So You Want to Become a Day Trader
At one point or another, you may have thought you wanted to become a day trader. You can still do that if you have an adequate amount of capital and understand some of the basics. Do you have the grit to learn how to start day trading? I think so.
Anyone can be a day trader if they put their mind to it. Heck, I went from being a broke college student to an options and biotech stock trader. That said, there are a few things you need to know if you want to learn how to start day trading.
How to Become a Day Trader
Learning how to start day trading may seem daunting at first. It was for me. There’s a wealth of information being thrown at you, and most of the time it’s hard to figure out what to do.
First things first, you need to understand the pattern day trader rule. According to the U.S. Securities and Exchange Commission (SEC), “Under FINRA rules, customers who are deemed ‘pattern day traders’ must have at least $25,000 in their accounts and can only trade in margin accounts.”
That means at all times you need to have at least $25,000 in your account if you want to be a pattern day trader. Now, to be considered a “pattern day trader,” you would need to execute four or more “day trades” within five trading days. However, the number of day trades must represent more than 6% of your total day trades in your margin account for the same five trading days.
That said, if you want to be an active day trader, that means day trading every day, you’ll need more than $25,000.
Opening an Account for Day Trading
Keep in mind we’re focused mainly on stocks. Remember, you only want to use capital that you could afford to lose. Don’t go and use all of your savings or take out a loan to start day trading.
Once you have enough capital set aside, you need to figure out how to open a brokerage account and which one to choose. Basically, you need to understand how to choose the right broker.
Depending on your needs, you need to ask yourself a few questions, such as:
- What are the trading costs and fees if I open up an account with this brokerage firm?
- What kind of services does the brokerage firm offer?
- What’s the account minimum and are there any other fees associated with holding an account with the brokerage?
- Are the reviews for the brokerage firm good? How reputable is the brokerage?
- What type of research tools do they offer?
- Does the brokerage offer direct market access and fast execution speeds? (Those who want to actively trader or scalp would consider this)
Figuring out your trading style early is an important step when you’re learning how to start day trading. Depending on your personality and strengths, your trading style will differ from others. For example, I like to trade biotech stocks because I understand how they work.
Now, you might think trading biotechs is risky and difficult. It’s not that difficult, but there are a few key factors you should look at when you want to start day trading biotech stocks.
Here’s a look at my process when selecting biotech stocks to swing trade or day trade.
You need to quickly define whether you’ll trade-off of fundamentals, technicals, catalyst events or quantitative analysis. This requires your own due diligence and figuring out which type of trading style fits your needs.
Once you’ve got this figured out, you need to understand how to risk on your trades.
How to Start Day Trading – Managing Risk
Any good trader will tell you that risk management is one of the keys to success. That said, you need to remain humble and not be stubborn with your positions. That means if you’re in a losing position, respect your stop-loss prices and don’t hold onto a loser too long.
When you’re first starting out to trade, you should treat every trade as if they were the same. In other words, you will not risk more in one trade than another. Depending on your account size, your loss limit per trade may be different.
A good rule of thumb is to not lose more than 2% of your account in any one trade.
Final Words on Day Trading
A lot of people get scared when they want to learn how to start day trading. However, it’s not that difficult when you understand the basics. You need to treat day trading like a class in school. Take the information in chunks and become an expert in each chunk before moving on.
The first thing you need to do is figuring out whether you have enough capital to day trade. Again, you need to make sure you only use capital you could afford to lose. Thereafter, you need to figure out your trading style and how to manage risk.
It’s a long and bumpy road when you’re learning how to start day trading. However, with grit, you could potentially become successful in day trading.