A lot of people fall in love with the concept of day trading when they first get introduced to it. They like the idea of making fast-paced trades and making equally fast profits. They also love the reactive side of it versus investing over the long term and sitting on assets.
While that’s all fine and good, you should first know that a very tiny number of day traders end up being successful. It takes a special type of personality to make it, and even then, it’s not guaranteed. Some things are required to become a day trader that you need to know. You then have to learn the basics, the common pitfalls to avoid, and how to formulate a strategy. Let’s take a look at a few things you should know before you become a day trader.
Know what a Day Trader is and Does
The first thing you’ll need to know is what a day trader is in the first place. Day traders specify intra-day trades, hence the name day trader. They are not to be mistaken for active or swing traders who will hold a position for days or weeks or true investors who are in it for the long run.
Day traders will usually bet on movement, whether it’s up or down. They are also more likely to use leverage to maximize their returns.
By definition, a pattern day trader is someone who makes more than 4 trades per day over a 5 day period. It’s very important to know that because the requirements to be a day trader are higher. For one, your account balance should have at least $25,000 in it at all times to be an active day trader. So, this is something you’ll need to keep in mind before you even get started.
You Need to Conduct a Self-Assessment
You also have to look at your life and the realities of day trading to see if they’re even compatible. As a day trader, you might have to stay active all day and give all your attention to trading. You have to be fully committed and there are very few times when you can take breaks. You also need to have some skills and traits to get started.
Math Skills are Essential
If you have horrible math skills, then you will struggle as a day trader. This doesn’t mean, however, that you can’t trade stocks. This only means that you’ll need to delegate to someone who knows more than you. But you still need to understand the basics of investing.
If you want to learn the basics of how to buy stocks, WealthSimple is the way to go. You’ll be able to set a foundation for your investing career and learn all the fundamentals needed. They guide you through your different trading options as well as a few tips on how to trade wisely. They will even invest your money for you in a portfolio of low-cost index funds.
Discipline is Everything
Another trait successful day traders tend to have is extreme discipline. There is an almost infinite number of options available, but only a few of them are profitable. If you have a solid strategy, you could make a handful of trades per day with stop losses already set based on your strategy. This could mean that most of your day will be spent looking at signals and acting according to your strategy.
As a day trader, you’ll need to both refrain from trying to find opportunities where there aren’t and be disciplined enough to act swiftly when true opportunities occur. Traders need to be able to stick to their trade plan no matter what when they’re engaged in one, which requires not only discipline but patience. Which brings us to our next point.
Do You Have the Patience Needed?
Patience is a by-product of discipline, and lack of patience is what ends up hurting so many new traders. Too many of them make the mistake of leaving or entering trades way too soon. In most cases, they may say that their timing was off when they should instead say that their patience was off.
Patience is essential if you want to be able to enter and exit trades at the right time, and according to your strategy. And when the moment comes, you have to act swiftly. Day trading is really a game of waiting, then split seconds of action, then more waiting. So, if you were thinking you’d be making trades all day looking at your monitors reacting to recent news or financial statements, then you have to reconsider your idea of what day trading is.
Are You Adaptable?
However, while you want to be able to stick to a playbook, there are some times when the market and stocks will behave in ways you didn’t expect and where you’ll need to call an audible.
Some people will look at a textbook example of a certain strategy, but it’s never how it truly plays out in the market. Maybe the range is wider or narrower. Or there’s more turbulence and volatility. Or maybe the trend is not as strong as the examples they saw. A good trader needs to have the mental flexibility to look at the price action every morning and adapt their strategies accordingly, i.e. going based on range or trends. This is one of the things that truly separates mediocre and falling day traders from great ones.
What About Your Mental Toughness?
You may already know this, but day trading is definitely not for the faint of heart. There are times when the market will constantly be throwing curves at you, and you have to be able to roll with the punches. Being a day trader also means being able to deal with losing trades as most day traders will encounter one or a few losing trades per day. You can’t feel deflated every time you lose one or your strategy isn’t working.
Being a day trader is really about managing your losses and making sure that your winning trades make slightly more than your losing ones. Successful day traders tend to lose less on their unsuccessful trades and earn more on their winners. In this case, they could still make money even if they lose 60% to 70% of their trades. You then have people whose losses on losing trends are about the equivalent of gains on winning ones. In that case, they may need to win around 60% to 70% of trades to turn a profit. These are two different approaches, but they both imply losing trades. The only question is if you’ll be able to bounce back and trust your plan.
A Few Strategies for Starting Day Traders
If you feel like you have all that it takes to become a great day trader, you will need to start with a good foundation. You need to start learning how to read a candlestick chart, and how to identify basic figures. This is the bare minimum. You can then start looking at technical indicators such as Stochastics and the RSI.
The next step is to get as much knowledge about the stock market as you can. You need to stay abreast of the latest news, keep an eye on interest rates, economic outlook, etc. You need to learn how to read financial statements. You’ll need to understand the true factors that are affecting daily trades, such as overseas markets, futures data, and analyst ratings among other things.
You will also need to set a strategy on how much you are willing to risk on trades. Many advocate spending around 1% to 2% of your account on each trade, but you could go even lower than that. For instance, if you decide to only invest 0.5% of your account on each trade, that’s about a maximum loss of $250 on a $50,000 account.
It’s also important to start small on the amount of trading that you do. If possible, try to stick to 1 or 2 stocks per day. You might have trouble keeping track of the action if you go over that, and that will allow you to learn about patterns and price action better when you can focus on a couple of stocks.
Some brokers will even allow you to buy fractional shares, so take advantage of that. For instance, if Tesla is trading at $450 and you only want to invest $90, many brokers will allow you to buy one-fifth of a share.
And one last thing before we go; make sure to avoid penny stocks at all costs. There are so many things that can go wrong with these, and so little upside. One thing that people don’t realize is that not all stocks are as liquid, and you could very well be stuck with your penny stock with no one to buy. As a matter of fact, many of these stocks will be delisted from major exchanges leaving you with nothing but the OTC market. So, if you’re going to buy, make sure that it’s a sure shot and that it’s backed by solid analysis.
Day trading is not for everybody, and you must understand what it is and isn’t before getting started. With these few tips, you should be able to start your journey on solid grounds.