How To Become a Day Trader | Invest 101
Players in the stock market are often divided into two categories: investors and traders.
While technically both are engaged in investing activities, it is the duration that tends to be the biggest dividing line. Investors often have longer time horizons, sometimes holding positions in equities for years. Towards the other end of the spectrum lie day traders.
If you are interested in becoming a day trader, here are a few things to keep in mind:
- What is a day trader?
- Why you might want to become a day trader.
- What are the risks of day trading?
- Requirements for day trading.
- How to be a successful day trader.
What is a day trader?
Strictly speaking, a day trader is someone who opens and closes positions during the trading day instead of keeping them longer. Over the course of a day, trading times can vary widely – including durations of a minute, an hour, or several hours.
Rather than focusing on the fundamentals of a business, day traders pay more attention to technical charts of what the stock price is doing right now and how the price has behaved historically in the past. certain conditions.
For example, a day trader might buy a position in a bankrupt company simply because there is an uptrend on a given day, says Gust Kepler, CEO of trading software company BlackBoxStocks (ticker: BLBX).
Why you might want to become a day trader
People tend to be drawn to day trading because they see a friend making money, says Nigam Arora, CEO of The Arora Report.
Those who are successful by the day can earn more by working a few hours a day from home on their laptops in the morning than they would with a 40-hour-a-week job, Kepler says.
“It can be very profitable for people who are learning to do it,” he says.
What are the risks of day trading?
While there are day trading success stories, the reality is that most people fail.
Kepler estimates that only about 15% of people who try day trading are successful, and he thinks that number is probably high because as a trading software provider he is able to see many successes.
Arora places the number much lower, claiming that maybe 1% to 2% are really successful.
If you trade long positions in stocks on a daily basis, the risk is that “you will lose all your money,” says Arora. “If you are try to bypass the market, you can lose even more; your downside risk is unlimited. “
Day traders run the risk of not making enough money to cover the additional transaction costs associated with a higher trading volume.
“Academic studies of day traders around the world consistently find that the vast majority of day traders fail,” says Robert Johnson, professor of finance at Creighton University. “The central message was that trading is dangerous for your wealth.”
There can also be psychological risk in day trading if it is combined with a gambling mentality that can lead to addiction. High-risk gambling and stock trading cause a surge of dopamine in some people. When the incentive becomes the dopamine-induced rush itself, investors become players in the stock market.
“Day trading is no more likely to make you rich than roulette or a blackjack table,” says Aaron Sherman, president of Odyssey Group Wealth Advisors. “And just like gambling, the more you do it, the more likely you are to lose.”
Requirements for day trading
If you want to start day trading you will need a brokerage account. Brokers are individuals or businesses who charge for the execution of trades on behalf of their investors.
Day traders are likely to go the DIY route and may prefer an online brokerage account or a discount brokerage that allows investors to buy and sell securities through the broker’s website or app.
The brokerage may also offer a trading platform that displays real-time news, allows traders to view technical charts, and provides analysis that shows which stocks are making the biggest moves.
Some platforms allow investors to place transactions online directly with a brokerage house for a fraction of the traditional cost or nothing, depending on the asset traded.
Discount or online brokers for DIY investors include Charles Schwab Corp. (SCHW), Fidelity Investments, TD Ameritrade or E-Trade. Examples of full-service brokers include Raymond James Financial (RJF) and Edward Jones, to name a few.
Once you have a broker, to be considered a model day trader by the Financial Industry Regulatory Authority, or FINRA, you will need to fund your account with $ 25,000 and complete at least four open and closed within five business days – and these transactions must represent more than 6% of your total business activity for that period. This is regardless of the brokerage’s account minimum, which can be zero dollars, but only applies to clients who trade less than day traders. There are also special margin requirements for model day trading accounts to consider.
However, this big chunk of change can be to your advantage as a day trader. If you can afford to buy higher priced stocks, or larger chunks of low priced stocks, you can make more money and get more bang for your buck when it comes to transaction costs.
If you don’t want to keep a balance of $ 25,000, you will need to complete three or less stock transactions in five days with the same broker, trade in an international market, join a day trading company that requires a smaller deposit, open multiple accounts with different brokers or trade currencies, futures or options.
How to be a successful day trader
Perhaps the most important skill set to have in day trading is the right temperament.
Successful day traders are level-headed, able to follow the rules even when money is at stake, and good at pattern recognition, says Arora. Day trading also takes a lot of discipline, Kepler adds, and even those who are well educated can find themselves overtrading instead of stopping when they are ahead.
If you feel you’ve got what it takes, then you’ll want to educate yourself. There are plenty of free online trading resources out there, not to mention the books in the library, so do your homework if you are thinking of paying money for trading lessons.
Once you feel you have mastered the basics, Arora recommends that you start with short term trade in which you hold positions for a week or maybe a few months. Combine these more lenient deadlines with small amounts of money.
If you find that you are successful, try to slowly shorten the time frames until you open and close trades on the same day.
Once you are established as a true day trader, you will spend time researching promising technical patterns and stocks that are moving a lot, up and down. You can browse the headlines to see what’s moving the market or individual stocks.
Because you might be watching the news and data sheets for multiple stocks, indices, and other transactions, you’ll probably want to have a home office with multiple computer screens, not to mention reliable high-speed internet access.
At the end of the day, however, remember that day trading is very risky, doesn’t work for most people in the long run, and can be best viewed as a hobby for those who are already wealthy.
“Too often investors look at financial news networks 24/7 and have a penchant for action, which is trading,” Johnson says. “Investment success is easier to achieve by making fewer decisions and practicing buy and hold investments. “