Day trading is the dream job for many aspiring investors. You work a few hours a day in your pajamas, live anywhere with a WiFi connection, and retire before you’re 30 – what more could you want?
Unfortunately, reality is slightly less glamorous. First of all, day trading requires two skills most people struggle to master regardless of the endeavor: practice and discipline. Secondly, day trading is risky and most people lose money.
You won’t become a successful day trader by hitting a few early home runs. And you certainly won’t become a successful day trader if you chase every hot stock like a cat who finds a mouse at 3am.
Day traders need to combine the practice habits of a pro athlete with the patience of a Jedi. You won’t get there overnight, but with the right tools and experience, you can make a career out of successful day trading.
How to Day Trade a Small Account
What Is Day Trading?
If you’ve ever opened a position and closed it on the same day, you’ve participated in day trading. Day trading simply means buying and selling stocks within the same trading day while holding no positions overnight.
Most people who call themselves day traders will occasionally use other techniques like swing trading, but most trades will be opened and closed in the same session.
Since day traders are attempting to predict a price shift minutes or seconds before it occurs, technical analysis plays a huge role in day trading strategies. The basics are the same as any type of investing – buy low and sell high.
But technical analysis provides clues as to when that high or low will actually occur and day traders use that information to enter positions.
By leveraging strategies like momentum or gap and go, day traders can be in and out of positions within minutes (or sometimes even seconds).
What You’ll Need to Day Trade
Day trading requires more than just a smartphone with a brokerage account. You need to meet certain capital requirements, find a proper broker, and get the right tools. Before diving in, here’s what you’ll need to get started on a day trading career.
Day traders aren’t the only ones looking for patterns. In late 2001, the SEC and FINRA imposed new rules regarding equity minimums for what they call “pattern day traders”.
Unless you have a minimum of $25,000 in your brokerage account, you’re limited to three or fewer day trades in a rolling 5-day period.
Once you hit three day trades in five days, most brokers will ban you from making another one – which could leave you holding stock overnight when you don’t want to. In order to start your day trading career, you’ll need at least $25,000 in capital (and ideally more since that $25,000 minimum must be maintained every day).
Day trading requires careful planning before executing any trades. What criteria are you looking for today? What strategies are you trying to implement? How volatile is the market?
You’ll need to ask yourself these questions each and every day while developing a trading plan.
And yes, putting pen to paper is critical when devising a plan. Not only will you better retain the information, but you’ll have something close by to keep you on track should a trade blow up.
Trading on tilt is a quick way to erase profits and turn a simple bad day into a margin call. Consult your plan often to keep your emotions at bay.
Direct Market Access
Many brokers have gone commission free now, but that doesn’t mean trading comes with zero costs. Many brokers sell order flow to market makers, who then decide where to send each order out to.
This doesn’t affect a 401(k) saver tapping some mutual funds, but it does affect a day trader who needs pinpoint timing and accuracy to meet profit goals. Direct access brokers allow traders to dictate exactly where and when their order is executed.
You’ll get faster trade execution with smaller spreads. Some great examples of DMA brokers include LightSpeed, TradeStation, and Interactive Brokers.
There’s a difference between a stock screener and a stock scanner. A screener can help you find index funds with low expense ratios or stocks making new all-time highs, but they won’t give you real-time alerts on securities in every corner of the market.
Scanners help take some of the guesswork out of trading by tightly narrowing down the parameters of acceptable stocks. You’re trying to pull a handful of matches out of thousands and thousands of options – you’re eyeballs alone won’t be enough to find the best opportunities.
Ever have a day at work where you just can’t get anything done? Whether it’s nosy coworkers or IT issues, you’re making no progress and would be better off calling it quits for the day.
Day traders get to escape the coworkers, but not the days where nothing gets done. Day trading requires a certain amount of volatility. If stocks aren’t moving, day traders aren’t making much money.
You’ll run into days where the screeners aren’t finding anything decent or the market as a whole just stays flat. This is where discipline is critical – don’t force things that aren’t there!
If you can’t find any stocks matching your criteria, don’t make any trades. Take care of some errands, go for a walk, or just rejoice in the fact that you don’t need to wait until 5pm to leave work.
Steps To Becoming a Successful Day Trader
You probably already have an interest in technical analysis if you want to get into day trading. But knowing how to spot support and resistance levels is merely dipping your toe in the water.
To become a successful day trader, you’ll need an education and a serious amount of studying in order to grasp the following strategies:
- Momentum Trading
- Gap and Go Trading
- Bull Flag Trading
- Reversal Trading
- Pull Back Trading
- Breakout Trading
You don’t need to master all of these techniques, but you do need to understand them. Most day traders hone in on a few specialized trading strategies to prevent over-trading or taking on too much risk.
Once you’ve chosen your favorite strategies, write down your trading plan. This should include the strategies you plan to use, the amount of risk you’re willing to take, and how much you’re willing to lose (or gain) before closing out the trade.
If you’re unsure which technique best fits your style, the Warrior Trading chat room is a great place to watch these strategies unfold in real-time.
Lebron James was born with immense physical gifts, but he didn’t become the greatest NBA player in a generation by simply showing up to the games.
He spent hours in the workout room, took thousands of shots in empty gyms, and sought advice on where he could make improvements.
As a day trader, you need to adopt the same mindset. Practice is critical and that’s why paper trading is so popular. Using a simulator allows you to test out strategies in different market conditions without risking any real capital.
Start out with goals like $200 per day with a 60% success rate and see which strategies help you most. You’ll come to favor some techniques more than others, but that’s good! The route to profits has many different paths and practice is all about finding what works for you.
Practice is helpful and necessary, but it’s still no substitute for the real thing. Paper trading removes some of the emotion behind the process, which is why it’s often easy to rack up paper gains while struggling in live markets.
When you start leveraging day trading strategies in real markets, starting small and scaling up is the ideal way to go. Keep your profit goals in line with your simulator sessions, then scale up once you become comfortable.
A common approach for new day traders is to start with a goal of $200 per day and work up to $800-$1000 over time. Small winners are better than home runs because it forces you to stay on your plan and use discipline.
Sure, you’ll hit a big winner every now and then, but consistency is the real key to day trading. Keep your position sizes in line with your risk tolerance and don’t let your emotions get the best of you.
Day trader is hard, no matter how glamorous the pros make it look. Not only do you need to meet FINRA’s capital requirements, but you’ll need hours upon hours of study and practice to perfect your system.
Plus, Mr. Market tends to make a habit out of humbling even the most patient and disciplined trader.
However, if you want to ditch the desk job and become a day trader, you can make it happen with the right training and techniques. Don’t expect instant success and avoid getting frustrated if you get off to a rough start.
Participate in the chats, educate yourself on the different strategies, and test everything in a simulator first.