5 Things You Need to Know Before You Start Day Trading

what you need to know about day trading
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There is a lot of hype around day trading. Some websites promote it as a way to get rich quick (it isn't), and others say it is impossible (also not true). There are lots of day traders around the world who find success and make a living off the markets, so the truth lies somewhere in between those two extremes. If you've thought about day trading, it's worth your time to read through this list before you do, so you know a little bit more about what to expect if you decide to proceed.

Time Investment to Day Trade Successfully

Day trading isn't a get rich quick career, nor is something that takes years to gain consistency. Expect to spend six months to a year honing your skills and practicing a strategy before you become comfortable with it in all conditions.

The problem most news traders make is that they don't practice a strategy in a demo account for several months or more. Therefore, they have no idea how a strategy works, and how they need to adapt, in various market conditions. This leads them to abandon the strategy, find something new and start all over again. If you choose this path you will never be successful. Instead, commit to spending six months every day practicing a specific method of trading. With the latter approach, you stand a good chance of becoming profitable and consistent.

Capital Investment for Day Trading

Different markets require different amounts of capital to day trade.

Stocks are popular, but also the most capital intensive. If you want to day trade stocks in the US, the absolute minimum you need is $25,000. And you'll actually need more because you need to keep your balance above $25,000, otherwise you can't day trade.

If you day trade forex you can start with as little as $500 (less is not recommended).

Trading futures you can open an account for a minimum of $1000 with some brokers, but if trading a popular day trading contract like the S&P 500 E-mini you'll want to start with at least $3500, or ideally $7000 or more.

Expected Monthly Income From Day Trading

It's recommended new traders only risk 1% of their account (or less) on a trade. That means if you lose on a trade it has a very small affect on your overall capital balance.

If risking 1% per trade day traders can expect to make between 10% and 30% a month. There may be some losing months as well, and some months that are higher than 30%, but assume that 20% will be your return on average. Depending on how much capital you trade, that gives you your approximate monthly income. Note the more capital you have, typically the lower the percentage return—it's easier to make high returns on small amounts of capital than it is to make the same return on large amounts of capital.

Where was that 20% figure attained? For detailed scenarios on how much you can expect to make, see How Much Can I Make Day Trading Futures, Forex, and/or Stocks.

Keep in mind, these figures are based on having a solid method and having practiced it in all market conditions.

It will likely take six months to a year, or even longer before you can expect these returns on a monthly basis...as the "Time" section above discussed.

Hurdles to Day Trading Successfully, Consistently

Day trading poses a number of hurdles. Mainly, each trading day is slightly different. You need a trading method that works in nearly all market conditions. That doesn't mean you will win every day. On the contrary, even with a great method, you may still lose money four or five days a month, but overall you are profitable (see above). You'll want a method that adapts to market conditions, typically this means you will want to avoid systems that are overly complex, contain lots of indicators or require constant research.

For example, if you want to learn how to day trade stocks consider using a simple price action strategy.

Day traders also face psychological hurdles. There is no guaranteed paycheck, which can weigh heavily when bills are due but your trading isn't going well. This can be a vicious cycle leading to more trading mistakes and worse performance.

Invest in Yourself, Not Software or Gimmicks

Software and gimmicky get rich quick products that promise riches overnight typically have a very short shelf life. They may work for a little while, but ultimately they will fail you unless you know how to make adjustments to the software yourself. Instead of getting suckered into trading product scams you're much better off spending your time and money on your own education.

Read books and articles on trading. Consider mentoring from someone you have followed and who's method you feel would work with your personality and needs. Invest in your own education, not trade signals you pay for each month or expensive subscriptions—these only serve to make you reliant on someone else. Invest in yourself from the start, that way, no matter what happens you have the skills to get the job done, on your own.

Final Word on Day Trading

Expect to put in at least six months to a year before you start to see any sort of profitability and consistency. It may come sooner, and that's a bonus, but don't assume that it will. Day trading stocks require at least $25,000, forex requires at least $500. And for futures, you'll want at least $3500 or more. Focus on simple methods that you can work on and practice yourself. Don't become too reliant on others. In the long run, you are better off investing in yourself and an education that will last forever, not blowing money on signals or gimmicks that offer no long run benefit to your trading career.