As long as you have a stable internet connection and a laptop or smartphone, you can trade stocks! Day trading is complex and risky, but let’s review some basic information regarding day trading for beginners.
What Is Day Trading?
First and foremost, what is day trading? Day trading is the buying and selling of securities, such as stocks, forex, commodities, and options, in a short period of time.
Unlike value investing or growth investing, day trading involves holding a position for a very short period of time. A day trader will typically close out all positions within a singular trading day.
How Does Day Trading Work?
Some of the most commonly asked questions are ‘how does day trading work, or how can anyone profit in such a short period of time?’ Speculation is one of the main driving forces behind day trading.
A trader will speculate that a security will increase or decrease within their desired period of time. If you’ve ever watched the live price action of a stock, you will notice the stock moves numerous times throughout the day.
Day traders aim to capitalize on those price movements. Stocks move for a variety of reasons.
Technical analysis plays a key role in the price movement, as does more macro news such as earnings reports, consumer spending habits, the broader economy and job numbers, and what a financial institution is purchasing.
What Characteristics Does a Day Trader Need?
The following characteristics will certainly help you become a better day trader:
- Discipline. Not only do you need to familiarize yourself with various technical analysis methods, you will need to have the discipline to stick to your trading plan. Cutting your loss and/or taking your profits takes a great deal of discipline, and it’s a foundational piece to your success.
- Persistence. There is not a single trader in the world that wins every time. Losing money is part of the business, but you’ll need to control your losses and maximize your wins. After a loss you need the persistence to revisit your trading plan and understand exactly what broke down.
- Decisiveness. If you spend too much time second guessing your decision, you may lose out on the opportunity. You need to be able to come to your conclusion in a timely manner and execute.
- Independence. Day trading is not a team sport, you need to be able to put in the work yourself to succeed. Day trading is often very lonely, it’s you against the price action on the screen. You need to be comfortable working alone.
What Equipment Does a Day Trader Need?
Believe it or not, it doesn’t take much equipment to be a successful day trader. The following are the basics:
- First and foremost, you’ll need a stable internet connection. The buying and selling of shares is done electronically, and if your internet connection is spotty, it can cost you a trade.
- A computer or laptop. Although you can trade on a smartphone, the vast majority of traders will trade from their computer or laptop. Having a high speed machine is helpful as you can process a lot of data and run numerous screens at once.
- On the topic of running numerous screens, many day traders like to have numerous computer screens to look at. For instance, a trader may have 3 screens all lined up in a row. The far left screen may be the financial news. The middle screen may be the daily chart of a specific security, and the far right screen may be another daily chart of the overall market.
Pros & Cons of Day Trading
Now that we’ve answered what day trading is, let’s cover some of the pros and cons of day trading.
Pros include:
- Trade from anywhere in the world as long as you have your equipment and an internet connection.
- Control your own hours as there is a market open 24 hours a day.
- You will not have a boss. You are accountable to you and your actions.
- Improve over time!
- You can make terrific money if you get good enough.
However, there is undoubtedly cons associated with day trading, and these cons include:
- Day trading is highly stressful!
- You can lose all of the money you’ve invested/traded.
- Day trading can be a very lonely profession.
- Income is not guaranteed, which can multiply the stress factor.
These cons often make one consider is day trading worth it?
Beginner’s Day Trading Tools
The following tools are found in most traders’ tool chests.
Earnings Calendars
A company reports earnings every quarter. There is a great deal of volatility and speculation surrounding an earnings report.
This speculation creates healthy profit if the trader is correct in which direction they expect the stock to move.
A Journal
As a trader, you are responsible for your results. Therefore, logging your decisions/thoughts will help you understand what habits typically work best for you.
If you find your journal is filled with entries that state “I should have sold earlier” – that can be used to reshape your decisions in the future. Understanding the why behind your purchasing or selling decisions will only help you.
A Trading Platform / Software
Understanding how to use your trading platform and software will help you navigate your trades in a more time efficient manner. Speed is an important piece to your trading success, as just a few seconds can move the price of a stock!
6 Steps to Start Day Trading
If you’re curious how to start day trading, follow these 6 simple steps.
Open a Brokerage Account
First and foremost, you’ll have to open a brokerage account. There are plenty of brokerage accounts on the market, each with their own pros and cons.
We’ll cover some of our favorite brokerages below.
Equipment and Software
Once you’ve opened your brokerage account, it’s time to familiarize yourself with how the software works. Generally speaking, you can schedule a demo with the brokerage to get an understanding of the software.
However, you must invest your own time into learning the ins/outs of the software as well.
Focus on One Market
Now with a better understanding of the software, it’s time to focus on the market. Get familiar with how the market moves, the recent trends that’s occurring.
Also it will be important to familiarize yourself with the finance lingo.
Seek Volatility in the Market
Remember, a day trader needs volatility in the market. There needs to be price movement in order to make money.
Create a watchlist of stocks that are going through a volatile time so you can experience the various swings.
Strategy
Once you’ve familiarized yourself with the various stocks worth reviewing, it’s time to develop a strategy for your moves. You must stick to your strategy throughout your position, and circle back to the journal once you’ve closed out such a position recording your thoughts and reasoning.
Check on Your Securities Every Morning and Review Again at Night
Day trading is not the buy and hold school of thought. You need to be constantly evaluating your stocks on your watchlist to identify your next opportunity.
Generally speaking, reviewing the stocks first thing in the morning, and again in the evening, is the most common practice.
5 Best Brokerages for Day Trading
So what exactly are some of the best brokerages for day trading?
TD Ameritrade
TD Ameritrade is a well known and respected trading and investing platform. They have millions of users throughout the United States and offer a very competitive fee structure.
Best For: TD Ameritrade is a fantastic universal platform. This software is great for the beginner, but also is robust enough to handle some of the most advanced traders out there!
Pros:
- The fee structure is competitive!
- The software itself is incredibly advanced.
- There are countless hours of instructional videos and documents you can view at any time.
- Their mobile app is fantastic!
Cons:
- If you don’t pay attention during a training class, you can get lost in their software. The software can be as simple or advanced as you make it, but it does take some getting used to.
Robinhood
Robinhood is a relatively new trading platform that is simple to use and centers around the novice or beginner trader.
Best For: Robinhood is best for beginners.
Pros:
- The trading platform is incredibly simple to use.
- The mobile app is also well polished and easy to use.
Cons:
- Trading can be complex, and Robinhood does not have the powerful analysis tools a trader typically needs.
- There are less security options available to the trader.
- Account types, such as a retirement account, are limited.
Charles Schwab
Charles Schwab is one of the most popular online brokers on the market today, and they have a long, and reputable, history within the investment world.
Best For: Great for both beginner traders and long term investors.
Pros:
- Outstanding customer service.
- Low commission structure.
- A wide range of investment options.
Cons:
- Charles Schwab is not for the advanced day trader. Their software lacks many technical features – which is part of the reason why Charles Schwab and TD Ameritrade merged!
- Their mobile app isn’t the best, nor is it the most robust.
Trade Station
Trade Station was founded in 1982 and is a well respected and reputable trading platform in the present day!
Best For: This brokerage is recommended for more advance traders.
Pros:
- The fee structure is very competitive.
- You can trade options, futures, ETFs, crypto currencies and stocks.
- There are plenty of trading classes you can stream.
Cons:
- Trade station is not for beginners.
- Although the trading software is robust, it is rather complex.
E Trade
E Trade dates back to the early 1980’s, and is currently owned by the investment bank Morgan Stanley.
Best For: Beginners
Pros:
- E Trade’s platform is easy to use.
- E Trade offers 24/7 customer service.
- You can trade bonds, options, mutual funds, stocks and ETFs all in one place.
Cons:
- E Trade is not an advanced stock trading platform.
- If you want to do heavy technical analysis, you may need to use another charting platform.
Is Day Trading Worth It?
Is day trading worth it? That’s entirely dependent on what you put into it.
If you’re willing to study and put in the countless hours of hard work, day trading can be an incredibly rewarding career choice. You’ll have the ability to earn a great deal of income, and you can do so from anywhere in the world!
However, day trading comes with serious risks that must be taken into consideration. You should only trade what you’re willing and able to lose, as making money trading is never guaranteed.
If you want to begin day trading, a great piece of advice would be to work with a financial advisor. A financial advisor can help manage your long term investments to ensure they are in a good place, and you can manage your short term investments.
This will limit your risk exposure and ultimately should help reduce the stress involved in trading.
FAQ
Q: What Are Day Trading Rules?
A: There are various day trading rules, such as round trip trades and margin limits a trader will need to adhere to.
Q: How Much Do You Need For Day Trading?
A: FINRA requires your account balance to be at least $25,000 to execute 3 round trip trades in a 5 day rolling period. Many day traders are executing far more than 3 round trip trades in any 5 day period!
Q: How Much Does the Average Day Trader Make?
A: A day trader’s income varies greatly. Some traders lose money, whereas other traders make a windfall of profits.
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