After all, what investor has not dreamed of becoming a day traderóworking comfortably at a home computer, being your own boss, watching profits roll in?
While many aspire, few actually succeed. In this article, we will discuss ten steps to take before becoming a day trader. Day traders are different from active traders who may hold position for multiple days, or from investors who invest for longer periods. Day traders also use leverage to increase their intraday trade exposure.
Conduct an Honest Self Assessment: Successful day trading requires a combination of knowledge, skills, and traits as well as a commitment to a lifestyle. Are you adept with mathematical analysis, full of financial knowledge, aware of behavioral psychology in yourself as well as others , and do you have the stomach for entrepreneurship? Contrary to the perceived notion of an easy life or easy money , day trading actually requires:.
The right mindset is the most important and the very first requirement in becoming a day trader. Begin by conducting a self-assessment on the above mentioned points. Unless one is prepared to devote time, self-learn and be mentally prepared to take risks and suffer losses, do not try day trading. No one can generate profits consistently. Intermittent and extended losses are part of the day trading game for example, a day trader may suffer eight loss making trades in a row and only recover with profit on the ninth trade.
To handle these risks, a day trader must have a sufficient cushion of capital. As Van Tharp explained in Trade Your Way to Financial Freedom , entering the trading world with only a small amount of money is a sure path to failure.
Novices can start with smaller amounts, depending upon their selected trading plan , frequency of trading, and other costs they bear. Day traders need a solid foundation of knowledge about how the markets functions.
From simple details like exchange trading hours and holidays to complex details like the impact of news events, margin requirements , and allowed tradable instruments , a trader needs to have a wide knowledge base. Understand the Securities to Trade: Stocks , futures , options , ETFs , and mutual funds all trade differently. For example, traders should know how margin requirements for futures, options, and commodities significantly impact trading capital or how an interim assignment or exercise of an option position can shatter the trading plan completely.
Lack of knowledge about these necessities specific to securities can lead to losses. Aspiring traders should ensure full familiarity with trading of selected securities. Select or Design a Suitable Trading Strategy: Novice traders entering the world of trading can begin by selecting at least two established trade strategies. Both would act as backup of each other in case of failure or lack of trading opportunities. One can move on to more number of strategies with more complexities later, as the experience builds up.
The trading world is highly dynamic. Trading strategies can consistently make money for long periods, but then fail at any time. One needs to keep a close eye on effectiveness of selected trading strategy, and adapt, customize, dump, or substitute it depending upon the developments.
Selecting the right trading strategies alone is not sufficient to succeed in the market. The following considerations need to complement the strategy, to come up with the trading plan:. Understand and Practice Money Management: How much should you spend on your first trade? What if the first 3 trades are a failure? What if the average record 7 profitable trades out of 10 no longer holds?
Or, while trading futures or options , how should you allocate your capital to margin money requirements? Money management helps you address these challenges. Effective money management can help you win even if there are only 4 profitable trades out of Practice, plan, and structure of the trades according to a money management and capital allocation plan.
Day trading usually involves frequent transactions, which result in high brokerage costs. After thorough research, select the brokerage plan wisely. If one intends to play with one-two trades per day, then a per trade basis brokerage plan would be appropriate. If daily trading volume is high, go for staggered plans the higher the volume, the lower the effective cost or fixed plans unlimited trades for a fixed high charge. Apart from trade execution, a broker also offers other trading utilities which includes trading platforms , integrated trading solutions like option combinations , trading software , historical data, research tools, trading alerts, charting application with technical indicators and several other features.
Some features may be free while some may come at a cost which can eat into your profits. It is advisable to select the features depending upon your trading needs and avoid subscribing to ones which are not needed. Novices should start with the low-cost basic brokerage package matching their initial trading needs, and later opt for upgrades to other modules when needed.
Simulate or Back Test on Historical Data: Once the plan is ready, simulate it on test account with virtual money most brokers offer such test accounts. Alternatively, one can back test the strategy on historical data.
For a realistic assessment, keep consideration for brokerage costs and subscription fee for various utilities. Start Small, Then Expand: Try out a new strategy with with smaller amount and increase the stakes after tasting success. Remember, markets and trading opportunities will remain forever, but money, once lost, may be difficult to re-accumulate. Start small, test to establish, and then go for the big ones. Aspiring traders should beware of websites and courses that promise fool-proof day trading success or endless profits.
The limited percentage of day traders who have managed to be successful do so by investing their time and efforts into building their own trading strategies and by following them religiously.
A day trader is on his own in this big trading world. Before giving up your job to become a day trader, be sure that you have the motivation to continuously learn, design your own trading strategies, and take accountability for your decisions and actions.
Dictionary Term Of The Day. A reduction in the ownership percentage of a share of stock caused by the issuance Broker Reviews Find the best broker for your trading or investing needs See Reviews. Sophisticated content for financial advisors around investment strategies, industry trends, and advisor education. A celebration of the most influential advisors and their contributions to critical conversations on finance.
Become a day trader. Contrary to the perceived notion of an easy life or easy money , day trading actually requires: The following considerations need to complement the strategy, to come up with the trading plan: If daily trading volume is high, go for staggered plans the higher the volume, the lower the effective cost or fixed plans unlimited trades for a fixed high charge Apart from trade execution, a broker also offers other trading utilities which includes trading platforms , integrated trading solutions like option combinations , trading software , historical data, research tools, trading alerts, charting application with technical indicators and several other features.
The Bottom Line Aspiring traders should beware of websites and courses that promise fool-proof day trading success or endless profits. A reduction in the ownership percentage of a share of stock caused by the issuance of new stock.
Dilution can also occur A conflict of interest inherent in any relationship where one party is expected to act in another's best interests. Passive investing is an investment strategy that limits buying and selling actions.
Passive investors will purchase investments How much a fixed asset is worth at the end of its lease, or at the end of its useful life. If you lease a car for three years, No thanks, I prefer not making money. Get Free Newsletters Newsletters.More...