If you’re thinking of getting involved in trading the financial markets, then you’ve probably already discovered that day trading is one of the most popular trading strategies. Both novice and advanced traders can use day trading strategies.
Read on for more guidance on how to become a day trader in your preferred financial market.
The term “day trading” encompasses any trading strategy in which the trader closes out positions by the end of their trading day or session. Day traders do not run any positions overnight.
Day trading offers the substantial benefit of avoiding exposure to unexpected market swings that can occur when you are not closely watching the market. This typically lets you get a better night’s sleep so that you can enter the next trading session fresh and ready to go.
You will need to get a few things together in order to start off on the right foot as a day trader.
First of all, you need a funded account at a broker that will allow you to access the financial markets you are interested in operating in.
Make sure any broker you consider day trading through is strictly regulated in its home jurisdiction and will take clients from your locale.
You also really want to make sure that your margin deposit remains safe with them in case of their insolvency, so check that they segregate client funds from their own.
An excellent way to test the services of a particular broker and practice using your day trading strategy in a real time environment involves creating a demo or practice account.
Most online brokers offer these accounts free of charge and fund them with virtual money. You can also use a demo account to practice using their online trading platform.
When the time arrives for you to start day trading with real money, many online brokers allow you to open and fund a live margin trading account by visiting their website. Expect to fill out an online form with your personal information and provide documentation of your identity and address.
It might take a few days to get the live trading account open, so take care of this formality before you think you want to make a trade.
Some restrictions may apply if you intend to day trade certain highly regulated financial markets, so make sure you meet any statutory requirements.
For example, U.S. based stock traders need to maintain a minimum balance of $25,000 in their trading account to operate as day traders. In contrast, retail forex traders can often start day trading with just $100 deposited in their margin accounts with an online broker.
Once you have decided to learn how to become a day trader, you will need to decide what particular style you most want to follow when operating in the financial markets. The good news is that day traders can make money using a variety of trading methods.
The one or more styles you ultimately select to incorporate into your trading plan will ideally suit your personality type, abilities and the amount of time you can devote to the pursuit of profit as a day trader.
Some of the more popular day trading styles are outlined below. You will note that they differ considerably but they all have the common theme of not requiring you to hold overnight positions, so they all qualify as day trading styles.
Scalping is one of the more common day trading strategies, but it requires plenty of time and focus to make it profitable. Scalpers typically look to lock in many small profits by taking very short-lived positions.
They need to be mentally flexible and have fast reactions in order to move into and out of trades in just seconds or minutes.
A financial markets theory known as “mean reversion” suggests that market prices eventually return to their average or mean level over time.
Someone using the fading trading strategy might exploit this tendency by looking for sharp market moves, either up or down, and then trading against them as they start to lose momentum and profit taking starts to set in.
Day traders with deep pockets and a decent appetite for risk can use news trading strategies to profit from the high market volatility seen in the wake of major economic data releases or other news events.
News traders will usually watch economic calendars and financial news feeds closely to determine what news events are mostly likely to move the markets they are trading.
A number of tools can be used by day traders no matter what the precise details of their preferred trading strategy consist of. Need to know what tools you’ll need while figuring out how to become a day trader?
Several of the more popular day trading tools are introduced below.
Few experienced day traders will get into a market without first checking out what relevant economic data might be coming out in the near future. If you plan on being a forex day trader, then a simple way to do this is to look over an economic data release calendar.
Such a calendar will typically list the various economic data releases for each day, consensus expectations and prior results. Most economic calendars also display priorities that reflect the likely market impact of the data, especially if the result differs from the market’s consensus.
Additional items displayed might include scheduled official policy statements and speeches by central bank directors, benchmark interest rate announcements and political elections.
Since major events can have a strong impact on financial markets, day traders need to be aware of them either to take advantage of them or avoid the extra risk they entail.
Although a financial market quickly assimilates new information into the price soon after its release, a key principle underlying technical analysis — i.e. “price discounts all” — can temporarily break down.
Furthermore, significant deviations from the market’s consensus can cause substantial volatility as the market rushes to discount the new information.
Even a technical day trader therefore needs to watch out for such market-moving events and can be adversely impacted by stop loss order slippage in fast markets.
Day traders typically use software known as trading platforms to execute transactions online via their chosen broker. Good trading platforms typically have technical analysis, order entry and trade management functions.
More sophisticated platforms might provide access to a financial news feed and even allow you to program trading algorithms and back test trading strategies.
Many day traders who use technical analysis need a platform that generates price charts for assets they wish to trade so that they can see where support and resistance levels lie.
Another very desirable feature for day traders is the ability to trade directly off charts. Many day traders also like to look for chart patterns, draw trend and retracement lines, and plot technical indicators.
A popular online trading platform used by retail traders around the world to trade forex currency pairs and precious metals online is the MetaTrader 5 platform from MetaQuotes. Most retail forex brokers support this platform and/or its older MetaTrader4 version.
MetaQuote’s MetaTrader 5 trading platform. Source: MetaTrader5.
Many active day traders find that keeping a record of their trades in journal can provide them with very useful feedback about their trading activities. This information can help them refine their trading strategy and highlight any weaknesses they need to work on.
Although you can use a paper journal or spreadsheet for this purpose, some day traders prefer to use a trade journal software tool like that provided by Edgewonk.
Edgewonk’s trade journaling and management software. Source: Edgewonk.
Stock screeners are a tool often used by equity day traders to filter stocks they might be interested in trading using parameters they specify. Some stock screeners are free to use, while others require you to pay a subscription fee.
Some of the parameters that most stock screeners let you filter stocks by include: price, sector, industry, market capitalization and region.
More sophisticated screeners might also allow you to screen by price/earnings (P/E) ratio, volume, percent change, return on equity (ROI), for example.
Now that you know how to become a day trader and what tools can help you on that path, you will want to make some initial practical decisions.
Those include which financial markets you will be trading, which broker you will trade through and what type of day trading style you will be using.
You might also need to educate yourself further on the topics of day trading and financial markets analysis to come to a firm conclusion about what method seems best for you.
Once you have organized your thoughts and gotten any education you feel you need to get started as a day trader, it then makes sense to write down your intended trading and money management strategies in a trade plan.
You can then follow and refine that plan as you start to day trade in a demo account to test that you have indeed developed a winning strategy overall.
When you think the time is right to take the leap into live day trading, remember to keep a trade journal to provide useful feedback and highlight any lapses in discipline that can cause avoidable losses.
If you’re ready to take the plunge, don’t forget to protect your brand-new day trading business with business insurance. An insurance policy can help protect you in case you’re accused of negligence or if any of your home office property gets damaged in a storm or flood (that’s right - homeowners insurance won’t cover it).
Once you’re protected, go out there and make the most of your new day trading business!
This content is for general, informational purposes only and is not intended to provide legal, tax, accounting, or financial advice. Please obtain expert advice from industry specific professionals who may better understand your business’s needs. Read our full disclaimer
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