Day trading is the buying and selling of financial instruments within the same trading day or even multiple times over the course of the same day. Taking advantage of small price movements can be a lucrative activity, but it is dangerous for beginners and anyone else who does not adhere to a well-thought-out strategy. In this article, we take a look at how to become a day trader, and what traders should do to stay on top of the markets.
Conduct a self-assessment
Successful day trading requires a combination of knowledge, experience, skills, and traits, as well as a commitment to a certain lifestyle. Traders should ask themselves whether they are adept with mathematical analysis if they are full of financial knowledge, aware of behavioral psychology, and if they have the stomach for entrepreneurship. Because contrary to the perceived notion of taking it easy, day trading is actually very time intensive and complicated. In fact, it requires:
- Long working hours
- Very little leave from work
- Continuous self-learning with no or little guidance
- Risk-taking abilities
- A never-ending commitment to daily activities of the job
Having the right mindset is one of the most important (and the very first) requirements in becoming a day trader. Unless an individual is prepared to devote hours of time, self-learn, and be mentally prepared to take risks and suffer any losses, they should not try day trading. Certain financial books are book resources for learning more about day trading and performing a self-assessment on whether day trading is a suitable endeavor.
Arrange sufficient capital
Unfortunately, no one can generate profits consistently when it comes to trading. Intermittent and extended losses are part of the day trading experience. For example, a day trader may suffer eight loss-making trades in a row and only recover their profit on the ninth trade.
In order to handle these risks, a day trader must have a sufficient cushion of capital. As some financial experts outline, entering the trading world with only a small amount of money is a sure path to failure. Being quitting any job and trading full-time, traders should have a least a large number of funds set aside for trading. Novices can start with a smaller amount, depending on the selected trading plan, their frequency of trading, and other costs they bear.
Understand the financial markets
To do well, day traders need a solid foundation of knowledge about how the markets function. From simple details such as exchange trading hours and holidays to complex details such as the impact of news events, margin requirements, and allowed tradable instruments, to name a few. As such, a trader needs to have a broad knowledge base in order to do well in the long run.
When it comes to financial instruments, stocks, futures, options, commodities, and mutual funds all trade differently. Without a clear understanding of a security’s characteristics and trading requirements, creating a trading strategy can be difficult and lead to failure. For example, traders should know and understand how margin requirements for futures, options, and commodities significantly impact trading capital or how an interim assignment or exercise of an option position can break the trading plan completely.
A lack of knowledge about these necessities specific to securities can lead to losses. Therefore, aspiring traders should make sure they have full familiarity with the trading of their selected securities.
Set up a trading strategy
Novice traders entering the world of trading can begin by selecting at least two established trade strategies. Both of these strategies would act as a backup of sorts to each other in case of a failure or lack of trading opportunities. A trader can then move on to a greater number of strategies with more complexities later, as experience builds up.
There is no doubt that the trading world is highly dynamic. Trading strategies can constantly make money for long periods but then fail at any time. As such, one needs to keep a close eye on the effectiveness of the selected trading strategy and adapt, customize, dump, or substitute it depending on the developments.
Integrate strategy and plan together
Selecting the right trading strategies alone is not sufficient to succeed in the financial markets. The following considerations need to complement the strategy to come up with a trading plan. Traders need to consider:
- How the strategy will be used
- How much capital will be used
- How much money per trade will be used
- Which assets will be traded
- How frequently do place trades
Practice money management
When it comes to making trades, traders should always ask themselves, how much should they spend on their first trade? How much should they allocate? Money management is there to help traders address these challenges and estimate their potential profitability. Effective money management can even help traders succeed even if there are only a few potentially profitable trades. So, make sure to practice, plan, and structure the trades according to a designated money management and capital allocation plan.
Research brokerage firms and charges
Day trading usually involves a lot of transactions, which can result in high brokerage costs in the long run. As such, traders need to conduct thorough research to find the brokerage firm best suited to their needs, such as Saxo Bank. After their research, make sure to pick a brokerage plan wisely. If one intends to play with one or two trades a day, then a per-trade basis brokerage plan may be more appropriate. On the other hand, if the daily trading volume is high, then one may decide to go for staggered plans (so the higher the volume, the lower the effective costs) or fixed plans (unlimited trades for a fixed high charge).
Apart from trade execution, a broker also offers other trading features, which can include a bespoke trading platform, integrated trading solutions like option combinations, trading software, research tools, historical data, trading alerts, charting applications with technical indicators, and more. Some features may be free for clients to use or they may come at a cost that can eat into funds.
As such, it is recommended that traders pick features depending on their trading needs and avoid subscribing to ones that are not needed. Novices should start with a low-cost basic brokerage package matching their initial trading needs and later opt for upgrades to other modules when needed.
Simulate and backtest
Once the strategy is in place, simulate it on a test or demo account. These demo accounts are entirely risk-free because trading takes place in a simulated and virtual environment. This means there are no monetary losses, but no gains either. As such, this is a great place for traders to test out their strategies and hone their trading skills. Alternatively, one can backtest the strategy on historical data instead.
Start small and expand
Even if a trader has sufficient funds and experience, they should not go all out the first time they trade. Instead, try out a new strategy with a smaller amount and increase the stakes after doing well. Remember, while markets and trading opportunities will come and go, funds once lost may be difficult to gain back. So, start small, test to establish, and then raise any positions.
Aspiring traders should make sure they have the motivation to continuously learn, design their trading strategies, and take accountability for their actions and decisions. Always make sure to have a strategy and trading plan in place before diving into the markets.