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.