How To Become A Day Trader
The Practical Guide To Day Trading
Most people who get into trading want to eventually become full time day traders.
The aspiration is to make money daytrading from home and be your own boss.
That's the dream, right?
The reality, however, is not so encouraging. Research has shown that among those who attempt to day trade for a living, only a small group is able to pull it off.
The implication is that if you want to succeed, you must approach day trading differently from most people.
How To Day Trade For A Living
The first thing to know is that there's no straight-forward procedure to day trading.
Ultimately, it's a form of entrepreneurship. And just like how there's no fixed path to become a successful entrepreneur, there's also no fixed path to become a profitable day trader.
This being said, there are guidelines that will keep you on the right track, and these are the points I'll be covering in this guide.
1. Conduct a Self-Assessment
Day trading is often portrayed as a fun and exciting path to easy money.
In truth, however, it's a highly stressful activity both mentally and emotionally.
Since day trading is about opening and closing trades within a few hours, there is little room for mistakes.
Success in this business requires:
- Extensive research,
- Meticulous planning, and
- Years of market experience
You will not find a truly successful day trader with less than 5 years of experience.
At the very minimum, therefore, you should only consider this path if you're able to commit to at least 2-3 years of dedicated practice.
In addition to this, you should also consider whether your personal traits are suitable for a career in day trading.
Successful day traders are:
- Highly logical
- Highly self-aware
- Quick to adapt to changing circumstances
- Able to rapidly admit mistakes
- Able to tolerate long periods of stress and emotional discomfort
What's more, you can't learn to day trade from a book. No amount of theory can fully prepare you for the struggle you'll face in your journey to become a day trader.
You can get mentorship and guidance, sure, but for the most part you are on your own.
So you must have the right mindset going in - be prepared to work hard, take risks, suffer losses, and willing to learn from mistakes.
Access to Capital
Lastly, to day trade for a living you need to have access to sufficient capital.
If you're wondering how to become a day trader with $100, here's the straight answer: you can't.
Of course, there's no lack of people on the internet that will tell you otherwise - they'll say you can make $300 a month day trading with just $100, or something along those lines.
If you're gullible enough to believe such claims, I can't do anything for you - you'd be the perfect target to get scammed.
Now don't get me wrong - you CAN start small at the beginning, but you'll eventually need much more capital down the line when you're ready to day trade for a living.
Most likely, you'd need about $100,000 in capital. This can be your own money, and/or money from investors.
With a decent track record over 2-3 years, you will easily be able to attract investors to grow their money with you for a performance fee.
This is option I recommend since most people don't have an extra $100,000 sitting around in their bank account. It'll be much easier to get 10 investors with $10,000 each, or 20 investors with $5,000 each.
At this time, don't worry about having enough capital - just focus on learning to become an effective day trader.
If you can perform, there won't be a lack of investors looking to put their money with you.
2. Choose a Market
Skilled day traders tend to specialize in one asset class.
Typically, they focus on the futures market or the currency (Forex) market.
Each market has different characteristics, such as trading hours, margin requirements, and regulations. When choosing a market to specialize in, pick the one with characteristics most suited to your circumstances.
For example, the US stock market opens for trading between 9:30am - 4:00pm EST on weekdays, excluding public holidays.
In contrast, the Forex market is open 24 hours a day, even on public holidays.
If you live in Asia (like I do), you'd only be able to trade the US stock market late at night, within the restricted trading hours.
This is a big reason why I personally prefer Forex trading - there are always currencies being actively traded around the clock.
Generally speaking, stock trading (including its derivatives like ETFs, CFDs, options and futures) has a higher margin requirement than spot Forex trading.
This means if you're a stock trader, you'd need more capital in your trading account than if you were a Forex trader.
A higher margin requirement is beneficial for beginner traders (it's safer), while a lower margin requirement is beneficial for experienced traders (it allows for more flexibility).
If you're based in the Unites States, you need to be aware of the Pattern Day Trader rule as outlined by the Financial Industry Regulatory Authority (FINRA).
According to this rule, if you execute 4 or more day trades within 5 business days on a margin account, you need to maintain a minimum account size of $25,000. This applies to all US-based traders of stocks (equities), corporate bonds, futures and options.
Forex day traders tend to be subject to less regulation than other traders. For example, they do not operate under the jurisdiction of FINRA - even if based in the US - and are thus not subject to the Pattern Day Trader rule.
Why I Choose Forex Trading
Trading currencies, as composed to the other asset classes, as has the most upsides and fewest downsides.
While there is no such thing as a perfect asset class for day trading, in my view, Forex is the closest thing there is to one.
3. Choose a Suitable Broker
As a day trader, your most important partner is your brokerage firm. It provides you with the margin (financial leverage) to trade with, and the facilities to carry out your trading operation.
This is why it's crucial that you only trade with brokers regulated by the proper authorities. Otherwise, they have strong incentives to carry out unethical practices against you.
Depending on where you broker is incorporated, make sure it is regulated (not just registered) by the following financial authorities:
- United States: National Futures Association (NFA), Commodities and Futures Trading (CFTC)
- Australia: Australian Securities and Investment Commission (ASIC)
- United Kingdom: Financial Conduct Authority (FCA)
- South Africa: Financial Sector Conduct Authority (FSCA)
- Singapore: Monetary Authority of Singapore (MAS)
- Malaysia: Securities Commission Malaysia
Do not trade with brokers based in Cyprus, Seychelles, Belize, British Virgin Islands, or any of the other Caribbean islands. These financial jurisdictions have weak protections for retail traders like you and me.
Among all market participants, day traders pay the most in brokerage fees.
In some stock markets, for example, commissions are charged on a per-trade basis, regardless of the order size. This means that a day trader who buys 100 shares a day across multiple trades will pay much more in commissions than a buy-and-hold investor who buys the same 100 shares at once.
As much as possible, therefore, try to choose brokers that charge fees based on order size.
In the Forex market, there are two general types of fee structures. Some brokers charge commissions only (based on order size), while others charge fees via a larger bid-ask spread (and no commissions).
Since day trades are sensitive to small price movements, my advice is to pick a broker that charges commission fees only. This ensures a smaller bid-ask spread that increases the chance of your trade orders being triggered at the prices you want.
Lastly - and it goes without saying - shop around and compare the fees charged by various brokers. Since you'll be trading actively, you want to minimize costs as much as possible.
As much as possible, you use a trading platform that works with multiple brokers.
The trading platform is especially important for day traders because in the middle of a busy trading session, its easy to mess up your orders on a platform you have little experience with.
As a Forex day trader, my preferred trading platform is Metatrader 4. Most Forex brokers work with it so if I ever change brokers I can easily do so without having to learn how to use a new platform again from scratch.
4. Day Trading Basics
Now that you've selected a broker, the next step is to get learn the basics of day trading with a demo account.
For starters, you'll need to learn:
- How margin trading works
- The implications of trading with different lot sizes
- What a margin call is, and its triggering conditions
- How to understand and navigate a price chart
- Basic technical analysis
- The different types of trade orders
- Responsible money management
- How to calculate trading profits and losses
In addition, you'll also have to familiarize yourself with the unique characteristics of the asset class you've chosen to specialize in.
Let's say you've decided to focus on the Forex market.
In that case, you'll also have to learn:
- How the Forex market is structured
- What it means to buy or sell a currency pair
- How to calculate the value of a pip
- The difference between standard, mini and micro lot sizes
- Typical inter-currency correlations
- How certain currencies correlate with other asset classes
- Basic macroeconomics
- The types of news that move the market
This list is by no means exhaustive. There are many basic concepts you'll need to learn as a beginner day trader.
But once you're familiar with the basics, the next step is to devise with a trading strategy.
5. Devise A Trading Strategy
A day trading strategy comprises of:
- A philosophy or big-picture explanation of how to make money in the market
- A set of tactics and tools that is used to express that philosophy in the market
The bulk of your work as a day trader centers around designing, testing, and executing trading strategies.
Designing A Strategy
The most important aspect of a trading strategy is its edge.
An edge refers to a set of advantages in the market. It's what enables you to win, while others lose.
Developing an edge is the most important, yet least appreciated aspect of trading - the reason why so many day traders fail is because they don't have an edge in the market.
Unfortunately, there's no quick and easy way to develop a trading edge from scratch. You can either find one through extensive trial and error, or you can take a course to shortcut the process.
Testing a Strategy
The only way to verify a trading edge is through live testing.
Many ideas sound good in our heads, but are actually ineffective when put into practice.
When we test a day trading strategy in the live market, we get objective feedback about whether we're on the right track.
Once we've identified and developed a trading edge that gives us an advantage in the market, the final step is to execute the strategy faithfully.
6. Execute the Strategy Faithfully
Your trading strategy is only as useful as your ability to execute it as planned.
Unfortunately, human emotions tend to get in the way of this ideal.
Countless books, articles and videos have been dedicated to this problem, spawning a whole sub-industry around the topic of trading psychology and discipline.
One way to solve the problem is to automate your trading strategy - a computer will execute your strategy without bias or emotion.
The downside, is that algorithmic trading is an almost entirely separate topic that takes years to learn, on top of the years it takes to learn how to make money day trading.
An alternative option, is to keep a trading journal that you regularly update and review.
This is not a perfect solution, as it still subjects your trading to human irrationality, but it's the fastest way to see improvements in properly executing your strategy.
7. Start Small and Scale Up
With all the pieces in place, you are now ready to become a day trader.
Start small with an account of a few thousand dollars.
As you build a track record of profitable day trading over the next 12 - 24 months, you may consider adding more funds and/or start taking on investors.
By this stage, you might be feeling anxious to start making money. Resist the urge to deposit your life savings and trading with it.
Just be patient focus on trading well. Your investors will reward you with more capital to trade with.
How To Be A Successful Day Trader
Technically, anyone can start day trading within a week.
To do it successfully, however, is another story.
That takes years.
So don't quit your full time job and jump into it expecting to make money right away.
Be patient and dedicate the next 2 - 3 years to learning, gaining experience, and building a track record.
The rewards of being a daytrader are hard earned, but they are worth the effort.