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Day trading is definitely not for the faint of heart. It requires $25,000 of free liquid capital, time, discipline and a courageous attitude. If you’re interested in entering the arena and taking the challenge, then you should read the whole day trading guide before you get started.

#1: Positive Mindset

First, you need the right mental approach. Some days you’ll feel invincible, while others you’ll feel like you can’t throw a penny in the ocean.

Day trading will become one of the biggest challenges in your life. So what should you think about before you get started?

Set Realistic Day Trading Goals

While many trading gurus tout 100%, 200% or 500% gains per year, it’s not the norm. Don’t get dazzled up by irrational advertising. Set a realistic goal.

For example like outperforming the S&P 500 average yearly performance. If you can beat a passive index, you’re already ahead of the game.

Give Your Account Time to Grow

Don’t stare at your account balance. It’s easy to day dream about how you’re going to spend an unrealized gain, only to watch the profits get washed away.

Know from the start, until you cash out, the money is not yours. In day trading things can change from one second to the other.

Aim to Win in the Long Run

Prioritize long term capital growth over short term profits. When starting out, there will be a lot of bumps in the road.

Instead of fixating over gains, focus on better decision-making, spotting trends more quickly and avoiding past mistakes. Day trading is about short term profits. But only the accumulated profit counts in the long term.

See Also: Day Trading for Beginners – The Ultimate Guide

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#2: Learn Technical Analysis

To perform at your best you need to increase your knowledge. That’s the same as any other profession. Day trading is mostly based on technical analysis. When learning how to start investing money, you should consider getting used the major chart types, trading patterns and indicators.

Chart Types

Line Charts

Line charts are the simple price charts you see most often. They plot the price history of a particular stock. The line you see below is based on the closing price of each trading day.

For day traders the price history of a line chart does not contain enough information. Instead of line charts, most day traders use bar charts and candlestick charts.

line chart s&p 500

Bar Charts

A bar chart extends the data. It plots a stock’s open, high, low and close for each day. Graphically, it’s a long vertical bar, with small horizontal bars sticking out at the various data points.

bar chart s&p 500

Candlestick Charts

A candlestick chart is a variation of a bar chart. It plots the same open-high-low-close as a bar chart but has a thick ‘body’ in the middle which is color-coded. A green body represents a positive close for the stock, while a red body represents a negative close.

candlestick chart s&p 500

Trading Patterns and Indicators

Technical analysis is all about support and resistance. If you plan to buy a stock, then you aim to enter at a well-supported price level, but you will try to sell at a resistance level.

Technical indicators and chart patterns can help you to identify those zones of support and resistance. Along with those factors, you should have a close eye on liquidity, volume, volatility and the float of a stock.

See Also: How to Find Low Float Stocks

#3: Brokerage Costs

This is extremely important. The last thing you want is an unreliable broker costing you money.

When it comes to commissions, most brokers offer discounts to highly active traders. Don’t settle for the standard rate. Shop around for the best possible deal. Remember, a dollar saved is a dollar earned when it comes to learning how to save money.

For example, if you are paying $2.50 per trade of a futures contract, then you are paying $5.00 every time you open and close a trade.

If you do that 10 times a day, you just spent $50 regardless of whether or not you make any money.

If you are trading stocks, it’s quite common to see this be something more like $4.95 per trade.

That means that by the time you made a day trade buying and selling one position, you just spent $9.90. So 10 trades for the day, suddenly means you have spent $99!

Transaction costs are one of the biggest challenges for day traders. Since your trade frequency will be reasonably high, you need to keep the costs per trade as low as possible.

Think of it this way: if you have a rough day in the markets, and only make $25 in total profit before trading costs, and use the $4.95 per trade figure, you have actually lost $74 (+$25 – (10*($4.95*2))). Even though you are profitable based on trade activity, your broker took all of your profits and much more.

You should also realize, that you need at least $25,000 in your account to day trade. Once your account balance falls below $25,000, you cannot day trade freely any longer.

Your trade frequency will be limited to <4 trades per 5 trading days. The SEC implemented this rule in 2011. Click here to read the SEC interpretation about Pattern Day Trading and the margin rules for day trading.

Additional Brokerage Costs

Web-based trading platforms are free to use in most cases. However, professional trading software platforms also come into play, and not all are free.

As a day trader, you need a professional platform with accurate market data. In many cases, you will have to pay for the trading software and the market data feed. For example, stock market data from the NYSE or Nasdaq.

Sometimes those costs get waived if you trade a lot. Do your research before you open your brokerage account. And one more word of caution.

Brokerages outside the United States allow you to open an account with less than $25,000 today to trade. Think twice before you consider doing that.

The SEC has implemented the $25,000 minimum to protect you! Now continue reading this day trading review with #4, the importance of speed.

#4: Speed of Execution

When day trading, a moment hesitation can be the difference between a profitable trade and hours of regret. Furthermore, if your order takes too long to get to the exchange, then your order may end up executed to a bad price.

You need a broker that executes trades at the best possible price by sending your order as fast as possible to the stock exchange.

The difference between the price you aimed for and the executed price is called “slippage”. You have to avoid slippage under any circumstances.

Let me give you an example:

You found a great broker, and you pay him 1 cent per share for each transaction. However, your broker is slow, and most of your orders end up with a slippage of 5 cents per trade. This way you lost 6 cents per share with one click.

In day trading, speed is everything, so the faster you are, the greater your potential profits.

As a result, you need a broker with low latency. The latency represents the time between when you place a trade and when it finally executes. You also need a fast internet connection and great infrastructure.

What is the best solution? Here are some tips:

  1. Before you open an account, start with a paper trading account or trading simulator instead. This protects you and gives you enough time to learn day trading.
  2. Once you are ready, go with one of the market leaders in this segment and do not open an account outside the United States.
  3. Use LAN instead of W-LAN because any outage can cost you thousands of dollars.
  4. Make sure to have at least 2 monitors attached to your trading PC.

#5: Limit Your Potential Losses

#5 is the final part of this day trading guide. Before you start day trading, make sure you implement a diligent risk management plan.

1% Rule

Day traders often apply a 1% rule to each position. It means you only risk 1% of your bankroll on each trade. The number is negotiable, but whatever you decide, make sure you stick to it.

If you opened an account with $30,000, then each trade’s risk is a maximum of $300! The best way to archive this is by setting a stop-loss.

Stop-Loss

As a day trader, you must work with a stop-loss.

Let’s assume that you just bought 100 shares of AAPL stock for $200 each. Your investment is $20,000 at the moment your order got executed.

Based on your example above, your maximum risk on that trade is $300. So you have to limit your potential loss to $300. You can do this by placing a stop order $3 away from your entry price. In our example at $197. In case that the stop-loss gets hit, you lost 1% of your capital.

If you do not set a stop and the stock drops, for example, $10 to $190, then you would lose $1,000 just in one trade, which is not acceptable. Cut your losses short and let your profits run. However, never forget to take profits.

You can use the same strategy when investing in index funds and not just individual stocks.  Always remember to use this risk mitigation strategy, no matter the investment targeted.

Take Profits

Taking profits requires the same discipline as implementing a stop loss. Your entry and exit point will never be the best possible one. You must take profits when they’re available.

The average profit you aim for should be higher than the maximum average loss. This way you make money even if half of the trades fail.

Day Trading Guide – Summary

Let’s sum it up. A positive mindset, low brokerage costs, high-speed trade execution, loss limitation and learning technical analysis from scratch reflect the five most essential aspects in day trading.

Be prepared to invest at least 12 months in education and marked studies before putting real money at risk. Day trading is one of the most challenging ways of making money.

It is not simple, easy nor suitable for anybody. Statistics say that more than 90% of day traders fail.

Day trading is not your path to unlimited wealth. But it is an excellent addition to your long-term investments on your path to financial independence.

There is no shortcut. Trading tools give you an edge. Trading educators may help you to understand market behavior faster.

However, every beginner should start his or her journey with free tools and a stock market simulator. The reason for this is simple.

No money will be put at risk, and you learn a lot about day trading during the time studying the markets on your own.

I know, this day trading guide is different compared to all those clever marketing illusions about day trading out there. I am sure that you would like to belong to the 10% of day traders who succeed. For that reason, you are obligated to make rational steps.

After all, who tells you that day trading is suitable for you?  You must find out that on your own.

Once you start making money, you can reinvest the capital made. Until then, stick with free resources like trading tools, stock chat rooms, YouTube videos and paper trading accounts.

 

About the Author

Alexander writes at daytradingz.com, a day trading blog that helps aspiring day traders to make the right decisions right from the start.

About the Site Author and Blog

In 2018, I was winding down a stint in investor relations and found myself newly equipped with a CPA, added insight on how investors behave in markets, and a load of free time.  My job routinely required extended work hours, complex assignments, and tight deadlines.  Seeking to maintain my momentum, I wanted to chase something ambitious.

I chose to start this financial independence blog as my next step, recognizing both the challenge and opportunity.  I launched the site with encouragement from my wife as a means to lay out our financial independence journey and connect with and help others who share the same goal.

Some of my favorite things to discuss include investing in index funds, how to save money, travel hacking with help from the Reddit churning (r/churning) community, house hacking and optimizing the benefits of my condo vs. apartment living, and tax topics like the earned income tax credit, common tax deductions,  tax reform in 2018, or other useful tax topics.  I want this to be a journey for us all to learn how to make a lot of money and pursue the lives we want.

Disclaimer

I have not been compensated by any of the companies listed in this post at the time of this writing.  Any recommendations made by me are my own.  Should you choose to act on them, please see my the disclaimer on my About Young and the Invested page.

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Join the discussion 4 Comments

  • Bernz JP says:

    I used to day-trade many years ago (late 1999-early 2001). It was so darn stressful and decided that it was not for me. Expect to lose sleep the fact that you need to get up like 4 am just to get the feel of the market before it opens and staying up late at night doing stock research. I was young and motivated and just like the other daytraders, I thought I can beat the market. I made a little money day-trading but all the stress and anxieties that come with the process was not worth it for me (my2cents). I am more of a longterm stock investor now and I am liking it this way.

    • It’s not something I’ve truly had success doing. I dabbled early in graduate school with trading and made some money with it. However, I knew these returns wouldn’t last. It was around this time my approach changed to buy and hold individual stocks. Only in the last 3 years have I adopted the passive ETF strategy. It is by far the least stressful and has been shown to lead to more desirable results.

  • fehmeen says:

    I’ve heard of people making a decent living post retirement by simply day trading but they play with a lot of money to begin with. When you make a few cents per share, you need a lot of shares to get any tangible benefit. Then there’s the transaction fees and commissions that one has to absorb and it leaves me wondering if day trading is more beneficial for the broker rather than the actual investor.

  • Rasheed says:

    Excellent guide form top to bottom. Can’t blame people if they are having negative thoughts in trading cause it is risky. Understanding Charts is essential in trading so that you can keep track of the stock. I like how visible our chart is other people have complicated charts on their articles which I really don’t understand. I use Fx Leaders in using live charts it’s also has a mobile app that has push notifications.

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