Why are there just a few successful asday traders in a society when everyone has simple access to internet trading? After all, what investor hasn’t fantasized of being a day trader—working from home, being your own boss, and seeing riches stream in? While many people strive, just a few are successful.
- Day traders actively engage with the market, employing intraday strategies to profit off quick price changes in a given security.
- To become a day trader, you must be sure to be well-enough capitalized and have access to an affordable and functional trading platform.
- Day trading can be a lucrative undertaking, but it also comes with a high degree of risk and uncertainty.
- A thorough understanding of markets, financial securities, and behavioral finance—along with personal discipline and focus—is necessary for success.
What Does a Day Trader Do?
A day trader buys and sells securities often during the day, but without carrying any open holdings over to the following day. All buy and sell positions acquired during a trading day are squared off before the market closes on the same day. Day traders are distinct from active traders, who may keep a position for many days, and investors, who invest for longer periods of time. Leverage is often used by day traders to raise their intraday trading exposure.
How To Become A Day Trader
1. Conduct a Self-Assessment
A mix of information, abilities, and qualities, as well as a dedication to a lifestyle, are required for successful day trading. Are you skilled in quantitative analysis, well-versed in finance, cognizant of behavioral psychology (in yourself and others), and do you have the stomach for entrepreneurship? Day trading, in contrast to the popular perception of an easy life or quick money, necessitates:
- Long working hours
- Very little leave from work
- Continuous self-learning with no guidance
- Risk-taking abilities
- Never-ending commitment to daily activities of the job
The most critical (and initial) need for being a day trader is the appropriate attitude. Do not attempt day trading unless you are willing to dedicate time, self-learn, and be psychologically prepared to take risks and lose money. Books like Van K. Tharp’s Trade Your Way to Financial Freedom and Brett N. Steenbarger’s The Psychology of Trading are excellent resources for learning more about day trading and doing a self-assessment.
2. Arrange Sufficient Capital
Nobody can continually earn profits. Day trading involves both short-term and long-term losses. (For example, a day trader may lose eight consecutive deals before turning a profit on the ninth.)
A day trader must have a substantial cash cushion to deal with these dangers. Entering the trading industry with just a modest amount of money, as Van K. Tharp highlighted in Trade Your Way to Financial Freedom, is a guaranteed way to failure. Tharp advocates having at least $100,000 in trading capital before leaving your job to trade full-time. Novices may begin with lower sums, depending on their trading strategy, frequency of trading, and other charges. To actively day trade, you must have a balance of $25,000 in your trading account.
3. Understand the Markets
Day traders must have a thorough understanding of how the markets work. A trader must have a comprehensive knowledge base, from basic information (such as exchange trading hours and holidays) to complicated issues (such as the influence of news events, margin requirements, and permissible traded instruments).
4. Understand Securities
Stocks, futures, options, exchange-traded funds, and mutual funds all trade in various ways. Initiating a trading strategy without a good grasp of a security’s features and trading needs might result in failure. For example, traders should understand how margin restrictions for futures, options, and commodities affect trading capital dramatically, or how an interim assignment or execution of an option position might entirely derail a trading strategy.
A lack of awareness about these securities-specific requirements might result in losses. Aspiring traders should get well acquainted with the trading of certain securities.
5. Set up a Trading Strategy
Novice traders who are new to trading should start by picking at least two proven trade strategies. Both would serve as backups for each other in the event of a failure or a shortage of trade possibilities. As experience grows, one may go to a bigger number of tactics (with increasing complexity).
The trading world is a fast-paced one. Trading techniques may produce money regularly for lengthy periods of time but suddenly fail at any point. One must maintain a tight check on the efficiency of the chosen trading strategy and adjust, tweak, dump, or replace it as events unfold.
6. Integrate Strategy and Plan
Choosing the appropriate trading methods is not enough to ensure market success. To develop a trading plan, the following aspects must be included to the strategy:
- The approach’s application (entry/exit strategy)
- How much capital will be used
- How much money will be spent on each trade?
- Which assets will be traded
- How frequently to place trades
7. Practice Money Management
Assume you have $100,000 in trading capital and a successful trading method with a 70% success rate (seven trades out of 10 are profitable).How much money should you invest in your first trade? What if the first three deals go wrong? What if the average performance (seven winning transactions out of ten) is no longer valid? Alternatively, how should you distribute your capital to margin money needs while trading futures (or options)?
Money management assists you in addressing these issues and estimating your future profitability. Even if only four of ten transactions are successful, effective money management may help you win. Practice, plan, and organize transactions in accordance with a certain money management and capital allocation strategy.
8. Research Brokerage Charges
Day trading often entails a large volume of transactions, which results in hefty brokerage fees. Choose the brokerage plan prudently after doing extensive study. A per transaction basis brokerage plan might be ideal if one wishes to dabble with one or two trades per day. If you have a significant daily trading volume, consider staggered plans (the greater the volume, the lower the effective cost) or fixed plans (unlimited trades for a fixed high charge).
A broker also provides various trading utilities, such as trading platforms, integrated trading solutions such as option combinations, trading software, historical data, research tools, trading alerts, and charting programs with technical indicators, among other things. Some features may be free, while others may incur a fee that reduces your revenues.
It is best to choose features based on your trading demands and avoid subscribing to those that aren’t. Novices should begin with a low-cost basic brokerage package that meets their first trading requirements and then upgrade to further modules as required.
9. Simulate and Backtest
When the plan is complete, run it on a test account with virtual money (most brokers offer such test accounts).Alternatively, the method may be backtested using past data. Keep brokerage charges and utility subscription fees in mind when making a reasonable estimate.
10. Start Small and Then Expand
Even if you have enough money and expertise, don’t bet large on the initial trades of a new strategy. Try out a new strategy with a tiny bet and gradually raise the stakes as you gain experience. Remember that markets and trading opportunities will always exist, but money, once lost, may be impossible to recoup. Begin small, test to establish, and then scale up.
The Bottom Line
Websites and seminars that guarantee infallible day trading success or unlimited earnings should be avoided by aspiring traders. The small minority of successful day traders do so by devoting time and effort to developing trading methods and adhering to them faithfully.
In this large trading universe, day traders are on their own. Before quitting your job to become a day trader, be sure you have the will to constantly study, build your trading techniques, and accept responsibility for your choices and actions. If you want to get started with day trading, you may utilize one of the finest stock brokers for day trading.
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