A Day Trading Guide for Beginners in 2020
Table of Contents
The popularity of day trading increases at pace, as more and more people seek to achieve financial freedom.
During the 1990s, day trading was a popular side-hustle, but when the dot-com bubble burst, the interest in day trading subsided. Subsequent economic crises and bubbles have led to a resurgence in day trading, especially with many brokers charging zero commission rates.
Whatever your reason for wanting to give day trading a go, you should know that there is an ocean of information available on the subject, as well as a vast community of active traders. It is wonderful to have so many resources to provide help and advice, but the sheer amount of information can overwhelm you.
So, we have produced this guide on day trading to give you essential information and proven techniques to get you started. All of the information we provide you can be backed up by verified broker statements.
Having made over $1,000,000 through day trading, I feel qualified to teach new traders how to replicate this success. To date, I have taught thousands of new traders how to become successful day traders, some of them having earned over $100,000 from what they have learned, and one student reaching $500,000. I feel that these results qualify me to pass on my knowledge of day trading.
Learning the intricacies of day trading takes time, dedication, and practice. The financial world works at a lightning-fast pace, and with the correct information and a suitable plan, it is possible to make a great living from day trading.
This guide takes you on a detailed discovery of day trading, so you will be completely aware of what you are getting into, and how to get started.
What Is Day Trading?
Day trading gets its name because it involves a speculative trade or trades that are opened and closed within the same day. Opening a trade at 9:30 AM and closing it at 4:00 PM is classed as a day trade. However, closing the same trade on the following day, would not classify it as a day trade.
To help them decide which trades to make, day traders typically utilize technical analysis tools and strategies. To increase their buying power, and therefore the potential for higher profits (or losses), day traders frequently use margins to trade.
Successful day trading is not merely about selecting a stock on an ad-hoc basis. It requires strategy, rules, and parameters within which to manage your funds.
How Day Trading Works
The way day trading works is by capitalizing on short-term market volatility (price movements) for buying and selling stocks and shares. If there is no volatility in the market, there is little opportunity to make money. The higher the volatility, the greater the potential for earnings or losses.
As there is a potential for loss and profit, day traders must manage risk and keep their losses smaller than their earnings. Risk management is the crux of day trading; traders are putting their capital at risk to make a profit. Without adequate risk management, it will be incredibly challenging to make money.
Having an exit strategy that you have set before you enter into a trade is critical. Doing this will help remove the emotion from the trade, and you are less likely to over-manage your positions, which will have a negative long-term impact.
Before You Trade Your Own Money
Before you risk any of your own money on day trading, you must do a few things:
- Learn key terminology and technical analysis methods.
- Develop a proven and tested strategy.
- Prove that you can be profitable on a day-trading simulator.
1. Learn Key Terminology and Technical Analysis Methods
Becoming proficient at day trading is challenging, and becoming an expert is a different prospect. An expert in day trading can be likened to a professional sportsperson in that your success is dependent on your performance. Just as training is essential in sport, so it is too in day trading. Without adequate training, you will not be successful, and you will lose money.
Books are a good starting point for learning day trading terminology and technical analysis methods, and there are also plenty of online videos. Don’t become complacent, though, because you watch a video on space travel, it doesn’t make you an astronaut.
The sheer amount of easily accessible information can prove overwhelming, and you will often receive contradictory advice. It is not that one source gives you useful information while another is not; it is due to the nature of the technical analysis. Some analysis will work with a particular strategy; others will work with different approaches.
It is best to become an expert in a single strategy, rather than knowing a little bit about lots of them. Just make sure that strategy is proven and tested.
Look at the person that you are learning the strategy from and assess if they are profitable or not. My guiding principle has always been transparency. I take pride in making all of my trades visible on open platforms such as YouTube. If someone is making bold claims about their profitability without providing tangible evidence, be cautious.
Whether going with my premium classes or choosing another route to learn about day trading, the first steps involve learning. Our courses offer a comprehensive learning package that includes everything you need to develop your successful day trading business. For an insight into what the course looks like, click HERE.
2. Develop a Proven and Tested Strategy
You can choose to develop your own strategy for day trading success, or you can adopt or adapt one that has already shown positive results.
My strategy was two years in development before I was confident it was working. Developing your own may not take you as long, or it might take you longer. You must be prepared for months of testing, refining, and retesting before you risk trading with your own money.
Rather than trying to ‘reinvent the wheel,’ most new day traders tend to opt for an existing profitable strategy. You may choose to use a current strategy as it is, ‘off-the-shelf,’ so to speak, or you may decide to put your own spin on it.
Whichever strategy you end up using, it must provide you with a setup, system of trades, and trading method that you are comfortable with using. An existing strategy will allow you to concentrate on becoming competent rather than spending time on trying different setups.
Maybe when you’ve been trading for some time, you can experiment with other setups. However, the important thing when starting is to pick one that is suitable and stick with it until you have mastered it. Sticking to one will inform you whether or not it is profitable for you, whereas running several strategies at once will add confusion and give you poor feedback on your performance.
3. Prove That You Can Be Profitable On a Day-Trading Simulator
Having done your research and picked a suitable strategy, you may have the feeling that you are ready to give day trading a go. In reality, you are only just getting started in your preparations, and any feelings of confidence are signs of overestimating your ability.
There is a massive amount of difference in understanding the theory behind day trading and executing that theory into profitable trades. The next thing you need to do is practice – a lot!
Practicing on a day trading simulator will allow you to practice your strategy on the actual stocks or that you will when you trade for real. You can test, adjust, and retest your strategy with no risk of losing your money.
A simulator is a place to become proficient in day trading, and if your strategy does not work here, it will not work in real day trading. Trading for real with your own money too early is one of the most common and costly mistakes that new day traders make.
All The Day Trading Tools You Need
To start day trading, you will need the following tools:
- Online Broker
- Chart Platform
Choosing your broker is one of the most significant decisions you will make regarding day trading. It is with your broker that you will entrust your money, they will execute your trades, and charge you a commission. There are various types of stockbrokers, some specializing in specific niches. The following brokers serve the day trading niche:
- Interactive Brokers
- Trade Zero
- Centerpoint Securities
- TD Ameritrade
When selecting your broker, there are a few things that you must consider:
- Trade Execution
- Commission Level
- Chart Platform
The speed of executing your trades is the most critical aspect you need to consider when selecting your broker. When executing a trade, seconds count, and the difference of even a single second can be the difference of catching or missing a move in the market. DMA (Direct Market Access) is what day traders should be looking for from their broker.
Not all brokers provide DMA, and the majority are just middlemen between your trades and the market. These brokers send your order to the market, and your trades can be combined with the trades of other clients. Some of the routes these brokers use for your trades have more or less priority than others,
So, to cut out the middleman, and the delay they cause, make sure your broker gives you DMA. DMA allows you to place a trade instantly, rather than waiting for your broker to place it, and potentially losing liquidity. Lightspeed Trading is one example of a broker that provides DMA.
The sheer amount of trades that day traders make means that commission levels can be the difference between making a profit or a loss over a month. Depending on the size of your position, commissions are based on either per share basis or per trade. The smaller the position, the more sense a per trade commission makes, and the vice-versa for more significant positions.
Per-share commissions tend to be popular with day trading brokers. A typical rate offered to low-capital traders is $0.005 per each traded share. Some brokers have a minimum of $5 per trade, but this generally is not suitable for day traders with limited capital.
The most common commission level is per-trade, whereby you pay a fee for every trade you make. This fee is generally around $5, which, at a certain level of position, is of little consequence.
Whichever commission type you opt for, it is crucial to be aware that the broker offering the best commission level may not be the best in terms of service. For instance, some brokers receive payments from market makers to direct orders to them. This referral leads to delays and results in you losing liquidity on a trade. For this reason, you must have DMA.
Stock Scanners and Stock Screeners
They may sound alike, but there are significant differences between a stock scanner and a stock screener.
Stock scanners are used to scan the market and stream real-time data continuously. Stock screeners provide a static list of stocks, having searched the market according to set criteria.
Stock scanners are essential for day trading, particularly for extremely short-term trades. Stock scanners can scan to as small a timescale as a Tick, or as large as Weeks, updating data in real-time.
Why is a Stock Scanner Essential for Day Trading?
Stock scanners are essential as they will give you an indication of the correct stocks to trade. The right type of stocks are those that are moving due to some sort of catalyst and in sufficient volumes. These stocks are called stocks-in-play.
Trading stocks-in-play means that you have a higher chance of capitalizing on stocks that breakout and trend in the same direction throughout the day. Behaving with this predictability means these stocks give you a higher chance of trading profitability.
There are various stock scanner programs available. Trade-Ideas is a particular favorite of ours, as it can be customized and is a reliable program.
A reliable and stable charting platform allows day traders to view price fluctuations and is an excellent tool for aiding your trading decisions. However, the charting platforms used by many brokers do not match the demands of active day traders. You may have to source your charting platform from a third party if this is the case.
One third-party charting platform supplier is eSignal. They offer a robust, reliable, and comprehensive charting platform software, which is certainly worth considering.
How to Get Started With Day Trading
So, you have done the research, decided on a strategy, and completed comprehensive testing of your strategy on a simulator. If you are consistently profitable, then it is time to start trading for real with a live account.
To get started, you need to follow these steps:
- Open an account with your chosen broker.
- Transfer funds to your account.
- Construct a written trading plan.
- Review your trading plan each morning.
- Make a stock watchlist every morning.
- Trade your plan without fluctuating.
- Review your trades on completion of day’s trading.
Start off trading slowly on your live account. Avoid the temptations of jumping in too quickly and with too much. You can increase the size of your trading positions as you become comfortable with trading your own money.
Trading on a live account is different from trading on a simulator. You may be trading on the same information and sticks, but with a live account, there is a significant emotional factor of trading your own money. These emotions will decrease as you get used to trading your own cash.
Being prudent about your trading on a live account will prevent you from losing all your capital on day one – it has happened!
How Much Capital Is Required For Day Trading?
How much capital is required is a commonly asked question from new day traders. The straightforward answer is that the amount of money you need depends on your day trading goals. Do you want it to be your primary source of income, or is it something that you want to generate a bit of pocket money from?
There are examples of traders opening accounts with $500 that two years later are valued more than $1million. These cases are, by far, the exceptional ones, and most traders will not be anywhere near that successful, even experienced traders.
However, $500 is not a bad figure to start with. You are still testing your skills, so a relatively small amount like this is quite safe. More accurately, the capital you need should be based on how much you want to make per day and how much capital you have to trade with.
For instance, if your target is to make $100 per day, and your trading capital is $1,000, you could buy 500 shares valued at $2 per share. To make your $100, your stock price would need to increase by $0.20, or 10%, which is a considerable increase in a single day.
Of course, this is assuming you are just using your cash to trade. Margin trading will allow you to purchase more stock with your $1,000, but there are risks and benefits with this approach.
Trading With Cash or Using a Margin Account?
As the name suggests, trading with cash means it is only the cash you have on account that you are trading.
A margin account allows you to increase the amount you can buy through leverage or using the margin by borrowing your broker’s funds.
Here are the main characteristics of cash and margin accounts.
- You can trade as much as the amount that is in your cash account.
- Trades get settled within two days.
- You can only trade when your account is settled.
- Trading with unsettled funds can lead to an account suspension.
- Maximum of 3 trades in a five-business-day period for accounts under $25K.
- Increased buying power compared to a cash account
- Accounts under $25K have 2X buying power.
- Accounts over $25K have 4X buying power.
- Trading on borrowed funds.
- Potential to lose more than is in your account.
The majority of day traders tend to trade using a margin account as it gives them the ability to make larger trades. So, scalping gives a better return than with a cash account. However, you should be aware of the risks of margin trading and manage your trades accordingly.
Margin Accounts – Day Trading Rules
The primary rule for day trading is the PDT – Pattern Day Trader rule. What the PDT involves:
- It only applies to margin accounts.
- Making four day-trades in five business days means you are marked as a PDT.
- When identified as a PDT, you must have $25,000 in your account on that day.
- Times four buying power.
The PDT rule was implemented in 2001 by FINRA, following the DotCom bubble bursting, when many day traders suffered considerable losses. The rule restricts traders with less than $25K on account to placing three trades in five business days.
So, a trader with only $15K in their account can only make three trades in a five business-day period. The fourth trade will mark them as a PDT, and their account will have a 90-day restriction imposed. When you bring your account up to $25K, the restrictions are lifted. There are other regulations placed on day traders, but the PDT rule is the most significant.
Ways of Getting Around the PDT Rule
A couple of options exist for getting around the PDT rule. One is to open an account with an offshore broker who is not subject to U.S. regulations. Two such brokers are CMEG and TradeZero. Another option is day trading in futures, which are not subject to the PDT rule as stocks are. This way, you can trade as much as you want, regardless of your broker being in the U.S.
Day Trading Strategies for Beginners
There are many strategies for successful day trading out there, and the one that we feel is best suited to day trading beginners is the big percentage gap strategy.
Key aspects of the big percentage gap are as follows:
- High probability setup.
- High relative volume.
- Strongly moves higher on news-catalyst moves.
- Begins to top out with lots of downside potential
- Lower highs follow.
Big Percentage Gap Reversal Strategy
So how do you adopt the big percentage reversal strategy?
Your first step should be to find a stock that is gapping up pre-market over 50%. Look for one that has a week long-term chart that’s been trending to the downside. So if you have your chart view set to daily chart, you should be seeing a pretty beat up chart that’s been downtrending.
Your next move is to wait until the stock begins to top out, preferably to a much lower volume than the upward trend.
When to Enter. Short when the stock breaks down out of the consolidation pattern with an increased volume.
When to Exit. Place a stop above the top of the pattern.
Trading in this fashion means you can let your trade run, taking profits as it trends in your favor. Your setup should have a reward to risk ratio of 2 to 1, meaning your minimal potential profits are twice those of your stop losses.
Other day trading strategies to consider are the following ones:
- High Percentage Gaps
- Penny Stocks
- Momentum Trading
Whichever strategy you select, you must consider risk management.
Day Trading Risk Management
Here is a scenario whereby a day trader has a successful run if nine trades. Their setup was with a reward/risk ratio of 2:1, so a potential loss of $50, and a potential profit of $100, for example.
The trader’s first nine trades returned them $900. On the tenth trade, however, their position was $50 down. Rather than stopping the loss at that point, the trader’s inexperience led them to buy more of the same stock at the lower price to try to cover the loss.
As their position sinks further, they hold tight, and soon their loss has reached $1,000. Of the ten trades the trader made, 90% of them were successful, but they still made a loss!
The reason? They did not manage the risk. Failing to manage risk is a common error that new day traders make. They may have a successful strategy (90% for this example trader), but the one substantial loss wipes out all the progress they had previously made. This situation is incredibly demoralizing and can lead to new traders giving up. So, how can you avoid this situation happening to you?
Learn to Play Defensively
Mitigating your losses should be your main focus when you first start trading. Learning how to lose small amounts will then allow you to concentrate on maximizing your profits.
A valuable tip for trading defensively is to set your stop losses immediately after entering the trade. Once set, leave the stop loss in place.
Continuously adjusting the stop loss position because of how the order is performing is a bad habit to get into. You should have already factored the risk of loss into the trade, so adjusting it under the pressure and emotional stress of a loss is not a good strategy. Being disciplined about setting stop losses and sticking with them is a good trade and risk management.
How Much Money Does a Day Trader Make?
This question is challenging because there are so many variables to consider, such as capital, experience, market, skill, etc.
The best day traders can have 7-figure incomes from day trading. Profitable new traders are more likely to see profits of between $200 to $500 per day. With markets open 253 days per year, an average profit of $200 per day would see you with resp $50,600 per annum. Not an insignificant amount!
Some new traders have seen incredibly quick results, turning $500 into over $50K in under one month. It is essential to realize that this level of success is not guaranteed, but as an example, here is how some traders have achieved it:
- Setup an offshore broker account. This type of broker will keep your clear of the PDT rule. Trade Zero is an offshore broker that we have used before.
- Use leverage on the capital you have to increase your buying power. CMEG offers four times leverage on capital under $2,500. So if you start with $500, you can leverage that to $2,000. Capital over $2,500 can be leveraged to six times buying power, meaning that $4,000 of capital will get you $24,000 in purchasing power.
- Follow your strategy, sticking to the stop losses you have set. An initial stop loss of $50 on each trade could be suitable when starting to trade.
- Start with a setup with a risk/reward ratio of 2:1, but be prepared to increase your risk as your account grows.
- Doubling your account in a single day is possible, but you need to find volatile stocks and trade on those.
Remember, the traders that are successful at this level are few and far between, but it has been achieved. Just consider the risks when trying to make it.
Also, bear in mind that some specific fees and charges will eat into your profits, such as commissions, tax, software fees, etc. These costs can amount to around 7-8% of your gross profit, and this figure will depend on your selection of a broker, software, etc.
Reading this article is just your introduction to day trading. You have maybe just started on the first stage of your day trading career, which is research.
However, there is so much more information you need to learn. If you choose to have a career in day trading, you should see continuous learning as part of that career. The good thing is that learning resources are abundant and readily available.
Look for a strategy that you understand and suits your risk profile. Once you have done that, test it on a simulator, adjust it, and test it again. As we stressed before, you cannot spend too much time on the simulator. Then, and only then, might you be ready for trading on a live platform.
If this article has whetted your appetite for day trading, you should join us in our FREE day trading class. It takes an in-depth look at how to get started as well as profitable day trading strategies.