The Process of Becoming a Day Trader (10 Steps to Success)

Everyone has easy access to online trading, and this is why it is a wonder why there are few people who have succeeded as day traders. Many investors dream about becoming day traders which means they get to work from the comfort of their own home, not having a boss, and watching the profits coming in. While there are many people who want this, but very few will end up succeeding as day traders.

A day trader is a person who buys and sells securities, and this is usually at different times of the day, but they don’t carry their position to the next day. All the positions the trader has taken during the day will be squared off before the closing of the market. This is different from active traders who usually hold their position for a couple of days, or investors who hold it for many months and even years. When trading, day traders tend to use leverage so that they can increase their intraday trade exposure.

Analyze Yourself

In order to be a successful trader, you will need a combination of skills, knowledge, and traits. You have to be fully committed to the lifestyle. Are you good in mathematical analysis, behavioral psychology (this is both in yourself and others), financial knowledge, and do you have what it takes to be an entrepreneur? Many people think day trading is all about an easy life or easy money. Day trading is mostly about;

  • Working long hours
  • You don’t have leave from work
  • Taking a lot of risks
  • Learning on your own without any guidance
  • You have to commit your daily activities to the job

One of the most important requirements you need when it comes to day trading is having the right mindset. You should first start by doing a self-assessment on the points mentioned above. Unless you are ready to devote all of your time, learn on your own, and be ready to take a risk and make losses, you should not even consider trading. You will also need to get the right resources for learning more about trading and also how to assess yourself. Some great books to start are “The Psychology of Trading” which is a book written by Brett Steenbarger and “Trade Your Way to Financial Freedom” written by Van Tharp.

Consider Funding

You will realize that there is no one who will always generate consistent profits. A common characteristic of day trading is extended and intermittent losses (you might find a trader has made eight consecutive losses, then make a profit on the ninth trade).

If you want to handle the risks, you need to have enough capital to cushion your trading. In the above-mentioned book, Van Tharp mentions that getting into the world of day trading with a small amount of money is a sure way of failing. Before you can quit your job in order to focus on day trading, he recommends saving at least $100,000 to use. You can use a small amount of money when getting started, and it will mainly depend on your trading plan, how frequent you trade, and other related costs. You can also consider trading on margin.

Study the Markets

If you want to be a day trader, you will need to have a solid foundation of knowledge about how the market works. You need to have a good understanding of the simple details like market trends and trading hours to the more complex details like margin requirements, the impact of news events, and instruments you can trade in. Having a wide knowledge base is a must for a day trader.

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Learn Your Investment Options

Futures, stocks, ETFs, options, and mutual funds are differently traded. If you don’t have a good understanding of the characteristics of the security and requirements to trade in it, then you cannot expect to succeed. For example, traders must know how the margin requirements for futures, commodities, and options will affect the trading capital or how an interim assignment or even exercise of an option can bring down the trading plan.

If you jump in without knowing this, then you can expect to make a lot of losses. Before you start trading, you must have a good understanding of the securities you are interested in.

investment options

Build Your Strategy

When getting started, it is a good idea to start with at least two established strategies for trading. Having two is important because they would act as each other’s backup in case of lack of trading opportunities and failure. Once you have some experience trading, you can move on to the more complex ones as you gain even more experience.

The world of trading is very dynamic. You can find a strategy that consistently makes you money for a long period of time then it just fails. You will need to have a close eye on your strategy and how effective it is so you will be able to customize, adapt, substitute or dump it more easily without having to make a lot of losses.

Think Long Term

Having a great strategy will not be enough to guarantee success when trading. There are some considerations you have to make so as to complement your strategy, in order to create a good trading plan;

  • How you are going to use the strategy (your entry and exit strategy)
  • The amount of capital you are going to use
  • How much you are going to use per trade
  • The assets you are going to trade in
  • How frequent you plan to trade

Protect Your Capital

Say you have 100k as your capital and you have a strategy that has a 70% success rate (This means you will be making a profit on seven out of ten trades). How much do you plan on spending on the first trade? What happens if you fail in the first three trades? What if the 70% success rate doesn’t hold? While trading options or futures, how do you plan on allocating the capital to margin money requirements?

Money management is what will help in addressing these questions. Having an effective money management plan can help you win even if you find yourself having a 40% success rate. Practicing, planning, and structuring your trades according to capital allocation and a money management plan will go a long way in helping you with your trading.

Choose the Right Broker

You will need to do frequent transactions when day trading, and this will lead to high brokerage costs. This is why you should invest time and effort in choosing a brokerage plan. If you plan on trading once or twice a day, a per-trade plan is the best option for you. If you have a high trading volume, then you should choose a staggered plan (the higher your volume, the lower your costs per trade). Another option is the fixed plan (this is where you have unlimited trades, but you have to pay a high charge).

A broker will help with a number of things part from trade execution. Some other things they offer include trading utilities which include the trading platform, trading software, research tools, charting applications that have technical indicators, trading alerts, integrated trading solutions i.e. options combinations, and many more. There are some that will come for free, while there are some that you have to pay. You have to be careful because they will eat into your profits.

You should know which features you need when trading so you don’t have to pay for a feature you don’t need. When starting, you should go with a low-cost brokerage package that matches your needs and you can upgrade with time.

Test Your Strategy

Once you have a plan in place, you should start by simulating your strategy with virtual money on a test account (many of the brokers offer this). Another option is using historical data to backtest. You should also remember to add the brokerage costs and the fees of the different features so you can have a more realistic assessment.

Start Small

Even if you have enough experience enough capital, you should not go big when starting a new strategy. You should start with a small amount of money then increase it when you see success. The opportunities will be there forever, but your money will be gone for good if you lose it. You will have a harder time trying to get it back. You should begin small then go big if it is a success.

Let’s Get Started!

Novices should be careful when it comes to websites and courses promising a full-proof trading strategy that brings endless profits. The day traders who are making a good return are those who have succeeded by investing time and effort into the own strategies and following them to the latter.

If you want to be a day trader, then you need to remember that you are on your own. Before quitting your job to be a day trader, first make sure you have the motivation needed to learn continuously, coming up with your own strategies, and taking full accountability for your actions and decisions. Choose the right stock broker when getting started with day trading.