More people are trying day trading to gain financial freedom and live life on their own terms, causing its popularity to soar.
Day trading requires time and dedication to master, but with proper information and planning, it’s possible to earn a great living. In this comprehensive guide, I’ll explain the ins and outs of day trading and provide tips on getting started.
What is Day Trading?
Day trading is a type of trading where a position is opened and closed within the same day. For instance, if you buy and sell a stock between 10 AM and 4 PM, it’s considered a day trade. Day traders rely on technical analysis and a strategy to make profits quickly, often using margin to increase their buying power. It’s important to have a well-defined strategy with rules and money management parameters to be a successful day trader.
How Does Day Trading Work?
Day trading involves actively buying and selling shares to profit from short-term price movements in a stock. Day traders seek volatility, as it provides opportunities for profit. Effective risk management is crucial to minimizing losses and maximizing gains. Successful traders establish predetermined entry and exit points to reduce emotional trading and over-management of positions, which can have a negative impact on profitability in the long run.
What You Need Before You Start Day Trading
Before diving into day trading with real money, there are three essential things you should have:
- A solid understanding of day trading terms and technical analysis.
- A profitable trading strategy that’s been tested in the past.
- Become profitable in a day trading simulator (paper money).
- A solid understanding of day trading terms and technical analysis.
Day trading is a challenging skill that requires training and education. It’s like playing a professional sport, where your ability to make money is based on consistent performance. Attempting to day trade without proper knowledge and education can result in significant losses. To gain a solid understanding of day trading terminology and technical analysis, start by reading books and watching videos. However, it’s important to remember that gaining knowledge is just the first step, and practice is necessary to master the skill.
Learning to trade can be challenging due to the abundance of information available, and sometimes the information can be contradictory. This is because the technical analysis or entry and exit requirements that work for one strategy may not work for another. To ensure long-term success, it’s better to focus on learning as much as possible about one strategy that has proven to be profitable, rather than learning a little about many strategies.
While only a small percentage of traders share their trades on social media, I am one of the few who post and document my trades on Instagram. Furthermore, there are even fewer traders who have been able to purchase investment property through their trading profits and share their success with others, but I have accomplished this. Whether you choose to join MTC or seek education from another proven profitable trader, studying is the first step towards learning how to day trade.
If you are interested in learning more, the MTC Incubator includes a Mastermind program with an extensive curriculum that covers everything you need to build your day trading business. In addition, becoming a member of the MTC Incubator offers many other informative resources beyond the Mastermind program. Be sure to read until the end to discover more.
2. A profitable trading strategy that’s been tested in the past.
To become a successful day trader, you must have a strategy that is profitable and has been proven to work. You have two options: you can either develop your own strategy or adopt an existing one that is already being used by other traders.
Creating your own strategy can take a considerable amount of time and effort, as you will need to backtest and refine it for several months or even years before you can start trading with real money. However, some traders prefer to create their own strategy, as it allows them to customize it to their individual preferences and risk tolerance.
On the other hand, many beginner traders choose to master a strategy that has already been proven to be profitable by other traders. Once they have gained enough experience, they may make some modifications to the strategy to make it their own.
Regardless of whether you choose to develop your own strategy or adopt an existing one, it is crucial to have a specific setup, trading system, or methodology that you are comfortable with when you start trading.
Focusing on one specific trading strategy allows you to develop a level of expertise in that area, rather than spreading yourself too thin and not mastering any one approach. While it’s always possible to learn more later on, it’s important to start with one strategy and consistently stick to it until you’ve mastered it. Trying to trade multiple strategies simultaneously can be risky, as it can be difficult to determine which ones are profitable if others are losing money.
At MTC Incubator, we provide a range of trading strategies and discuss them with traders during webinars, but we encourage students to focus on one strategy at a time. This approach allows students to learn about all of the different strategies and then choose which one is best for them, with the opportunity to ask questions during webinars for further guidance.
3. Become profitable in a day trading simulator (paper money).
Having completed several high-quality trading courses, read some books, and followed our daily trading breakdowns, you might believe that you are prepared to start trading. However, the truth is that you are probably not prepared yet. Novice day traders tend to overestimate their abilities, begin trading with actual money, and end up losing.
Comprehending day trading conceptually and effectively responding to opportunities in real-time are two distinct things. This is where practicing becomes crucial. You require a trading simulator where you can rehearse your strategies in real-time until you become comfortable with order entries and trade management. If you cannot make a profit in a trading simulator, then it is highly unlikely that you can make a profit in an actual account! Launching into an actual trading account without any preparation is one of the most detrimental decisions that a beginner trader can make.
Getting Started with Day Trading
To begin day trading, you need to follow these steps:
- Open a brokerage account and deposit money.
- Have a written trading plan and review it every morning.
- Prepare a list of stocks to watch in the morning.
- Stick to your plan while trading.
- Evaluate your trades at the end of the day.
For novice traders, it’s advisable to take it slow and avoid risking a lot of money in the beginning. Trading in a real account is more challenging and emotionally demanding, which can subside with experience.
Lastly, you should consider how much money you need to start day trading.
How Much Money Do You Need for Day Trading?
Your day trading budget is determined by your desired income and initial investment. For instance, if your goal is to earn $100 daily with a starting capital of $1,000, you can purchase 500 shares of a $2.00 stock and wait for it to increase by 20 cents to reach your target. Alternatively, you can choose to trade options and acquire 5 contracts of $2, considering that the stock will move in your favor just enough that the options go up by 10% to earn $100. However, this is just a rudimentary example that doesn’t account for margin. To gain a better understanding of the necessary day trading funds, refer to the video above, which provides more information about margins, offshore brokers, and the PDT rule.
Day Trading with Cash vs. Margin
When it comes to day trading, using a cash account means that you are limited to the cash you have available in your account. On the other hand, a margin account allows you to increase your buying power by borrowing funds from your broker.
Here are the key differences between a cash account and a margin account for day trading:
Cash Account
- Unlimited day trading as long as your funds have settled (typically takes 2 days)
- Trading is limited to the cash available in the account; no margin is available
- Trading with unsettled funds can lead to a suspended account
Margin Account
- If your account balance is below $25k, you can only place 3 day trades within a 5-day period
- Accounts below $25k have 2x buying power, while accounts above $25k have 4x buying power
- You can trade with more shares than the cash available in your account due to the leverage granted
- You can lose more than the cash in your account since you’re trading with borrowed funds.
The differences between a margin account and a cash account are significant, but many day traders prefer margin trading because of its ability to increase their buying power and allow for larger trades. This can make scalping smaller moves more profitable.
Day traders who use margin accounts must adhere to the Pattern Day Trader (PDT) rule, which was introduced by FINRA in 2001 after many retail traders lost significant amounts of money during the dot-com bubble. Here’s a breakdown of the rule:
- PDT rule only applies to margin accounts.
- If you make four or more day trades within a five-day period, you will be labeled a PDT.
- You must have a minimum of $25,000 in your account to continue day trading once labeled as a PDT.
- PDT accounts have four times the buying power for day trading.
- If you violate the PDT rule and make a fourth-day trade, your account will be restricted for 90 days.
In essence, if you have less than $25,000 in your brokerage account, you can only make a maximum of three-day trades within a five-day period. If you make a fourth-day trade, you’ll be labeled a PDT, and your account will be restricted for 90 days. However, once you have at least $25,000 in equity in your account, these restrictions will no longer apply.
It’s worth noting that the regulations and restrictions mentioned in this article are applicable only to traders based in the United States. Canadian traders, on the other hand, are not subject to the PDT rule in Canada. If you are a trader located outside of the USA or Canada, it’s important to research the day trading rules and regulations that apply to your country to ensure compliance.
For beginners, it’s important to start with a simple and effective trading strategy. One such strategy is the trend following, breakout, moving average crossover, and bull flag pattern, which has a high probability of success and is easy to learn.
- Trend following: This involves identifying the current trend in the market and making trades in the direction of that trend. For example, if the market is in an uptrend, you would look for opportunities to buy stocks.
- Breakout trading: This strategy involves identifying stocks that are breaking out of a trading range or price level. Once the stock breaks out, you would look to buy or sell in the direction of the breakout.
- Moving average crossover: This strategy involves using two or more moving averages and looking for a crossover where the shorter-term moving average crosses above or below the longer-term moving average. This can be a signal to buy or sell a stock.
- Bull flag pattern: This pattern is characterized by a strong move upward on a stock with a news catalyst, followed by a high relative volume and consolidation pattern. This consolidation phase appears like a flag on the chart, and once the stock breaks out of this pattern, it’s an indication to go long on the stock.
One of the most important parts of trading: Risk Management
This scenario illustrates the importance of risk management in day trading. Consider a trader who had nine successful trades, with each trade having a $50 risk and $100 profit potential, resulting in a total profit of $900. However, on the tenth trade, the position goes down $50, and instead of accepting the loss, the trader purchases more shares at a lower price to reduce the cost basis. The position then goes down $100, and the trader becomes unsure of whether to hold or sell. Ultimately, the trader takes the loss when it reaches $1,000. Although this trader had a success rate of 90%, they still ended up losing money due to poor risk management. This is a common pitfall for beginners who may have several small wins but allow one significant loss to wipe out all their progress, resulting in a demoralizing experience.
For beginners in trading, it is important to learn how to minimize losses before trying to maximize profits. This means setting a stop loss immediately after entering a position and leaving it alone. It’s not wise to constantly move orders around based on what you think is happening during the trade.
It is essential to understand where your risk is and how much you could potentially lose before entering a trade. This knowledge is crucial not only for trade management but also for maintaining a healthy trading mindset. By learning to play defense and managing risk, traders can avoid the trap of letting one large loss wipe out their progress.
How much can I make as a day trader?
To sum it up, this article offers an introduction to day trading, but it is not a guarantee of success in the markets. Becoming a skilled day trader takes time and dedication, even for the most successful ones. However, there are plenty of resources available to help you learn the ropes and discover different trading strategies.
The question of how many days traders make depends on various factors such as trading capital, skill level, and market conditions. Profits can vary widely, with highly skilled traders making seven figures per year and profitable new traders making anywhere from $200 to $500 per day. If a trader consistently earns $200 per day during the 253 trading days in a year, their annual income would be $50,600, while a profit of $500 per day would translate to an annual income of $126,500.
If you’re serious about day trading, consider joining a free class to gain a deeper understanding of profitable strategies and get started on your trading journey.
