What You Need to Know to Start Day Trading
If you want to start day trading, here are five things you need to plan for
Starting to day trade isn't a decision to be taken lightly. It is possible to be successful and earn a good living trading only a few hours per day, but that many months away for people just starting out. The first year is tough; there are lots of ups and downs and the only real goal should be not to lose everything. Still interested? If you still want to start day trading, then here are five things you need to plan for in order to put yourself on the right path.
To Start Day Trading, Create/Learn a Strategy
Day trading isn't something to do on a whim. It requires a sound and rehearsed method that gives you a statistical edge on each trade you make.
Start by watching live charts (available for free) of an asset move. As you watch, ask yourself:
- How would you get into a trade?
- How would you get out (for both winning and losing trades)?
- How much would you risk on the trade and what position size would you take (how many shares, lots or contracts)?
- After deciding all this, what are the odds that trade will be profitable, and if taking the trade 100 times what tendencies does the strategy show?
The only way to answer all these questions is by implementing the same method over and over again, and monitoring the results.
A strategy can be created simply by finding tendencies in the daily price action of an asset, or a strategy can be learned from someone else.
To Start Day Trading, Practice a Lot
Practice is key in day trading. To be good at a sport, you practice...a lot! Even at a minimum wage job the boss usually makes you practice what you are supposed to do before doing it for real.
With thousands of your hard earned dollars at stake, practice is extremely important, yet new day traders rarely practice.
Practice is done in a demo account before a single real dollar is risked. Practice methodically, trading your strategy over and over again. What you will find is that no two trades are ever exactly the same. Today may be volatile, while tomorrow is sedate, today is trending while tomorrow is ranging. If you don't practice, you may miss seeing trade signals, or be inclined to make trades which aren't part of your strategy.
Practice only the strategy you are working on. Perfect it, and know it well. With the added pressure of trading real capital, when you switch to live trading, you don't want to still be thinking about whether you should take a trade or not.
Practice until you have been profitable in a demo account for several months. Only then consider opening a live account with real capital.
To Start Day Trading, Know the Capital Requirements
Capital to a day trader is like inventory to a store owner. You need it to operate, and how much you have, and how you deploy it, will determine your income.
In summary, you legally need $25,000 to start day trading stocks in the U.S. To give yourself a buffer, deposit at least $30,000. If you enter and exit stock positions on the same day with less than $25,000 your account will be flagged and you run the risk of losing your trading privileges.
Forex day trading doesn't have a legal minimum, but start with at least $500. Less than this and you're limited on the number of trades you can take. If you want to produce a monthly income, worth withdrawing, start with $5000 or more.
To day trade futures, start with at least $2500. $7,500 to $10,000 is recommended. Some contracts cost more to trade than others, but if day trading the S&P 500 E-mini futures this amount of capital will suffice.
Making an income is possible, but not easy, on these recommended deposit amounts.
To Start Day Trading, Consider Goals and Constraints
Before you invest time in learning and practicing a day trading strategy, consider your goals and constraints.
- Do you have enough capital to day trade? If not, wait till you do (you can start creating and practicing strategies though).
- Day trading takes practice. Do you have several hours a day to commit to honing your skill?
- Once you are trading live, can you commit to trading two to three hours per day, accommodating for your job and other commitments?
- Don't give up your job until your trading profits replace your income. Therefore, given your other commitments, what time of day can you trade? Is your strategy designed for that time of day? Your strategy needs to fit your life.
- Becoming consistently profitable takes six months to a year when practicing several hours each day. It will take longer if you only put in part-time study/practice. Are you willing to put in that amount of time?
- Are you day trading because you want to quit your job? Trading will likely take a year or more to replace your income (based on capital deposited and performance).
Consider all these questions before investing a lot of time or money in learning to day trade.
To Start Day Trading, Choose a Broker
While you are practicing and developing strategies, choose a broker. This may be the same broker you open a demo account with, or it may be another. Choosing your broker is the biggest trade you make because you are trusting all your capital to them.
Balance great execution with customer service, reputation and competitive fees. For some guidance on picking a broker, see Tips for Finding a Forex Broker.
Final Word on Getting Started in Day Trading
Day trading takes a lot of time to master. Develop or learn a strategy, and then practice it thoroughly for a number of months until it shows consistent profitability. Consider your own circumstances: do you have enough capital and/or time to trade a live account? If you are profitable demo trading for several months, then switch to live trading with a broker you have chosen based on your research.
Note that many traders struggle with the transition from demo trading to live trading. To minimize these struggles, see Transitioning From Demo to Live Day Trading.