Day trading simply refers to traders that buy and sell stocks within the same day. Sometimes the asset can just be held for a few seconds or for a few hours. This is done with the hope that the value of those stocks will increase or fall within the short period that they are held and they will make quick profits.
This is a trading method that is associated with a lot of risks but you can easily make a lot of money if you know what you are doing. There are several people who make money online through day trading. With the right knowledge and some amount of capital, you too can make money as a day trader. Simply follow the tips outlined in this article.
- Making profits with day trading
- Becoming a day trader
- From Demo to Live Trading
- Manage Your Day Trading Risk
Making profits with day trading
This method of purchasing and selling stocks within a very short interval of time can easily create great profits for the day trader. On the other hand, it can also lead to losses. Over 80% of day traders lose money at the end of a regular trading day.
Read Also: How to Trade Forex – A complete Beginners Guide
This method of trading has however continued to increase in popularity because there is now easier access to the internet. People are always attracted to any strategy that can help them to make huge profits within a few minutes or hours. It used to be a method that was used only by professional traders and financial firms but it is now commonly practiced by a lot of ordinary traders.
Becoming a day trader
For you to get the most out of your day trading, you need to pay attention to some factors before investing your money. So of them are mentioned below.
Create 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 (available for free) 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 position size would you take (how many shares of stock, lots of currency, or futures contracts)?
- After deciding all this, what are the odds the trade will be profitable? And if you take similar types of trades 100 times, what tendencies does your strategy show?
The only way to answer these questions is by implementing the same method over and over again and monitoring the results. You can create a strategy by finding tendencies in the daily price action of an asset, or you can learn a strategy from someone else.
Practice as Much a Possible
Practicing is key in day trading. Even at a minimum-wage job, the boss usually makes you practice what you are supposed to do before you do it for real. With thousands of your hard-earned dollars at stake, practice is extremely important. Yet, new day traders rarely practice.
To get started, practice in a demo account before you risk a single real dollar. Do so methodically, trading your created or learned 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 is trending, while tomorrow is ranging. If you don’t practice, you may miss trade signals or be inclined to make trades that aren’t part of your strategy.
Practice only the strategy you are working on. Know it well and perfect it. Once you add the pressure of trading real capital, you don’t want to still be thinking about whether you should take a trade or not.
Consider Goals and Constraints
Before you invest time in creating or learning and then practicing a day trading strategy, consider your goals and constraints.
- Do you have enough capital to day trade? If not, wait until you do. In the meantime, you can continue practicing your strategy.
- Becoming consistently profitable takes six months to a year when practicing several hours each day. It will take longer if you do it only intermittently. Are you willing to put in that amount of time?
- Once you are trading live, can you commit to trading two to three hours a day, accounting for your job and other commitments?
- You shouldn’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.
- Are you day trading because you want to quit your job? You will likely have to trade for a year or more to get to the point where you can replace your income by day trading.
Consider all these questions before investing a lot of time or money in learning to day trade.
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 will make because you are trusting them with all of your capital. Look for a broker who balances great execution with customer service, reputation, and competitive fees.
Know the Capital Requirement
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 manage it—will determine your income.
You legally need $25,000 to start day trading stocks in the U.S. To give yourself a buffer, deposit at least $30,000. If you enter and exit stock positions on the same day with less than $25,000, your account will be flagged and you run the risk of losing your trading privileges.
Forex day trading doesn’t have a legal minimum but starts with at least $500. Less than that and you’re limited on the number of trades you can take. If you want to produce a monthly income that’s worth withdrawing, start with $5,000 or more.
To day trade futures, start with at least $2,500, but $7,500 to $10,000 is better. Some contracts cost more to trade than others, but if you plan to trade the common E-mini S&P 500, that range of capital will suffice.
From Demo to Live Trading
Most traders notice a deterioration in performance from when they switch from demo trading to live trading. Demo trading is a good practice ground for determining if a strategy is viable, but it can’t mimic the actual market precisely, nor does it create the emotional turmoil many traders face when they put real money on the line.
Therefore, if you notice that your trading isn’t going very well when you start to live (compared to the demo), know that this is natural.
Manage Your Day Trading Risk
You’ve picked a market, have equipment and software setup, and sometimes know what is good for day trading. Before you even start thinking about trading, you need to know how to control risk. Day traders should control risk in two ways: trade risk and daily risk.
- Trade risk is how much you are willing to risk on each trade. Ideally, risk 1% or less of your capital on each trade. This is accomplished by picking an entry point and then setting a stop loss, which will get you out of the trade if starts going too much against you. The risk is also affected by how big of a position you take, therefore, learn how to calculate the proper position size for stocks, forex, or futures. Factoring your position size, your entry price, and your stop loss price, no single trade should expose you to more than a 1% loss in capital.6
- Also, control your daily risk. Just as you don’t want a single trade to cause a lot of damage to your account (hence the 1% rule), you also don’t want one day to ruin your week or month. Therefore, set a daily loss limit. One possibility is to set it at 3% of your capital. If you are risking 1% or less on each trade, you would need to lose three trades or more (with no winners) to lose 3%. With a sound strategy, that shouldn’t happen very often. Once you hit your daily cap, stop trading for the day. Once you are consistently profitable, set your daily loss limit equal to your average winning day. For example, if you typically make $500 on winning days, then you are allowed to lose $500 on losing days. If you lose more than that, stop trading. The logic is that we want to keep daily losses small so that the loss can be easily recouped by a typical winning day.
Pick a market you are interested in and can afford to trade. Then, set yourself up with the right equipment and software. Choose a time of day that you will day trade, and only trade during that time; typically the best day trading times are around major market openings and closings.
Read Also: Make Money Online Through Stocks Trading
Manage your risk, on each trade, and each day. Then, practice a strategy over and over again. You don’t need to know everything to trade profitability. You need to be able to implement one strategy that makes money.
Focus on winning with one strategy before attempting to learn others. Hone your skills in a demo account, but realize that it is not exactly like real trading. When you switch to trading with real capital, a bumpy ride is common for several months. Focus on precision and implementation to steady your nerves.
