Starting to day trade isn’t a decision to be taken lightly. It is possible to be successful and earn a good living trading only a few hours per day, but that many months away for people just starting out. The first year is tough; there are lots of ups and downs and the only real goal should be not to lose everything. Still interested? If you still want to start day trading, then here are five things you need to plan for in order to put yourself on the right path.
To Start Day Trading, Create/Learn a Strategy
Day trading isn’t something to do on a whim. It requires a sound and rehearsed method that gives you a statistical edge on each trade you make.
Start by watching live charts of an asset move. As you watch, ask yourself:
- How would you get into a trade?
- How would you get out (for both winning and losing trades)?
- How much would you risk on the trade and what would you take (how many shares, lots or contracts)?
- After deciding all this, what are the odds that trade will be profitable, and if taking the trade 100 times what tendencies does the strategy show?
The only way to answer all these questions is by implementing the same method over and over again, and monitoring the results.
A strategy can be created simply by finding tendencies in the daily price action of an asset, or a strategy can be learned from someone else.
To Start Day Trading, Practice a Lot
Practice is key in day trading. To be good at a sport, you practice…a lot! Even at a minimum wage job the boss usually makes you practice what you are supposed to do before doing it for real.
With thousands of your hard earned dollars at stake, practice is extremely important, yet new day traders rarely practice.
. Practice methodically, trading your strategy over and over again. What you will find is that no two trades are ever exactly the same. Today may be volatile, while tomorrow is sedate, today iswhile tomorrow is ranging. If you don’t practice, you may miss seeing trade signals, or be inclined to make trades which aren’t part of your strategy.
Practice only the strategy you are working on. Perfect it, and know it well. With the added pressure of trading real capital, when you switch to live trading, you don’t want to still be thinking about whether you should take a trade or not.
Practice until you have been profitable in a demo account for several months. Only then consider opening a live account with real capital.
To Start Day Trading, Know the Capital Requirements
Capital to a day trader is like inventory to a store owner. You need it to operate, and how much you have, and how you deploy it, will determine your income.
Capital requirements are discussed in the three articles: Minimum Capital Required to Day Trade In summary, you legally need $25,000 to start day trading stocks in the U.S. To give yourself a buffer, deposit at least $30,000.
Forex day trading doesn’t have a legal minimum, but start with at least $500. Less than this and you’re limited on the number of trades you can take. If you want to produce a monthly income, worth withdrawing, start with $5000 or more.
To day trade futures, start with at least $2500. $7,500 to $10,000 is recommended. Some contracts cost more to trade than others, but if day trading the S&P 500 E-mini futures this amount of capital will suffice.
Making an income is possible, but not easy, on these recommended deposit amounts.
Also, check out how much day traders can potentially make in each of the major markets:
To Start Day Trading, Consider Goals and Constraints
Before you invest time in learning and practicing a day trading strategy, consider your goals and constraints.
- Do you have enough capital to day trade? If not, wait till you do (you can start creating and practicing strategies though).
- Day trading takes practice. Do you have several hours a day to commit to honing your skill?
- Once you are trading live, can you commit to trading two to three hours per day, accommodating for your job and other commitments?
- Don’t give up your job until your trading profits replace your income. Therefore, given your other commitments, what time of day can you trade? Is your strategy designed for that time of day? Your strategy needs to fit your life.
- Becoming consistently profitable takes six months to a year when practicing several hours each day. It will take longer if you only put in part-time study/practice. Are you willing to put in that amount of time?
- Are you day trading because you want to quit your job? Trading will likely take a year or more to replace your income (based on capital deposited and performance).
Consider all these questions before investing a lot of time or money in learning to day trade.
To Start Day Trading, Choose a Broker
While you are practicing and developing strategies, choose a broker. This may be the same broker you open a demo account with, or it may be another. Choosing your broker is the biggest trade you make because you are trusting all your capital to them.
Balance great execution with customer service, reputation and competitive fees. For some guidance on picking a broker
Final Word on Getting Started in Day Trading
Day trading takes a lot of time to master. Develop or learn a strategy, and then practice it thoroughly for a number of months until it shows consistent profitability. Consider your own circumstances: do you have enough capital and/or time to trade a live account? If you are profitable demo trading for several months, then switch to live trading with a broker you have chosen based on your research.
Note that many traders struggle with the transition from demo trading to live trading. To minimize these struggles, see
1) Buy Low, Sell High
Sounds so simple right? And yet investing is a rare part of our financial lives where things getting cheaper feels like a bad thing. Few consumers are lamenting cheaper prices at the pump amid the collapse in oil prices over the last year and a half, yet a moderate market fall is treated as the death knell for the bull market.
These are facts that are not mutually exclusive: the current bull market will end, and over almost any long-term horizon have proven to be beneficial investments that generally grind higher.
2) There Is No Such Thing As A Sure Thing
Oil prices at $100 a barrel are here for the long haul; is a world-beating juggernaut that can’t be stopped; is immune to the shifting sands of the cable business and it’s ability to mint money for Disney will never be in doubt. Just three examples of story lines once taken as gospel that have been shot full of holes.
A word to the wise: the conventional wisdom isn’t always wrong, but it frequently has terrible timing. Some of the stock market’s best investors over the long term – and their ilk – have placed their biggest bets on companies out of favor or during times of market stress.
While long-term gains for stocks at large have historically been a safe bet, individual companies are inherently riskier.
3) Get Familiar
While some investors might think they have a sixth sense for finding good companies, the rest of us have to do our homework. There’s no better starting point than the regular filings public companies make with the SEC, which are required to detail everything from company finances to potential conflicts and risk factors.
The annual 10-K includes the most information, ranging from quarterly and annual financial numbers to descriptions of business lines and management commentary on growth opportunities and costs. Regulatory filings will also detail any senior management changes, acquisitions, and stock transactions by executives or board members.
All filings for U.S. public companies, and foreign companies that list on U.S. exchanges, can be found online
4) Think Long Term
aren’t the only reason short-term trading is a loser’s game for most investors. Trying to buy or sell shares based on a quarterly earnings report or an economic data point is a game for automated trading platforms, not the average Joe.
Better opportunities come when a stock or sector is dismissed by the market and languishes despite steady economic results that will produce a long stream of profits. Transportation stocks like airlines and railroads have gone through long out-of-favor stretches, only to churn out considerable gains when economic conditions and industry dynamics align.
Years of mismanagement in the airline industry led to a string of bankruptcies in the 2000s, but the resulting merger wave made American Airlines, United Continental and more competitive and poised to benefit from trends like plunging fuel costs.
5) Dividends Are Your Friend
share price dropped from $110.38 to $105.26 in 2015. That’s an 11% decline, but investors who owned the stock all year lost just 3%. Why? Because Apple paid out $2.03 in dividends over the course of the year.
Shark Tank investor Kevin O’Leary is that shows the bulk of the S&P 500’s returns over the years have come from dividends, not price appreciation. That’s why he says he’ll never own a stock that doesn’t pay at least some of its profits out to shareholders
6) There Is No Perfect Metric
Professsional and amateur investors alike have their favorite measures of growth and value, from price-earnings ratios to dividend yields and profit margins. But there is no single number that divides good stocks from bad ones. A stock that looks cheap at 10 times earnings can go to 5 times in a flash, and a flashy tech startup that looks pricey at 3 time sales can easily jump to 6 in a heartbeat.
7) A $100 Stock Isn’t Expensive And A $5 Stock Isn’t Cheap
The price of a single share is not the right number to evaluate when deciding if a stock is a good buy or not. While triple-digit price tags might cost too much for a new investor with limited funds, loading up on 100 $1 stocks isn’t necessarily a better strategy. Think of investing like grocery shopping — there’s a reason you go to the store with a list instead of just deciding what to buy based on price tags.
8) Taxes Can Take A Bite Out Of Your Profits
(Alphabet) — had a great run in 2015, with returns ranging from 34% to 134%, but from a tax perspective any investor who bought last year and eyeing the exits wants them to keep climbing. That’s because the one-year mark is a line of demarcation for the tax man.
Selling stocks you’ve held for less than a year triggers a short-term capital gain, taxed as ordinary income. That could mean kicking back anywhere from 25% to 39.6% to Uncle Sam. But hold those same stocks for at least 12 months and the tax rate drops to 15% for most tax brackets.
9) Know What You Need, And What You’re Paying For
The evolving brokerage industry is a beehive of competition to offer the latest and greatest trading options, but for most investors the basic essentials can be found anywhere.
Make sure you know the type of buy or sell order you’re entering. A market order, for instance, will be executed as soon as possible, whatever the prevailing market price; a limit order by contrast will only complete the transaction within price parameters you’ve established.
10) Take Market “News” With A Whole Shaker Of Salt
The first trading day of 2016 had not shortage of headlines, from a plummeting Chinese stock market to GM’s investment in Uber rival Lyft and the severing of relations between Saudi Arabia and Iran. But is that any reason for U.S. stocks to plunge more than 2.5% (as they did before bouncing off their lows)?
As an investor, the news flow driving day-to-day gyrations in the market should be taken as interesting reading rather than a reason to make or change strategy.