What is Day Trading and why is there so much interest lately?
In this new world we live in as it relates to the changes Covid-19 has caused, Day Trading is now more popular than ever. With the sudden loss, or even the threat of loss, of someone’s livelihood due to no fault of their own, people have begun looking for alternatives to the new risk involved with employment. Having a way to make a living from your kitchen table every day can be very appealing. Especially with the new realization that a job or business can be snatched away for you without any notice. It can be very empowering to be the master of your own destiny. Becoming a successful Day Trader really fits the bill for many people in this regard.
What is Day Trading?
Simply put, Day Trading means that the trader does not hold any positions over night. The trader will execute and exit all trading positions in a single day. Hence the term “Day Trader”. Some Day Traders use strategies that have them executing trades that last for many hours at a time. Others may execute trades that last for only seconds or minutes at a time. The key is to have a strategy that works for the traders risk tolerance. The longer a trader is in a trade, the more speculative the trade becomes but the larger the profit potential. The shorter the time period, the less speculative, but also a smaller profit potential. Longer term traders (hours) may only take one or two trades per day. Shorter term traders (seconds to minutes) may take dozens of trades in a single day.
One of the biggest problems with Day Trading is that to the casual observer, it looks like it should be really easy. You just need to know which way price is going to go and then execute your buy or sell trade. So many traders start their trading careers with this assumption and are therefore usually not very successful at Day Trading. The fact is, most Day Trader lose a lot of money because they do not take the time to learn what is really important to know when trading. Managing risk is a huge part of Day Trading that most traders fail to do. Eventually they find out that trading is not as easy as they thought, but they still believe that it SHOULD be easy. So they keep throwing more and more money into it hoping that one day they’ll have that big breakthrough they have been dreaming about.
If you do not have a clear understanding of the risk involved in Day Trading, you should not be Day Trading with real money.
Fortunately, most brokers trading platforms allow traders to practice without using real money. This is called Paper or Sim trading. There is no better way to learn about the realities of the markets than paper trading. If you can not consistently grow your simulation trading account (they usually start you with $100,000 of pretend money) then you know you are not ready to trade with real money yet. More time, study, and practice is required.
Choosing what and how to trade
There are so many different ways to trade that it may take some time to research them to determine what feels right to you. Stocks, Options, Futures, and Forex are the most common and popular classifications of instruments to trade. Within each classification you can decide to be a trend trader, a momentum trader, a pullback trader, a counter trend trader, or any of hundreds of other styles of trading. Trading can easily become complicated if you try to learn everything there is to know about everything. It’s best to focus on one style and instrument classification at a time. It is easy to get overwhelmed with the amount of information available, but it is necessary to take the time if you do not want to become just another failed Day Trader statistic.
Trading Stocks vs Futures vs Forex
Most people think of stocks when they think of trading. But for a new trader with a small trading account, stocks may not be the best option. The “Pattern Day Trader” rule for stock trading requires that a trader has a minimum of $20,000 in his trading account. To actually take several trades a day, you would need a good bit more than that. For new traders, this rule can be prohibitive to getting involved in Day Trading stocks. There is an option to trade a cash account, but you lose the ability to use your brokers leverage to buy more stock than you actually have money to purchase. It is not generally recommended to trade without leverage. Cash account traders also do not have access to any earnings to trade with until the following day.
Futures and Forex trading is a much more popular option for those that want to start trading with a smaller trading account. Traders can open brokerage accounts for futures trading with as little as $500. While Forex traders (Currency trading) can start with even less. Futures traders are not subject to the pattern Day Trader rule. They also still get full use of their brokers leverage so that they may place trades that have more actual value than the money in their trading account. It is the best way to make bigger profits, but also have bigger losses on each trade.
Forex trading is very popular simply because of the low barrier to entry. Lots of trader take $50 to open a brokerage account and begin trading immediately. Unfortunately the Forex markets are unregulated and therefore have a lot of shady actors in the mix. Many Forex traders eventually transition to Futures trading which is much safer.
Set Goals, but Understand Your Limitations
You must never begin Day Trading real money with money that you can not afford to lose. It is always best to prove to yourself that you can consistently grow your simulation trading account for many weeks or months before ever placing a real money trade. And even after doing that, you must know when it is time to stop and walk away. Either for the day, the week, or forever. Set goals, but more importantly, set limits to how much time and money you are willing to invest in the learning process.
Day Trading can be a lucrative and rewarding career choice, but there are risks involved. Take the time to learn about the risks and how to manage the risks. Spend time looking at trading systems and mentors that make you feel most comfortable that you will have a good chance of being successful. Don’t be in a hurry to get rich. Slow and steady wins the race every time.
The Intentional Trader
Tony started trading in 2003 but did not see any success until 2010. Since then, Tony has been teaching his futures day trading system to thousand of individuals in his daily trade room.