In a world where everyone has easy access to online trading, what investor has not dreamed of becoming a day trader—being his/her own boss, working comfortably at home, and watching the profits roll in? Alas, while many dream, few actually succeed. Learning how to day trade is difficult and the success rate for day traders is estimated to only be around 10%.

So if 90% are losing money, how could anyone expect to make a living at it? Well, old legends die hard, and the one that says "day trading is a snap" goes back to the early years of online trading. During the heyday of the tech bubble in the late 1990s, day traders made easy money buying and selling Internet stocks. It didn't take much skill to succeed in that heady time. In just a 17-month period, from October 1998 to March 2000, the Nasdaq Composite Index skyrocketed from roughly 1,344 to an all-time high of around 5,132, so all a trader had to do was ride that rising tide. Other, savvier souls made just as much shorting the index on its way down to a low of about 1,108 in October 2002, (a 78% decline in value in 31 months).

Of course, once the bubble had fully deflated, the easy money dried up. Many of those who had profited in the go-go days soldiered on briefly – and then looked for other work. They discovered that day trading, like any other profession, requires education and skills to make a consistent living at.

But it can be done. And here's a checklist to keep in mind when learning how to become a day trader.

What is a Day Trader?

But first, let's define our terms. A day trader actively buys and sells securities, often at multiple times during the trading day (hence the name). A pure day trader buys and sells stocks or other investments and ends the day in cash with no open positions; all buy/sell positions have been squared-off by the time the market closes. Others, technically called active traders, fudge a little, holding a position overnight or for several days (a maneuver called a swing trade). Most day traders use both approaches, depending on their trading style and the nature of their investments. They also use leverage to increase their intraday trade exposure. The point is, they differ from investors who buy and hold securities; they are not investing for the long term.

The Right Mindset

Along with certain skills, one's mindset is the most important (and the very first) requirement in becoming a day trader. Are you adept with mathematical analysis, have a head for financial knowledge and are aware of behavioral psychology (in yourself as well as others)? Most of all, do you have the stomach for entrepreneurship? Contrary to the perceived notion of an easy life or easy money, day trading actually requires:

  • long working hours
  • little time off
  • continuous self-education with no guidance
  • risk-taking abilities

Day Trading Tips

Not scared off yet? Great. Here's a step-by-step plan on what beginners need to learn and do to start day trading.

1. Get the Right Equipment

Day trading requires a professional software platform and a reliable high-speed Internet connection. While it's possible to design and build your own trading platform, most traders use a prepackaged setup provided by their brokerage or a specialized software company. It's best to have a powerful desktop with at least two monitors, and preferably four to six. You need multiple screens to display the charts and technical indicators that will provide your buy and sell signals.

When you use a brokerage platform, ensure that real-time news and data feeds are included in the package. You'll need that data to construct charts that expose trends and portray the time frames and trading strategies you want.

Day trading usually involves frequent transactions, which result in high brokerage costs – so research different brokerage plans carefully. If you intend to play with only one or two trades per day, then a per-trade basis brokerage plan would be appropriate. If your daily trading volume is going to be high, go for staggered plans (the higher the volume, the lower the effective cost) or fixed plans (unlimited trades for a fixed high charge).

Apart from trade execution, a broker also offers other trading utilities which include integrated trading solutions like option combinations, trading software, historical data, research tools, trading alerts and charting applications with technical indicators. Some features may be free while some may come at a cost, which can eat into your profits. Novices should generally start with the lowest-cost, basic brokerage package that matches their initial trading needs, and later opt for upgrades to other modules when needed.

2. Arrange Sufficient Capital

Trading requires sufficient capital to take advantage of leveraging fairly large positions. Intermittent and extended losses are part of the day trading game (for example, a day trader may suffer eight loss making trades in a row and only recover with profit on the ninth trade). Most traders make their money on relatively small price movements in liquid stocks or indexes with mid to high volatility. You need price movement to make money, either long or short.

Besides, unless you can buy several hundred or more shares of a stock, you won't make enough money on trades to cover the brokerage commissions. The lower the price of the stock, the more shares you'll need to gain sufficient leverage and total price movement.

So, a day trader must start out with a cushion of capital. Entering the trading world with only a small amount of money is a sure path to failure. Before quitting your job to trade full time, some recommend having at least $100,000 for trading. Novices can start with smaller amounts, depending upon their selected trading plan, frequency of trading, and other costs they bear.

3. Understand the Markets and the Instruments

Aspiring day traders need a solid foundation of knowledge about how the markets function. From simple details (like exchange trading hours and holidays) to complex ones (like the impact of news events, margin requirements, and allowed tradable instruments), a trader needs to have a wide knowledge base.

You need to thoroughly understand all the types of trading instruments, too. Stocks, futures, options, ETFs, and mutual funds all trade differently. For example, traders should know how margin requirements for futures, options, and commodities significantly impact trading capital or how an interim assignment or exercise of an option position can shatter a trading plan completely – and lead to losses.

Familiarity with securities and market fundamentals isn't enough to succeed as a trader, however. You should understand technical analysis and all of the tools used to dissect chart patterns, trading volume and price movements. Some of the more common indicators are resistance and support levels, moving average convergence/divergence (MACD), volatility, price oscillators and Bollinger Bands®.

4. Develop a Day Trading Strategy

Learning and understanding how these indicators work only scratches the surface of what you'll need to know to develop your personal trading style. Hundreds of books have been written about day trading; Trade Your Way to Financial Freedom by Van Tharp and The Psychology of Trading by Brett N. Steenbarger are two well-regarded ones You can also take classes online or in person.

The key to successful trading is developing techniques to determine entry and exit points. Most traders develop a style that they stick with, once they are comfortable with it. Some only trade one or two stocks every day, while others trade a small basket of favorites. The advantage of trading only a few stocks is that you learn how they act under different conditions and how movement is affected by the key market makers.

Novice traders can begin by selecting at least two established trade strategies, which act as backups for each other. One can move on to more strategies (with more complexities) later, as the experience builds up. Remember that the trading world is highly dynamic: A certain strategy can make money for long periods, but then begin to consistently fail. One needs to be ready to adapt, customize, dump, or substitute it depending upon the developments.

5. Integrate the Trading Strategy into a Trading Plan

Selecting the right trading strategies alone is not sufficient to succeed in the market. The following considerations need to complement the strategy, to come up with an overall trading plan:

  • How the strategy will be used (entry/exit strategy)
  • How much capital will be used
  • How much money per trade will be used
  • Which assets will be traded
  • How frequency to place trades

Let’s say you have $100,000 as trading capital and an excellent trading strategy that offers a 70% success rate (seven trades out of 10 are profitable). How much should you spend on your first trade? What if the first three trades are a failure? What if the average record seven profitable trades out of 10) no longer holds? Or, while trading futures (or options), how should you allocate your capital to margin money requirements? Effective money management can help you win even if there are only four profitable trades out of 10. Practice, plan, and structure of the trades according to a money management and capital allocation plan.

6. Do a Test Run

Once the plan is ready, try it out with fictional trades. You can simulate it with virtual money on a test account (most brokers offer these). Or, you can back test the strategy using historical performance data. For the most realistic assessment, don't forget your brokerage costs and subscription fee for various utilities.

Refine the process and find what works for you. Only then should you put real money on the line and start actively trading the markets. Experienced traders define what constitutes a trading setup and the pattern and indicator combination they want to see before pulling the trigger. They rarely deviate from those setups in order to maintain focus and keep their emotions at bay.

Once you enter a position, stops should be placed to get you out of that position when a specified loss threshold is reached. If a trade is going the wrong way, hope and prayer will not help turn it around. Exiting the trade frees up your capital to redeploy to another more promising trade. You want to exit losers as soon as possible and ride the winners as long as they're profitable.

7. Start Small

Even if you have sufficient money and sufficient experience, don’t play big on the first trades of a new strategy. Try it out with smaller amounts and increase the stakes after tasting success. Remember, markets and trading opportunities will remain forever, but money, once lost, may be difficult to re-accumulate. Start small, test to establish, and then go for the big ones.

The Bottom Line

The limited percentage of day traders who have managed to be successful do so by investing their time and efforts into building their own trading strategies and by following them religiously. A day trader is on his own in this big trading world: You have to be prepared to make split-second, unemotional decisions based on information that is sometimes incomplete, contradictory and changing by the second. A winning strategy may involve executing many trades in one day, while avoiding the trap of overtrading and running up huge commissions.

Day trading is not for the faint of heart. But if you learn the ropes and set realistic goals, it can be profitable—and even fun.

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