Day Trading – Getting Started
So, you have decided to become a day trader. Now it is time to interact with an unpredictable and unforgiving beast known as the Stock Market. Unforgiving, it might be, but it also offers fantastic rewards for successful day traders with a proven strategy.
Taming this beast is out of the question. However, knowing how to properly trade it, and controlling the risks associated with it, will help you initially survive it, and move on to become successful in the Stock Market as a day trader.
Practice is another critical aspect of your survival. For how long does not have a set answer. The length of time you need to practice will depend upon the strategy you choose, and the time it takes to master it and prove it profitable.
Of course, proving the strategy to be profitable is only a theory, because you have yet to trade with your own money. The place that you practice and master your strategy is within the safety of a simulator. It should be many months before you day trade a live account.
Even when you do start trading on a live account having transitioned from the simulator, don’t expect to replicate your practice success rates immediately. You may be trading the same stocks, on the same strategy, with the same volumes. However, the critical difference is you are now using your own money, and there is a certain amount of emotion with this that a simulation trade cannot replicate. So, be prepared to wait several months before turning a profit.
So, still ready to start day trading? Good, let’s have a look at the steps involved in getting started day trading.
1: Decide What to Trade
Stock market brokers tend to specialize in a specific financial instrument. To select the best broker, you first need to decide what you will be trading.
You may decide to trade traditional stocks, but there are other trading avenues such as bonds, derivatives, forex, futures, options, etc. When starting as a day trader, you should select and master one market type before trying others.
There is a common misconception among people new to day trading that more than $25,000 of capital is needed to start trading. This is not entirely true. A $25,000 threshold is in place to limit the number of day trades that new can make in 5 days. When an account’s capital is less than $25,000, the Pattern Day Trader rule, or PDT, limits the number of round-trip trades (those that are opened and closed on the same day) to a maximum of three in any 5-day period. Those traders with less than $25,000 can still trade, but just less frequently. This rule is a good thing, as it means you have to choose your trades wisely.
2: Choose Your Day Trading Broker
When you have determined what you want to trade, it is time to choose your stockbroker. Finding a broker should not be difficult, as they tend to like day traders due to the frequency of trades and, therefore, the frequency of commissions.
Before you commit to a particular broker, look at a few, and assess the advantages and disadvantages of each one. Consider the following:
You might be making a nice gross profit on your trades, but that will quickly be diminished by high commission fees, margin rates, and other trading expenses. Look at your broker’s costs carefully, and make sure you factor these costs into your trading plan.
Day trading is all about speculating on price movements. To do this with any degree of accuracy, you need the right tools for Technical and Fundamental research. Make sure your broker provides everything you need in this regard.
Charting Tools & Software
There is an immense amount of charting tools and software available. No matter who you ask, they are likely to give you a different answer as to which ones are the best. Start doing some research, decide which tools you need, and make sure your chosen broker has them.
Trade Execution Speed
There is a need for speed when it comes to day trading. If you delay a trade by mere seconds, your liquidity on a position can be seriously eaten into. Your chosen broker needs to have a high-speed platform that is easy to use and provides Direct Market Access (DMA). Delays will harm your chances of success, without question.
Simulation & Paper Trading
As a new trader, you must have a means of practicing your trading strategy before you risk your own money. Some cavalier traders or brokers may disagree with this approach, but in our opinion, it is a MUST. If your chosen broker can’t provide this facility, find one that can.
Regulated and Safe
Whichever agent you choose, check that they are a regulated broker. This way, they are bound by law to follow financial regulations regarding trading and your capital.
The broker’s standing among other traders is an excellent source of intelligence. Don’t be persuaded to select a broker merely on promises or introductory bonuses.
If you have an issue with your trading platform, charting tools, or anything else that’s likely to affect your trading, you want a broker that will sort the problems out fast. Imagine sitting on a position, unable to stop a worsening loss because the broker’s customer service desk is slow to respond.
3: Determine Your Trading Hours
Whatever trading hours you decide upon, make sure you stick to those hours every day. This consistency is essential, as you don’t want time-of-day to be another variable you need to assess.
Typically, day traders trade the first hour after the market’s opening (9:30-10:30 EST), and the final hour before close (3-4 p.m.). These times are considered to be the best times for higher profits.
4: Select Stock to Trade
You’ve already chosen the type of financial instrument you are going to trade. Now it’s time to select the individual stick for a trade. From the thousands available, you should choose one or two and trade these all the time. Limiting the number of stocks you trade allows you to become more of an expert on those stocks.
Of course, you may choose to search out high-performance stocks daily, but this requires extensive research. We recommend this approach only when you become an experienced and profitable trader.
Choosing Gainers or Losers
Here is the sort of information you would expect your broker to provide if you are going to be trading Gainers and Losers:
5: Determine How Much Capital to Invest
Part of your strategy will be determining how much capital you are comfortable risking on each trade. A recommended maximum is between one and two percent of your total account capital. Another measure to consider as a new trader is not trading on margin until you find your feet. Avoiding margin trading will also save you on commission. Brokers are lending you their money when you trade on margin, so these trades tend to be at higher commission levels.
Day Trading Lingo
People that are new to day trading often find the language and technical terminology confusing. Below are the most common terms used in day trading, ones you will need to become familiar with:
- Ask. The rice at which the seller will sell the stock.
- Bid. The price buyer is prepared to buy the stock.
- Breakout. The point at which a stock moves above its previous resistance level.
- Candlesticks. Type of trading chart representing values for a given period – low, high, open, close.
- Covering. When a trader buys back shares, they previously sold short.
- Float. The number of shares available to the public for trading.
- Gap Up/Down. Stocks opening at a price above or below their previous close.
- Going Long. Buying stock to be sold later for a profit.
- High/Low of Day (HOD/LOD). The prices at which a stock reached its high and low points for that day.
- Hard-to-borrow. Stocks that are not readily available to sell. Traders who want to sell such stock will incur additional broker and/or commission fees.
- Liquidity. How easy it is to trade a stock without drastically impacting the price.
- Low Float. Stock with a small quantity of public-traded shares. These stocks often experience high volatility levels.
- Market Makers. Firms that facilitate stock orders, buying, selling, and market liquidity.
- Market Cap. A company’s value, in U.S. dollars, calculated on current share price and outstanding shares.
- Outstanding Shares. The total number of shares that have been issued. This figure includes both public (float) and institutional shares.
- Profit and Loss (P&L). The performance of a portfolio over a given period in terms of it making a profit or loss.
- Red-to-Green and Green-to-Red. Signifies a position moving from a loss to a profit (Red-to-Green), or vice-versa. When a position is losing, it will be shown in red on the charts – the color changes to green when it moves into profit.
- Resistance. The price at which a stock has more sellers than buyers, making a price increase unlikely.
- Scalp. Taking small profits from tiny movements in the market.
- Short Selling. When a trader sells the stock they do not own, to buy them later when the price is lower.
- Spread. Difference between the ask and the bid.
- Support. The price at which a stock has more buyers than sellers, making a price decrease unlikely.
- Technical Analysis. Using charts and technical indicators to analyze the market and make a prediction of future movements.
- Trend. A stock’s general direction of travel, downtrend or uptrend.
Getting Started on Day Trading – Final Words
Day trading does not involve investing a massive amount of capital. Unless you want to conduct pattern day trading, you can make three trades over a five day period with relatively little cash.
If you’re looking to get started with a proven day trading strategy, click here.