Day trading sounds like a tempting proposition, after all, who wouldn’t like to be successful and make decent money trading just a few hours every day. Day traders close their positions each day, so no overnight worries, right? The reality of the situation is not so simple and careful consideration is warranted before you can entertain the notion of taking up day trading. If you are just starting out, making a living as a day trader is months away in the best-case scenario. The first year can be rough, there will be lots of ups and downs, and realistically your first goal should be to hold on to your money and not lose everything. If you still consider day trading a good idea, here are some things you need to do to ensure yourself a good chance of success.
Create a Strategy
Day trading is serious business and not something to approach impulsively. Achieving success requires a rational and well-tested method that will give you a statistical edge on the trades you make. A good starting place is monitoring live charts. Watch how the price of a certain asset moves and keep the following questions in mind:
- When would you enter a position (get into the trade)?
- When would you exit the position in case you are gaining value?
- When would you exit the position in case you are losing?
- How much money are you willing to risk on the trade?
- What size position would you take (how many shares, futures contracts, or currency lots)?
- What are the chances of your trade being profitable?
The best course of action to answer those questions is sticking to the same method time and time again and observing the results of your trades.
There are different approaches to forming strategies. Some traders rely on the fundamental approach (a method that attempts to gauge the real value of an asset) and will focus on news or company-specific events, while others adopt a more technical approach and will, for example, analyze price action and the history of an asset.
Practice is essential to do anything well and day trading is no exception. When you take up something new, a job, a sport, even a hobby, it is usually a good idea to put in some practice hours before expecting good results.
With day trading, where your hard-earned money is on the line, the stakes are high and practice plays an even bigger role, and yet this is an aspect of trading that most newcomers neglect.
By now you have probably already browsed the internet looking for a broker, a step we will address later on. Many online broker sites nowadays offer practice or demo accounts. You should take advantage of that opportunity before you risk your actual money in live action. Open an account and practice methodically. Stick to the strategy you have created and rehearse trading day by day. You will soon notice that every trade differs slightly from the previous one. Today the market might be slow and steady, while the next day conditions will be volatile and the prices swinging.
It is also a good idea to stay the course and practice only the strategy that you have set. You should know it inside out before switching to live trading to avoid second-guessing yourself and making poor decisions when your actual capital is involved and the pressure is rising.
Take some time, put in the hours, and only consider opening a live trading account once you have been profitable in practice environment for a couple of months.
Goals and Limits
One of the first things to lay out when you contemplate starting day trading is a goal and some limits. Ask yourself what you want to achieve, is your current financial situation in order, and whether you have extra funds that you can invest.
Setting a goal will help you evaluate your strategy and measure your success in the long run. If your finances are unstable at the moment, delay opening a live trading account until you have it under control. Even if you feel you have enough practice hours under your belt, it can take months or a year before you consistently earn money with day trading, and that is assuming you trade regularly. In the meantime, buckle down and practice your trading strategy.
Another thing you have to consider is how much spare time you can dedicate to trading. Balancing a day job with logging in trading hours in not so easy, and quitting your job is a bad idea until you are absolutely positive you can turn a profit and sustain yourself with day trading.
You will need capital to engage in any kind of trading activity, and how much capital you have and the way you manage it will directly influence your income. Governing bodies impose legal trading capital requirements to protect novice traders from irresponsible behavior and these numbers vary from country to country and instrument to instrument. Before you start trading, you should know how much capital you will need, both legally and otherwise, to trade in a certain market.
To day trade stocks in the US you will need $25.000 in your account, but to give yourself a buffer it is recommended you start with at least $30.000. Entering and exiting positions in the same day with less than $25.000 will get your account flagged, which means you could lose trading privileges.
There is no legal minimum in forex trading, but there might be one imposed by your broker. A balance of less than $500 dollars will usually mean you are limited on how many trades you can make, and the recommended sum to generate an income worth withdrawing is at least $5.000. The range of capital to successfully day trade futures spans from $2.500 to $10.000.
Pick a Broker
By the time you are ready to open an account and start live day trading, you have probably already considered which broker you will choose. If nothing else, you should at least have opened a demo account. You will need a broker to make trades, so take your time, research the field, and don’t settle on the first choice, after all, it is an important decision. A good broker should have a good reputation, great execution, competitive fees and responsive customer support. Best brokers for day trading are:
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