As with starting any career, there is a lot to learn when you're a day trading beginner. Not only will you need to decide what to trade and how much capital you'll need, but you'll have to get the proper equipment and software, determine when to trade, and of course, how to manage your risk.
Here are some tips to steer you in the right direction as you start your journey.
Picking a Day Trading Market
All markets offer profit potential. Therefore it often comes down to how much capital you need to get started. Don't try to master all markets at once. This will divide your attention, and it may take longer to make money. Pick one market so that you can focus your learning. Once you learn to make money in one market, it is easier to adapt to learn other markets. So, be patient.
You may already have a market in mind, but here's the background in a nutshell. It comes down to what you like, but also what you can afford.
- The foreign exchange market, where you're trading currencies such as the euro and U.S. dollar (EUR/USD), requires the least capital. You can get started with as little as $100, although starting with more is recommended.
- Trading certain futures markets may only require $1,000 to get started. There is also a wide assortment of futures available to trade. These are often based on commodities or indexes such as crude oil, gold, or S&P 500 movements.
- Day trading stocks requires at least $25,000, making this a more capital-intensive option.
A pattern day trader executes four or more "day trades" within five business days.
Equipment and Software for Day Trading Beginners
You need a few basic tools to day trade:
Computer or Laptop
Having two monitors is preferable, but not required. The computer should have enough memory and a fast enough processor that when you run your trading program (discussed later) there is no lagging or crashes.
You don't need a top-of-the-line computer, but you don't want to cheap out either. Software and computers are constantly changing, so make sure your computer is keeping up with the times. A slow computer can be costly when day trading, especially if it crashes while you are in trades or its slowness causes you to get stuck in trades.
Reliable, Quick Internet Connection
Day trading isn't recommended with a sporadic internet connection. You should be using at least a cable or ADSL-type internet connection. Speeds vary across these types of services, so strive for at least a mid-range internet package.
The slowest speed offered by your internet provider may do the job, but if you have multiple web pages and applications running, then you may notice your trading platform isn't updating as quickly as it should. If your internet goes down a lot, see if there is a more reliable provider.
A Trading Platform
Download several trading platforms and try them out. Since you are a beginner, you won't have a well-developed trading style yet, so just try a few that your broker offers and see which you like best.
Keep in mind you may change your trading platform more than once within your career, or you may alter how it is set up to accommodate your trading progress. NinjaTrader is a popular day trading platform for futures and forex traders. There are loads of stock trading platforms.
For forex and futures traders, one of the best ways to practice is using the NinjaTrader Replay feature, which lets you trade historical days as if you were trading in real-time.
Your broker facilitates your trades, and in exchange charges you a commission or fee on your trades. Day traders want to focus on low-fee brokers since high commission costs can ruin the profitability of a day trading strategy.
That said, the lowest fee broker isn't always best. You want a broker that will be there to provide support if you have an issue. A few cents extra on a commission is worth it if the company can save you hundreds or thousands of dollars when you have a computer meltdown and can't get out of your trades.
Major banks, while they offer trading accounts, typically aren't the best option for day traders. Fees are typically higher at major banks, and smaller brokers will typically offer more customizable fee and commission structures to day traders.
When to Day Trade
As a day trader, both as a beginner and a pro, your life is centered around consistency. One way to generate consistency is to trade during the same hours each day.
While some day traders trade for a whole regular session (9:30 a.m. to 4 p.m. EST, for example, for the U.S. stock market), most only trade for a portion of the day. Trading only two to three hours per day is quite common among day traders. Here are the hours you'll want to focus on:
- For stocks, the best time for day trading is the first one to two hours after the open, and the last hour before the close. You want to get good at trading between 9:30 a.m. and 11:30 a.m. EST because this is the most volatile time of the day, offering the biggest price moves and most profit potential. Some sizable moves also occur during the last hour of the day—3 p.m. to 4 p.m. If you only want to trade for an hour or two, trade the morning session.
- For day trading futures, around the open is a great time to day trade. Active futures see some trading activity around the clock, so good day trading opportunities typically start a bit earlier than in the stock market. Focus on trading between 8:30 a.m. and 11 a.m. EST. Futures markets have official closes at different times, but the last hour of trading also typically offers sizable moves to capitalize on.
- The forex market trades 24 hours a day during the week. The EUR/USD is the most popular day trading pair. This currency pair typically records greater trading volumes between 1 a.m. and noon EST., when the London markets are open. And the hours of 7 a.m. to 10 a.m. EST typically produce the biggest price moves because both the London and New York markets are open.
As a day trader, you don't need to trade all day. You will probably find more consistency by only trading two to three hours a day.
Manage Your Day Trading Risk
Before you go any further, 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 it starts going too much against you.
The risk is also affected by how big of a position you take, so learn how to calculate the proper position size for stocks, forex, or futures. Factoring in 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.
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.
Practicing Strategies for Day Trading Beginners
When you start, don't try to learn everything about trading at once. As a day trader, you only need one strategy that you implement over again and again. You don't need to know it all. Find one strategy that provides you with a method for entry, for setting a stop loss, and for taking profits. Then, go to work on implementing that strategy in a demo account.
A day trader's job is to find a repeating pattern (or that repeats enough to make a profit) and then exploit it.
No matter which market you trade, use a demo account to practice your strategy. This lets you practice all day if you want, even when the market is closed. No two days are the same in the markets, so it takes practice to be able to see the trade setups and be able to execute the trades without hesitation. Practice for at least three months before trading real capital. Only when you have at least three months in a row of profitable demo performance should you switch to live trading.
From Demo to Live Trading
Most traders notice a deterioration in performance 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.
As you become more comfortable trading real money, increase your position size up to the 1% threshold discussed above. Also, continually bring your focus back to what you have practiced and implement your strategies precisely. Focusing on precision and implementation will help dilute some of the strong emotions that may negatively affect your trading.
- 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 trade and only trade during that time.
- Consider your risk by looking at each trade as well as 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.
Which App Works Best for Beginner Day Traders?
Day trading with a smartphone app is not ideal. Most day traders open multiple windows to take in more information and multitask. It would be difficult, if not impossible, to replicate that experience with a smartphone. Also, a brokerage may simplify charting features or research tools for the smartphone app, but a day trader depends on that extra detail.
What Is Pattern Day Trading?
Federal law defines pattern day traders as those who open and close a trade on the same day at least four times per week. Pattern day traders have extra rules imposed on their accounts, like a minimum equity requirement of $25,000. They also have extra privileges, such as access to more leverage for day trades.
Can You Start Day Trading If You Only Have $500?
Someone with $500 can only day trade in the forex market. With stocks, you will need to meet the $25,000 minimum equity requirement. The futures market doesn't have a legally defined minimum equity requirement, but brokerages set their own minimum, and someone with $500 may struggle to find a brokerage that serves them.