Ever considered becoming a day trader? It is easier than ever to start trading on the exchanges in 2023, and there are around 1.5 million day traders in the US.
The good news is that you don’t need an in-depth knowledge of economics. Knowing what causes inflation or how the GDP figures are created is not necessary for trading success. The bad news is that succeeding at day trading is hard work. If you rush into it before making the right preparations, you’re quickly going to lose all of your money.
Defining day trading
Essentially, day traders buy and sell securities multiple times in a day, but don’t carry over any open positions to the next day. All positions are closed out before the market closes, which differentiates day traders from active traders and investors, who hold positions for longer, while leverage is a key part of day trading. To be a successful day trader requires many attributes, but the starting point is self-awareness.
You might like the idea of working from home and earning a lot of money, but that isn’t enough to become a successful day trader! It takes a certain set of attributes to succeed:
• Detailed knowledge of the markets.
• Strong math skills.
• Understanding of behavioral psychology.
• Ability to work long hours.
• Complete commitment.
• Ongoing willingness to learn.
• Risk tolerance.
• Calmness under pressure.
If you believe you have these qualities, then you may be able to succeed. But knowing your strengths is only the starting point.
Prepare your resources
As a day trader, you won’t be consistently generating profits. There will be some losing days and plenty of losing streaks within those days. To be able to ride out these losses, you will need a large enough cushion of capital that you don’t have to worry about being wiped out.
How much capital you need will depend on what markets you are trading in, but up to $100,000 total capital may be necessary, and ideally, a balance of $25,000 in your day trading account.
You should also carefully choose the broker that you will be using for your trading. There are many brokers available, and a range of plans, features and costs. Take time to study these brokers and assess which will be the most cost-effective.
Make a plan
A day trader without a plan is doomed to fail. When you’re putting together your plan, the first thing to consider is your trading strategy.
1. Trading strategy
A trading strategy is a specific set of instructions for trading. Experienced traders have multiple strategies, but novices can start with just two or three. Your strategy should cover these elements:
• How much capital will you use?
• What are your entry and exit points?
• How much money will be risked per trade?
• What assets will you be trading?
• How frequently will you place your trades?
Over time, strategies can become less effective, so you need to have an awareness of multiple strategies and approaches in order to successfully adapt.
2. Know the markets
You can’t hope to succeed as a trader without knowing how the market you are trading in operates. Your study should consider the following aspects:
• Characteristics of the securities you will be trading.
• Trading hours.
• How news events can impact the market.
• Margin requirements.
Read as much as you can, take your time to understand any concepts that seem strange to you, and don’t consider yourself ready to start trading until all these details are locked down.
3. Money management
Money management is vital to day trading. Money management involves working out the answers to a number of questions that can ensure you maximize your capital:
• What is your strategy’s expected success rate?
• What is your capital?
• How much should you risk on each trade?
• How should you respond if your first four trades fail?
• If trading futures, how should you allocate capital for margin money requirements?
In short, when you are day trading, no eventuality should come as a surprise. Your planning should ensure that 99% of the time, you are able to calmly respond to events and pursue your strategy.
4. Testing and practice
The final step is to put your strategy into practice, using a test account. These will be available at most brokers and enable you to trade using virtual money. Some traders also “backtest” their strategies on historical data. Either approach is fine, as long as you test your strategies thoroughly before you start trading for real.
Day trading is not a shortcut to riches. It requires an enormous investment in terms of time, effort and initial capital. You will be working alone, so self-motivation and the ability to be honest with yourself are essential qualities. Take your time to assess whether day trading is right for you, read and learn as much as you can, and ensure that you never trade with money that you cannot afford to lose.