriously, never invest more money than you can afford to lose, and spend some time perfecting your trading strategies before you start.
It’s possible that your brokerage firm has a mobile app for smartphones that includes charts and other capabilities, but you should expect such features to be limited. The vast majority of day traders will want to make use of detailed charts in order to acquire the most comprehensive information possible.
Frequently Asked Questions (FAQs)
Can I day trade cryptocurrencies?
Due to the high degree of volatility in the cryptocurrency (crypto) market, day trading may prove to be a fruitful endeavor in this sector.
In the same way that you would for any other kind of day trading, you should spend some time learning, practicing, and developing a strategy before engaging in day trading with cryptocurrency.
At the moment, cryptocurrencies are not subject to the same kinds of regulations that are placed on options and stocks. This indicates that there are no restrictions placed on their day trading.
What exactly is meant by “pattern day trading”?
Pattern day traders are those who open and close a deal on the same day at least four times every week, according to the definition provided by federal legislation.
For day traders who engage in pattern trading, additional regulations, such as a $25,000 minimum equity requirement, are applied to their accounts. 5 They also have access to additional leverage for day trading, which is one of the exclusive rights they have.
What type of trading is most appropriate for someone just starting out?
Day trading is not something you should consider doing if you are completely inexperienced in financial markets and investing in general. Invest some time in educating yourself about the stock market and building a portfolio for the long term by purchasing shares of stock, mutual funds, or exchange-traded funds (ETFs) (ETFs).
You may also put that time to better use by educating yourself on day trading and building up your self-assurance in your abilities to engage in trading and investing.