To online trading, why are there only a few succeeding as day traders? After all, what investor has not dreamed of becoming a day trader—working comfortably at a home computer, being your own boss, watching profits roll in? While many aspire, few actually succeed.
Day traders actively engage with the market, employing intraday strategies to profit off quick price changes in a given security.
To become a day trader, you must be sure to be well-enough capitalized and have access to an affordable and functional trading platform.
Day trading can be a lucrative undertaking, but it also comes with a high degree of risk and uncertainty.
A thorough understanding of markets, financial securities, and behavioral finance—along with personal discipline and focus—is necessary for success.
What Does a Day Trader Do?
A day trader actively buys and sells securities, often multiple times during the day, but without carrying any open positions to the next day. All buy and sell positions taken during a trading day are squared off on the same day before the market closes. Day traders are different from active traders who may hold a position for multiple days, or from investors who invest for longer periods. Day traders also use leverage to increase their intraday trade exposure.
How To Become A Day Trader
1. Conduct a 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:
Long working hours
Very little leave from work
Continuous self-learning with no guidance
Never-ending commitment to daily activities of the job
The right mindset is the most important (and the very first) requirement in becoming a day trader. Unless you are prepared to devote time, self-learn, and be mentally prepared to take risks and suffer losses, do not try day trading. Books like Trade Your Way to Financial Freedom by Van K. Tharp and The Psychology of Trading by Brett N. Steenbarger are good resources for learning more about day trading and performing a self-assessment.
2. Arrange Sufficient Capital
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 K. 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. Before quitting your job to trade full time, Tharp recommends having at least $100,000 for trading.1 Novices can start with smaller amounts, depending upon their selected trading plan, the frequency of trading, and other costs they bear. To actively day trade, it is required that you maintain a balance of $25,000 in your trading account.2
3. Understand the Markets
Day traders need a solid foundation of knowledge about how the markets function. 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 broad knowledge base.
4. Understand Securities
Stocks, futures, options, ETFs, and mutual funds all trade differently. Without a clear understanding of a security’s characteristics and trading requirements, initiating a trading strategy can lead to failure. 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 the trading of selected securities.
5. Set up a Trading Strategy
Novice traders entering the world of trading can begin by selecting at least two established trade strategies. Both would act as a backup of each other in case of failure or lack of trading opportunities. One can move on to a greater number of strategies (with more complexities) later, as 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 the effectiveness of the selected trading strategy and adapt, customize, dump, or substitute it depending upon the developments.