How To Be a Day Trader
Day Trading Education
Just like any other skill, the first thing an aspiring day trader needs to do is educate himself or herself. How can you do this if your goal is to day trade from home? You basically have four choices: Take day trading classes, find a paid trading coach, ask a friend or family member that is a successful trader to be your mentor, or do like I did, learn on your own.
There's no shortage of people willing to teach you how to trade. But, before plunking down thousands of dollars, you might want to do some research into what you're going to be learning and from whom.
What are their credentials? Also, if possible, consider contacting people that have taken the class or used the day trading coach's services. What do they have to say? Was it worth the money they paid? Are they trading well now?
Learning how to be a day trader can be quite different than learning other skills. Why? Because, any skill or business that has the potential to make the kind of money that traders can make is going have a lot of participants that will not freely share their methods for success. Going to a day trading forum and finding solutions to your trading problems is not always going to be as easy as say, going to a gardening forum and asking others how to grow better vegetables. I'm sure experts in that field will have no problem with giving you very helpful information. With trading however, many traders wrongfully feel that if they help you, or show you their way to trade, that some how they'll be negatively effected.
I don't think this is the case at all, unless we're talking about some kind of very unique, small edge that would absolutely be squashed by too many traders using it. Some, like myself feel that most successful day traders are using information that is widely available to the public and has been around for many years. Take for instance the patterns and price action trading strategies on my site. Simple right? But, they keep occurring week after week, year after year. Don't make the mistake thinking that you have to learn complicated techniques to make money. Keep it simple.
One thing many don't understand is, that even if someone were to drop several good trading systems in the lap of 1,000 different people that were trying to become intraday traders, probably at least 800 of them would not make money due to the trading psychology and tolerance for losses that is required of anyone in this business. Also, many of them would've never traded the systems exactly according to the rules. People have a strong tendency to put there own spice into the trading rules of any strategy anyway, so never worry about sharing information. The markets are so large and there's so many different ways for day traders to work it, it simply doesn't matter.
So, if you decide to learn how to be a day trader on your own like I did, what's the best way to get started? Well, in addition to this site of course, I'd suggest reading about classic price pattern analysis and technical analysis. If you care to look, I have a convenient list of titles on my day trading books page. Trading magazines sometimes have interesting info to read, but you'll find they often take you down complicated paths that simply aren't required to make money. Very few of these books were around when I first started trading, so I can't really say that any are required reading.
Really, the best advice I can give you as far as discretionary intraday trading goes, is to keep it simple and not get bogged down with the complications that so many others write about. There's so many different paths you can take while searching for enlightenment in the trading industry, that it can send you into a black hole of confusion. Don't let that happen to you. Again, keep it simple.
A reasonable goal for any trader is to:
- Exploit natural, common price patterns which cause volatility price expansion giving a trader potential for a decent profit.
- Trade with fairly tight stops, so that losses are small when trades don't work out.
- Give winning trades a chance to grow into big enough winners, so they outweigh losers and commissions.
- Use some form of Position Sizing on every day trade.
You can choose to complicate things further if you wish, but is it really necessary? Accomplishing these four goals above is sufficient for a day trader to be profitable.
Day Trading Software, Brokers & Simulators
OK, so lets say you've educated yourself some and you're convinced that being a day trader at home is for you. Where do you go from there? If you want to day trade, you're going to need trading software. Specifically, you'll need a a first class trading platform. Don't settle for any software that doesn't satisfy your requirements. Test drive them all until you find what you you need.
You will also need a broker that specifically serves day traders. You'll find that some brokers have decent trading platforms for intraday trading and others will require you to look for third-party software to satisfy your trading requirements. I provide plenty of high quality resources on my site for your convenience (I do not receive compensation from them).
If you haven't already read other pages of this site, you'll find that one of the things I'm always preaching about to beginners is to practice trading on a quality day trading simulator until you are consistently profitable and have gained enough confidence to ride through several series of losing streaks, which may take at least a month or two, depending on your trade strategies and trading frequency. If you can make it through the simulator phase, then maybe you'll be ready to use real money...but start small, real small. I know some of you won't take this advice, but there it is.
Day Trading Account
A day trader needs capital to trade. How much? It depends on what you want to trade. If it's stocks you want to trade in the U.S.A., then you'll fall under the SEC's pattern day trader rule, which means brokerages will require you to open a margin account with a minimum of usually $30,000. The SEC's rule will require you to maintain a minimum balance of $25,000 in your account at all times. If you go below $25k, your broker will require you to add money to your account in order to place day trades.
Investors, position traders and swing traders hold stocks overnight. Their margin rate is normally 50% of the stock's value. Since day traders do not hold stocks overnight, many brokers allow a margin rate of only 25% for intraday trading. This means that a trader with an account size of $50,000 can trade with 4x leverage, allowing the purchase of up to $200,000 in equities. Does a new trader want to do this? No! A new trader should not use any leverage.
Best Stocks For Day Traders
The best stocks for day trading are ones that allow you buy, sell, short and cover when YOU need to get in or out. Stay away from low volume, illiquid stocks that will cause you unnecessary pain due to large bid and ask spreads or slippage. Consider trading stocks that are components of the S&P 500.
I think you'll be happy with those. ETF's are also quite good for day traders, because of their high volume and tight spreads. Two ETF's that have extremely high volume are SPY and QQQ.
Price Action or Price Indicator Trading?
Generally speaking, home-based day traders can be divided into two main groups. Those that use only price (and sometimes volume) and those that use price indicators, such as MACD and Stochastics, to initiate their trades.
I provide loads of info on this site about both types of trading, but I think you'll find that I'm certainly clear about which camp I belong to.
It's certainly common for a person to start out as one type of trader and evolve to be another. Don't be surprised if that happens to you. You'll eventually find, and it might take years, what type of trader you'll be. It's just a matter of screen time.