How to Become a Day Trader

During the height of the tech bubble in the late 1990s, day traders made easy money buying and selling stocks on the internet. It didn’t take much talent to succeed in those days. In just 17 months between October 1998 and March 2000, the NASDAQ Composite rose from a low of around 1,344 to a high of around 5,133.All you had to do was ride this tidal wave to reap the benefits. Many of these traders were earning as much short circuit the index sank to a low of around 1,108 in October 2002, with the index losing 78% of its value in 31 months.

Once the bubble was completely deflated, the easy money dried up. Many of those who took advantage of luck and timing left the trade and sought other work. They discovered that day trading, like any other profession, requires education and skill to earn a steady living.

How to become a day trader

What defines a day trader?

Since September 28, 2001, FINRA and NYSEat the instigation of the SEC, have changed their definitions of day traders. A new term they use is “model day trader.” An investor can be called a pattern day trader by having one of the following two characteristics:

  1. They trade four or more times in a five-day period, provided that the number of daily transactions represents more than 6% of the client’s total trading activity for that same five-day period, or
  2. The company where the investor trades or opens a new account reasonably considers him a day trader.

Once an investor is deemed a day trader, the brokerage must classify them as such, and the investor is then subject to a raise equity terms. Primarily, the brokerage must require a minimum capital of $25,000 at the start of the client’s trading day. This minimum capital requirement was introduced by the United States Security and Exchange Commission (SEC) and the NYSE.By ensuring that any substantial loss can be offset by the day trader’s own funds, the requirement addresses the inherent risk imposed on brokerages by leveraged day trading activities.

A more restrictive margin rule was also implemented. Day traders are only allowed to buy four times their maintenance margin levels. If this level is exceeded, the company must issue a margin call to the day trader who then has five business days to deposit the funds before the account is restricted to trading on a cash-only basis for 90 days or until the call is satisfied.

The story of two traders

There are two different types of day traders. Professional day traders work for large financial institutions. They have access to the tools and training needed to succeed in their careers. The big advantage of being a professional day trader is that you are not trading your own capital. Instead, it is capital from customers and/or the business, so there is no risk to his personal capital. Most professional traders are able to leave their emotions and biases at the door.

The other type of day trader is the individual trader, who plays the markets alone. These traders must be able to understand the market, technical analysis, and price movements. They should also have access to research, news and analysis. And unless they have clients they’re trading for, they’re usually trading their own capital, which means there’s a lot at stake.

When it comes to capital, individual traders generally have a few options when it comes to their trading accounts—cash accounts vs margin accounts. In a cash account, traders use their own capital when making a transaction. In a margin account, the trader gets a loan from the brokerage. Most companies will require a minimum investment before traders can start trading on margin. Since they are dealing with company money, there are usually more rules to follow.

Basic principles of day trading

Day trading requires a professional software platform and a broadband internet connection. Although it is possible to design and build your own trading platform, most traders use a pre-packaged setup provided by their brokerage or a specialized software company. It’s best to have a powerful desktop computer with at least two monitors, preferably four to six. You need multiple screens to display graphs and technical indicators which will provide your buy and sell signals.

When using a brokerage platform, make sure that real-time news and data feeds are included in the package. You will need this data to build charts that expose trends and outline the timeframes and trading strategies you want.

A pure day trader buys and sells stocks or other investments and ends the trading day in cash with no open positions. If a position is held overnight or for several days, it is called a “commercial position.” Day traders can use both approaches, depending on their trading style and the nature of their investments.

Technical indicators

Knowledge of stocks and market fundamentals is not enough to succeed as a trader. You need to understand technical analysis and all the tools used to dissect chart patterns, trading volume, and price movements. Some of the most common indicators are support and resistance levels, moving average convergence divergence (MACD), volatility, price oscillators and Bollinger Bands.

Learning and understanding how these indicators work only scratches the surface of what you will need to know to develop your personal trading style. Hundreds of books and thousands of articles have been written on day trading. You can also take courses online or in person.

Day trading strategies

Trading requires sufficient capital to profit from benefit quite important positions. Most traders make their money on relatively small price movements in stocks or liquid indices with medium to high volatility. You need price movement to make money, whether long or short. Higher volatility implies higher risk, with the potential for greater gains and losses.

Unless you can buy several hundred shares or more than one share, you won’t make enough money on trades to cover commissions. The lower the stock price, the more shares you will need to achieve sufficient leverage and total price movement.

The key to successful trading is developing techniques to determine entry and exit points. Most traders develop a style that they stick with once they are comfortable with it. Some only trade one or two shares a day, while others only trade a small basket of favourites. The benefit of trading just a few stocks is that you learn how they act in different conditions and how the move is affected by the key. market makers.

Day trading success

The success rate for day traders is estimated to be around 10% only. With all the attention day trading is getting, this seems to suggest that the theory is sound. Critics claim that, if that were the case, at least one famous fund manager would have mastered the system and claimed the title of “day trading’s Warren Buffett.”

The long list of successful investors who became legends in their time does not include a single individual who built his reputation through day trading. Same Michael Steinhardtwho made a fortune trading time horizons ranging from 30 minutes to 30 days, claimed to take a long-term perspective on his investment decisions. From an economic perspective, many professional money managers and financial advisors shy away from day trading, arguing that the reward simply doesn’t justify the risk.

So if around 90% of day traders lose money, how can anyone expect to make a living this way? The answer lies in professional training, diligent research, refined skills, strong discipline, and the ability to admit mistakes and cut losses. You must be ready to make emotionless split-second decisions based on information that is sometimes incomplete, contradictory and changing by the second. Statistics prove that this is clearly much easier said than done.

Develop a process and try it out with fictitious trades. Refine the process and find what works for you. Only then should you stake real money and start actively trading the markets. Experienced traders define what constitutes a trading setup, as well as the pattern and indicator combination they want to see before they pull the trigger. They rarely deviate from these setups in order to stay focused and keep their emotions at bay.

Once you enter a position, stops must be placed to exit you from that position when a specified loss threshold is reached. If a trade goes the wrong way, hope won’t help reverse it. Leaving the job frees up your capital to redeploy it towards a more promising job. You want to take out the losers as soon as possible and ride the winners as long as they are profitable.

The essential

Day trading is not for the faint of heart. A winning strategy can involve executing many trades in a day while avoiding the trap of over-trading and running huge commissions. Day trading can be fun and profitable, if you learn the ropes and set realistic goals. If you are interested in becoming a day trader, your first step should be to choose a broker that suits your needs.

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