Day trading refers to buying and selling securities in short periods of time, rather than holding onto them for years at a time. You purchase an asset when the price goes down, then sell it off when the price goes back up.
Day trading takes skill if you want to make rather than lose money. There's 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.
- Day traders use different strategies to decide which assets to buy and sell. Some may be very active while others may trade once a day.
- You can begin trading forex for as little as $500 or futures for as little as $1000.
- Develop a successful strategy by practicing in a demo account before you begin using real money to buy and sell assets.
- Day trading involves high levels of risk that you must learn to manage if you want to be successful.
Day Trading Basics for Beginners
If you're a day trader, you don’t care if the overall market moves up or down. You're looking at the individual assets that you want to trade. As long as the stock market is moving up and down, you can make money.
Some day traders are very active. They may make dozens of trades over the course of the day as they buy and sell securities. Other traders may make just one trade in a single day. What you end up doing will depend on a variety of factors, including how prices are moving on that day and your overall trading strategy. Most day traders will use price charts to decide when to execute a trade, which is then done through a brokerage account.
A pattern day trader executes four or more "day trades" within five business days.
Day trading is complex and can be emotional, especially if you think you're going to lose money. Because of this, you shouldn't begin day trading casually. It isn't a quick way to get rich. But you also won't need to invest in years of preparation. You'll want to spend three to six months preparing and developing a strategy. You'll need to learn:
- How trades work
- When to buy and sell
- Common strategies for day trading
- How to read a price chart and recognize patterns
- How to limit your losses on a trade
Once you've had several months of practice and feel confident in your strategy, you'll be ready to begin trading with real money.
How Much Can You Make As a Day Trader?
Day trading isn't a way to get rich quickly, but it can be very profitable if you take it seriously. How much money you can make as a day trader varies widely because it is based on so many factors, including:
- Your experience
- How disciplined you are in your trading strategy
- How well you limit losses
- The amount of money you start trading
There is also a difference when talking about private day traders who are trading their own money compared to those who work for a bank or a hedge fund. Salaried day traders aren't spending their own money, so their income is more consistent. The average salary for a day trader was $80,081 in February 2022, though many may receive bonuses or commissions on top of that base amount.
How to Start Day Trading With $500 or $1,000
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.
Start Day Trading With $500
If you want to get started day trading with $500, you can do that on the foreign exchange market. This is also known as the forex market.
On the forex market, you're trading currencies such as the euro and U.S. dollar (EUR/USD). You can open an account here with as little as $100, but beginning with a little more is recommended. If you're beginning with only $500 and want to see what happens, this is a good place to start.
Start Day Trading With $1000
The futures market doesn't have a legally defined minimum equity requirement, but brokerages set house minimums. Depending on the brokerage you choose, you may be able to open an account and get started for as little as $1,000.
There is a wide assortment of futures available to trade. These are often based on commodities such as crude oil or gold. They may also be based on indexes such as the movements of the S&P 500.
Day trading stocks requires at least $25,000, making this a more capital-intensive option. Because it requires more capital up front, day trading stocks might not be a good choice if you are a beginner.
What You Need To Start Day Trading
Once you know what you'll be trading, you'll need a few basic tools to get started.
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 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 placing trades or if 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, you may notice your trading platform isn't updating as quickly as it should. If your internet goes down a lot, it may be worth paying a little more for a more reliable provider or faster connection.
A Trading Platform
Download several trading platforms to try out. Since you are a beginner, you won't have a well-developed trading style yet. Pick a few options from the one 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 many 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.
Tips for Day Traders
After you know what you'll be trading and have your tools set up, it's time to start practicing, planning, and developing a trading strategy. Below are a few tips to help you get started and manage the risk that comes with day trading.
When your first start day trading, begin with smaller amounts of money that you can afford to lose. For example, you may want to begin with $500 or $1000, depending on the type of trading you have chosen.
Many day traders lose money when they first start out, so you don't want to risk losing money that you need to pay your basic living expenses. It can also be stressful and lead to bad decisions if you see money that you can't afford to lose disappearing. By starting small, you limit your losses and make it less likely that you'll trade unwisely in response to those losses.
Use Limit Orders
A limit order lets you set a specific price for buying or selling. A limit order to buy will be executed at the limit price or lower (so you don't pay too much). A limit order to sell will be executed at the limit price or higher (so you don't lose too much).
You set the order up through your brokerage. When the stock reaches the price you set, the trade is executed automatically. This can keep you from experiencing high losses.
Don't React Emotionally
It can be easy to get emotional and react thoughtlessly to either good or bad news when you are day trading. But this can lead to unwise decision making. Instead, stick to your strategy when deciding to either buy or sell. Logical decisions are more profitable in day trading than emotional ones.
Time Your Trades Correctly
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. Which hours you'll want to focus on will depend on what you are trading.
- 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 per 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. 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.
Practice Your Strategy
No matter which market you trade, use a demo account to practice your trading 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 and get to the point where you can consistently make a profit before you switch to live trading.
A day trader's job is to find a repeating pattern (or that repeats enough to make a profit) and then exploit it.
Most traders notice a deterioration in performance when they switch from demo trading to live trading. Demo trading lets you practice and find out if your strategy is a good one. It can't mimic the actual market. It also doesn't 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. Stick with your strategy, avoid trading emotionally, and you'll eventually see your performance improve.
Skip the Penny Stocks
When you are just beginning as a day trader, you will want to look for good deals. Penny stocks may look attractive because of their low prices. But they can be difficult to trade quickly, which makes them a bad choice for day trading. They may also be suddenly delisted from major stock exchanges if their price drops too low. Unless you are a very experienced day trader, you should avoid these stocks.
Strategies for Day Trading
When you're deciding whether or not to buy an asset, you will want to look at three factors.
- Liquidity allows you to enter and exit a stock quickly and at advantageous prices. More liquidity means more ability to buy and sell at a profit.
- Volatility is how much the price of an asset will fluctuate on a given day. More volatility means more potential profit, but also more risk.
- Trading volume is how many trades of an asset there are in a day, which indicates how much demand there is for an asset. A higher trading volume means there is more interest in that asset.
Deciding when to exit a position in order to make a profit is also a key part of successful day trading. You will want to consider multiple strategies for when to sell assets to find the right one for you.
- Trading the news: Positive or negative news around a country or stock can create high volatility in the market, which can lead to high profits and losses. If you use this strategy, you will short sell when news is bad and buy when it is good. Once you're more experienced, you may be able to anticipate global and economic announcements and, for example, sell before bad news is announced.
- Scalping: Scalping is a trading style that makes use of small price gaps in the bid-ask spread. To do this, you'll need to enter a position and exit it almost immediately, usually within a few minutes or even seconds.
- Contrarian investing: If you assume that a rising price will eventually reverse and fall, you can use this strategy. You will buy when prices are falling and sell when they rise.
- Following trends: If you think that trends will continue, you will want to follow them. You will buy when a price is rising and sell when it is falling if you think it will continue in the direction it is already going.
As you practice in your demo platform, experiment with these different strategies. You'll find the one that works best for both your trading style and risk tolerance. Many day traders will use a combination of these strategies, depending on the behavior of the market and the type of assets they are investing in.
Is Day Trading Like Gambling?
Day trading comes with a risk of losing money. No matter how sound your strategy is or how much you've practiced, unexpected swings in the market can cause you to lose large amounts of money. Because of that, when you're just starting out, it can be helpful to think of day trading a bit like gambling. Don't use any money that you can't afford to lose.
In fact, most people who get into day trading end up losing money. They don't understand the risks, don't spend enough time practicing, and don't have a solid enough strategy to manage the ups and downs of the market.
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 the size 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.
Best Apps for Day Trading Beginners
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.
However, there are apps that can help you with the process of day trading. For example, some apps will allow you to set price alerts. Others will let you trade small amounts when you're just starting out. Some helpful apps for beginners to consider are:
- Moomoo: Moomoo is a mobile trading app that doesn't charge commissions, making it a less expensive platform for traders who are just starting out. It offers a variety of tools including advanced charting, tools for research and analysis, and free Level 2 quotes.
- Stock Alarm: Stock Alarm lets you set alerts for different assets, which can help you execute trades and respond to unexpected changes in the market quickly. You can set alerts for over 10,000 different assets and base them on more than 50 parameters.
- TD Ameritrade: TD Ameritrade is a mobile brokerage app that lets you trade forex, futures, stocks, and options. It also offers access to international markets. The platform allows you to execute trades 24 hours a day for five days of the week.
- Robinhood: Robinhood allows anyone to begin day trading, so it can be helpful for beginners. Its no-fee platform and $0 minimum make getting started less expensive. You should still, however, take your trades seriously, not invest money that you can't afford to lose, and spend time practicing your trading strategies before you begin.
Your brokerage may offer a smartphone app with charts and other features, but these will often need to be simplified. Most day traders will prefer to use detailed charts to get the most comprehensive information available.
Frequently Asked Questions (FAQs)
Can I day trade cryptocurrencies?
The cryptocurrency (crypto) market has a lot of volatility, which can make it a profitable place for day trading. Before day trading crypto, you should spend time learning, practicing, and developing a strategy just as you would for any other type of day trading. At the moment, cryptocurrencies aren't regulated the way that options and stocks are. This means there are no day trading limits on them.
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.
What type of trading is best for beginners?
If you are brand new to investing and the stock market, day trading may be too risky for you. Take some time to learn about the stock market and develop a long-term portfolio by investing in mutual funds, stocks, or exchange-traded funds (ETFs). You can also use that time to learn about day trading and work up to more confidence in your trading and investing ability.