If you’ve dubbed yourself a brand-new day trader and want to know how to start day trading, congratulations! You’ve just entered into a partnership with the unruly animal known as the stock market. However, unmatched risk can offer great rewards.
Learning to control risk and practicing strategies over and over are two of the most important aspects of learning how to day trade. It’s vitally important to practice for months ahead of time.
Realistically, as long as you find one strategy that works (and the trading pattern that accompanies it) you’ll be able to start paper trading—and eventually graduate to earning real money. Just know that when you’re just getting started, it could be six months to a year before you actually turn a profit.
To become a successful day trader, you’ll also need a few tools, including a trading platform on a quick internet speed and a broker—not to mention a concrete plan, too.
Step 1: Decide What You Will Be Trading
In order to pick the best broker for you, it’s vitally important to determine what type of financial instrument you’ll choose to trade. Most people assume that day traders trade only stocks—but the possibilities can also include trading futures or forex, options, derivatives or currencies.
Beginning day traders should pick one—and master that type of market before moving on to others. Many beginning traders believe that you need over $25,000 begin day trading. While you do need over $25,000 to bypass the Pattern Day Trader rule, you do not need $25,000 to actually trade. Traders with under $25,000 will just be limited to three round-trip trades (buying and selling in the same day) within a 5-day period, which is great for beginning traders who need to learn how to choose fewer trades wisely.
Step 2: Find The Best Day Trading Broker For You
Once you’ve determined what you’re trading, it’s likely pretty obvious that you’ll need to look for a broker. Brokers are usually falling all over themselves to attract day traders to their business—after all, frequent trading by you means commissions for them.
However, at times, it’s best to put aside any offers they’re throwing your way and instead, carefully evaluate the pros and cons. Here are a few things to consider in order to identify the best broker for you:
Commissions, margin rates and other expenses could easily eat up any day trader’s profits, as commission costs can certainly reach into the hundreds or even thousands of dollars for high volume traders. Therefore, cost is a major factor when choosing a broker.
The speculative nature of day trading demands excellent research tools. Technical and fundamental research are the backbone of any trader’s craft, and the broker a day trader chooses must have excellent research capabilities.
Make sure you’re getting great charting tools and software. The options are staggering—varying markets, trading strategies and software features—the list goes on and on. That’s why, if you ask ten different traders which trading software they like best, you’re liable to get ten different answers.
For high-frequency traders, execution speed with real-time execution is a must. Any second’s delay could eat into traders’ profits, so the chosen broker absolutely must have a top-notch trading platform that is relatively easy to use.
For brand-new traders, it might be worth it to find out if a broker has paper trading—so you can first practice trading without using your own money. Some traders disagree with that approach, but if you’re nervous to start, it’s a good way to get your feet wet.
Regulation and safety
Be sure that the firm you’re looking into is regulated by an agency with key metrics they are required to follow.
Consider safety and reputation. It’s also an excellent idea to ask questions about security, years in business and the stability of the broker. It might not be the best idea, for example, to choose a brand-new broker based solely on bonus offers.
Don’t forget about good customer service. In an endless search for fast executions, the lowest commissions and knock-your-socks-off platforms, it might be possible to ignore the human element of the equation. If you’re in the middle of a trade and something shorts out on your trading platform, you’d better have a broker who can help. For more specific brokers, check out Benzinga’s Best Brokers for Day Trading.
Step 3: Determine When You'll Day Trade
Be sure to trade during the same time every day. It’s typical that day traders will trade the stock market an hour after the open, 9:30-10:30 EST, or in the last hour before close, 3-4 p.m. EST. It’s been continually noted by day traders that the open and close are the best times to make the most money.
Step 4: Choose Stocks to Trade
Selecting the stocks you’d like to trade can be an overwhelming task, considering the thousands of options available to you. To narrow the field, choose one or two stocks you’d like to trade, and trade them all the time.
Otherwise, you can search for stocks that are performing well on a day-to-day basis. Doing this involves a lot more diligent research on which stocks could perform well. You’ll need to be in tune with the news, and in particular, alerts that will help you determine which stocks will be worth trading the next day. However, when you’re just starting out, it’s recommended to stick to the one-to-two stock strategy until you become a savvy day trader.
Step 5: Set Aside an Amount to Invest
You’ll need to decide in advance how much money you can risk on each trade. It’s recommended that you risk no more than 1-2% of your account per trade and assess the amount well ahead of time. Also, for beginning students in the art of day trading, it’s a really good idea to abstain from trading on margin until you’re comfortable with day trading in general. Brokers don’t allow you to trade on margin for free—and most charge high interest rates for borrowing their money.
Tips for Day Trading
Know the Lingo
The mechanics of day trading are crucial to beginners’ understanding, and unfortunately, can be confusing. Here are a few common terms/ideas to research in-depth before becoming a full-fledged expert day trader:
- Ask: The price a seller is willing to sell for.
- Bid: The price a buyer is willing to buy for.
- Breakouts: When a stock “breaks out” above its previous resistance level
- Candlesticks: A type of chart where each candle represents the high, low, open and close for a given period.
- Covering: Buying back the shares that were sold short.
- Float: The amount of shares available for public trading.
- Gap Up/Down: When a stock opens above or below its previous closing price.
- Going Long: Buying a stock with intentions of selling at a higher price.
- High/Low of Day (HOD/LOD): A stock’s highest or lowest price for the day
- Hard-to-borrow: A stock that is not readily available to short. Brokers will often charge an additional fee to those trying to short hard to borrow stocks.
- Liquidity: The ease with which a stock can be bought or sold without drastically affecting the stock’s price
- Low Float: A stock with a low amount of publicly traded shares, often times experiencing higher volatility
- Market makers: The firms responsible for facilitating buy & sell orders and maintaining liquidity in the markets.
- Market Cap: The total dollar value of a company based on the stock’s price and outstanding shares.
- Outstanding Shares: The total amount of shares issued, including both the float and institutional ownership.
- Profits and Losses (P&L): A portfolio’s gains/losses for a given period.
- Red-to-Green and Green-to-Red: When a stock goes from being up on the day to down on the day (or vice versa).
- Resistance: A price level at which sellers repeatedly overpower buyers, making it difficult for the stock to increase in price.
- Scalp: Taking advantage of very small price changes
- Short Selling: Selling shares of a stock that you do not own in hopes of buying the shares back at a lower price.
- Spread: The price difference between the bid and the ask
- Support: A price level at which buyers repeatedly overwhelm sellers, making it difficult for the stock to drop lower in price.
- Technical Analysis: Analyzing a stock’s historical price action (using charts and technical indicators) to predict future movement.
- Trend: The general direction of a stock’s price movement. A stock can be in an uptrend or downtrend.
Photos and definitions taken from www.speedtrader.com.
Final Thoughts on Day Trading
You don’t have to have huge amounts of money to be a day trader. However, if you’re interested in pattern-day trading, you must have a margin account and you’ll be required to maintain $25,000 equity in order to continue trading.
If your account falls below $25,000, an equity call is issued and the minimum must be restored by cash deposit or other marginal equities. If the day trading call isn’t met within five business days, the account’s day trading buying power is restricted for 90 days or until the margin call is met.