Last Updated on 10 February, 2024 by Trading System

Day trading indeed is the trading form that attracts most newcomers to the markets. Being a fast-paced and action-filled tradingform, at least in the view of most people, that’s not too strange. So, what is day trading?

Well,  day trading is a fast-paced trading form where all orders are held intraday. This means that no orders are held during the night which removes the by some dreaded overnight risk. However, day trading is one of the hardest trading forms to master, and to succeed you’ll want to look into going systematic.

In this article you’ll learn everything about day trading, and what we have learned from day trading ourselves. We’ll tell you the facts that most other day trading gurus don’t, to increase your chances of success.

We’ll start off by discussing day trading in general, and what the advantages and disadvantages are. In addition, we’ll compare day trading to swing trading to see if it really is this trading form you’ll focus on.

Then we’ll finally get to the meat of the article, where you’ll get a step by step guide to become a day trader.

Let’s start!

Part 1: What You Need to Know About Day Trading

This part of the article will deal with the most common questions on day trading, and provide a lot of useful information that anybody who wishes to start day trading will get a lot of use from! How Does Day Trading Work?

Related trading: Great article about day-trading from a day trader.

Why Is Day Trading So hard?

One topic that’s good to touch on before we look at how you may become a daytrader, is that of why day trading is so hard. Judging by the statistics that circulate the web, as many as 90-95% of all day traders fail to make money in the markets.

Now, while that number isn’t completely verified, it doesn’t surprise us the slightest. Most people expect to make money with no or very little previous knowledge, and haven’t anticipated the requirements that day trading puts on you.

So, here are some of the reasons to why day trading is so hard.

Most Market Moves are made during the night

One of the reasons why some people want to go with day trading rather than swing trading is to avoid the overnight risk. They’re afraid that the market will perform a significant negative gap, that will blow past their stop losses and cause significant damage to their account.

The risk of overnight gaps is real, but isn’t nearly as bad as it sounds. The fact is that you’re paid to take that extra risk, in the form of higher returns. Most people don’t know that most of the returns in the stock market actually are made in the form of small, positive gaps.

For instance, look at this equity curve of the money you would have made had you been in the market from open to close every day. Not that alluring, right?

Related reading: Is It Possible to Day-Trade Successfully?

The difference is striking if you haven’t seen it before. Most money in the market is made in the form of overnight gaps, and this is one factor behind why it’s so hard to make money as a day trader. You simply don’t have the bullish bias of the market to help you, like a swing trader who holds his or her positions overnight and takes advantage of the positive overnight drive.

Most Market Data is Random

Most of the moves that occur in the markets have no specific reason but are random. Only a little portion of it all can be quantified and used successfully, in the sense that it represents a recurring market pattern that precedes a certain price move.

Now, this means that you’ll spot a lot of seemingly profitable patterns that are nothing but random occurrences. And since they are random, they’re not going to work well in live trading or new market data.

This is one of the biggest challenges traders, and particularly day traders, face. If you’re interested in learning more about this particular issue and how it’s mitigated, our article on curve fitting deals with it in greater depth.

Competition Tightens

The markets are becoming ever more efficient as more and more people have received access to the markets through online platforms. In addition, computerized and algorithmic trading has become much more widely accessible and affordable, with the result that competition not only increases, but also becomes faster and more exact.

Not Having a Trading Strategy

While some traders believe that playing on gut feeling is a working method, those who have traded the markets for some time know that it’s extremely hard, or even impossible. You need a validated and rules-based trading strategy to stand a chance in today’s markets, which is something most traders lack. Thus, many end as losing traders.

Our article on how to build a trading strategy delves deeper into this topic, and how you may go about constructing something that has a chance of holding up in live trading!

Advantages of Day Trading

Let’s now look at what generally is considered the advantages of day trading.

Independence

Many people who pursue trading do so because they want to be independent of any workplace, and manage their own time better.

While day trading doesn’t mean that you may have loads of more spare time, you often have a lot more freedom. For instance, someday trading strategies will only execute orders during the first and last half hour or so of the market trading hours. Then you could potentially do other things during some of the days, although most traders spend most of their free time improving on their strategies and methods.

If you decide to go for an automated approach, as will discussed later, you’ll even gain more freedom. Then you could work on your trading whenever you want, regardless of the market trading hours. After all, the order execution is taken care of for you automatically!

Status

If you manage to become a profitable trader, you’re accomplishing something that others are merely dreaming of, which inevitably will attract a lot of attention. This might be an advantage for those who are seeking fame, but more of a cumbersome disadvantage if you’re the type who regards most extra attention as unwanted.

No overnight risk

Although we’ve already established that the lack of overnight holding periods makes day trading harder, many traders instead regard it as an advantage. And since the market is much less likely to gap against you, some traders will be willing to risk a little more on their trades, which means more money in the end.

You’re location independent

As a day trader, the only thing you need to carry out your work is an internet connection and a computer. Thus, you can choose to work from wherever you want, be it at home or in new exciting countries and places.

In that regard, trading and day trading could work well for someone who wishes to pursue a lifestyle as a digital nomad.

If you want to read more about combining trading and life as a digital nomad, our guide to becoming a digital trading nomad is a recommended read!

The pattern day trader rule – What Is Is and How Does It Work?

The pattern day trader rule applies to all traders who hold less than $25,000 AND trade on a margin account. In short, it limits the number of day trades to three per five consecutive working days. One day trade is defined as a trade that’s opened and closed within the same trading day.

Now, the reason why this rule was implemented in the first place was to protect day traders with little experience and knowledge from margin trading, which comes with much higher risks than a typical cash account.

However, the rule doesn’t keep you from trading a regular cash account, and all in all, we believe it does better than harm when it comes to protecting the capital of small and often inexperienced traders!

Disadvantages of Day Trading

As with any trading styles, day trading has some disadvantages that could be good to know about:

You can lose a lot of money

As laid out earlier, most people who attempt a career in day trading do lose money. And even if you manage to become one of those winning traders, day trading will remain a risky business.

Therefore it’s paramount that you control your risk and follow up your trades to learn from your mistakes. Otherwise, your trading career won’t be long-lived.

Day trading is harder than most other trading forms

For beginners, there are other trading forms that are much easier to master, and that still hold great profit potential. Swing trading is an example of such a trading style, that’s both beginner-friendly and time-efficient. Be sure to check out our swing trading guide if this sounds interesting to you!

The pattern day trader rule

Although we don’t fully agree, many people regard the pattern day trader rule as a significant disadvantage, since it keeps those with smaller accounts from day trading stocks with leverage. However, the limiations imposed by the rule were introduced to protect small market players from big losses, and given the fact that so many lose their trading capital, that was a wise decision. After all, you still can day trade. You’re just limited from using leverage!

Day trading takes more time than other trading forms

We recently raised the point that one of the advantages of day trading is that it gives you more freedom and makes you independent from a 9-5 job.

That’s still true, but for those who really seek freedom, there are other trading forms that might be a better choice. For example, swing traders may just need 15 minutes per day to execute their strategies, which is far less than the time an average day trader would need to spend.

Beware of Day Trading Scams!

With the rise of the internet and modern video sharing platforms like Youtube, the traditional snake-oil salesmen have stepped up their game. Nowadays you’re awash with fake trading vendors that proclamate their methods and offer expensive training courses. The day trading arena is hit especially hard since it attracts by far the most visitors. In short, it’s where the money lies!

Now, these types of trading scams can be really hard to see through as a beginner, and many people are falling victim to their unethical and spurious business models.

To help you differentiate between what is worth following, and perhaps buying and not, we’ll now quickly tell you about two common trading scams. These are astute concepts that have been repeated for many, many years, but that easily go unnoticed by somebody who is new to the markets.

Trading Scam 1: The Pump and Dump Scam

This scam consists of a trading leader who has a big base of followers. In short, the leader notifies his or her followers that he is taking a trade. The security is carefully chosen to have low volume and be easily manipulated by larger order flows. Many trading scams who choose this method go with penny stocks.

Then, as the orders of the followers hit the market they will be enough to cause the market to move in the direction of the trade that the trading leader just signaled. As soon as the market has moved up by a small amount, the trading leader gets out of the trade and notifies his followers, who do the same and cause the market to go down in the process.

Thus, the trading leader may very well make money, but only because of the control he exerts over his group of followers.

Trading Scam 2: Fake Tradingletters

This is quite an astute method where somebody gathers a big list of emails and then sends out a daily letter to all subscribers. One letter where the market is forecasted to go down is sent to the first half of the list, while the other half receives a forecast that the market will go up.

Then, the next day, the scammer will send another e-mail to the group which had received the correct market forecast the day before. This procedure is repeated several times, until only a few subscribers, who all have received accurate forecasts, remain. These are then offered an expensive subscription to continue receiving the newsletter.

Important Points

Here are some important points to consider before making any trading related purchase

1. Is the Trading Vendor Trading his or her own money?
2. Is he or she only trading penny stocks, with many followers who could impact prices upon being notified of recent trades?
3. Is he or she promising the holy grail and that day trading will be easy? If so, you can be quite confident that you’re dealing with a trading scam!

How Much Can You Make Day Trading?

The probably biggest reason why many people look to start day trading, is because of the profit potential. In fact, how much money can I make day trading is one of the most common questions we get.

Now, provided that you have one or several solid trading strategies that work, how much money you’ll make as a day traders is going to depend on a couple of factors. Let’s look at these before we give you the real numbers as to what we consider a good return!

Factor 1:The Robustness and quality of Your Trading Strategy:

All trading strategies aren’t equal. Some are more profitable than others, and simply have a better history of delivering profits to its owner. They may also have smaller drawdowns, which makes it possible to trade with a bigger position size.

What also impacts the amount you may make in day trading, is the robustness of the strategy. While some new traders believe that trading strategies continue to work well forever, that isn’t the case. Strategies do fail eventually, and then need to be replaced. However, a robust strategy is more likely to continue working, than one that’s not as robust.

Now, there are many factors involved in determining whether a trading strategy is robust or not, and they would take too much time to include in this guide. However, here are two common determinants:

1. How long the strategy has traded
2. How many conditions it uses

1. How long the strategy has been profitable

By how long the strategy has been profitable, we don’t mean how far back any historical observation stretches, but how long the strategy has delivered profits in a real or simulated trading account. Everyone can come up with something that looks fantastic with hindsight. However, not that many know how to build a day trading strategy that lasts into the future. That’s a completely different thing!

In our article on how to build a trading strategy, we deal with this topics in greater detail.

2. How Many Conditions It uses

If a strategy uses more than a couple of filters and conditions the chances are that it’s not as robust as a strategy that uses much fewer conditions. The reason is that the chance of introducing curve fitting into a trading strategy increases rapidly as you introduce more conditions and filters.

Our article on curve fitting goes deeper into this topic.

Factor 2: Your Position Size

Quite logically, somebody who risks double the amount will see his or her profits double as well. Generally, it’s recommended to risk no more than a couple of percent on each trade to keep the risk of ruin at an acceptable level.

Factor 3: Your ability to stick to the rules

Once you have a winning strategy, it’s essential that you stick to the rules. Many people can’t stand the emotional turmoil of following a strategy in its ups and downs, and will start to make their own buy and sell decisions as they attempt to make back previous losses. This is a recipe for disaster, since your edge lies in the trading strategy, and not your own ambiguous decisions!

Factor 4: The time and effort you put in

Nobody will succeed in day trading without putting in the time and effort that’s required. And in the long run, the market tends to favor those that work the hardest, provided that they work on the right things. This will be expanded on in the third part of this guide!

How Much Can You Make Then?

As you’ve probably realized, the returns that you may get from day trading vary a lot. However, what we can say, is that you shouldn’t expect those types of returns of hundreds of percent on an annual basis. That’s just unrealistic, and those who claim to have that type of returns are most likely either lying, or performing some type of pump and dump scam, as covered earlier.

We think that any return between 30-60% annually is a great return. That way you’ll be doubling your money every two to three years, which is a great return!

Most people enter day trading with the wrong expectations. You could say that they approach trading as if it were a sprint, whereas it’s more like a marathon that will favor those who persist in the game!

How much Capital Do You Need? – Can you start day trading with $500 or $1000?

While many brokers offer options for those with very small capital, such as $500 or $1000, it’s too little to make any significant amount of money.

We know that many people might tell you to use leverage to quickly double, triple or even quadruple your account size within days or weeks. However, the truth is that those who manage to make those kinds of returns are risking way too much, which means that they sooner or later will lose it all.

According to us, the amount you need is of a size that makes all the hard work worthwhile to you. In other words, if you just have $1000 and manage to get a 30% yearly return that will be merely $300, which might not be worth the effort. In other words, you need to consider which amount that will provide a return that makes the effort worth your time!

Part 2: Popular Day Trading strategy Types and Markets

Having covered some of the most commonly asked day trading questions, we’ll now head over to the most common day trading strategy types and what they mean.

Popular Day Trading Strategies

Scalping.

Scalping is a very popular trading strategy, especially in the forex market, that aims to profit from small minute price changes. Being one of the most fast-paced trading forms out there, it’s also the one that’s deemed the most alluring by newcomers.

Profits tend to be small, while the winning rate is quite high. This is also why it’s really important to trade a market that has high trading volume not to incur too much slippage.

In general, scalping is a trading style retail traders shouldn’t attempt. The moves simple are too small to gain any real consistency in your trading results, and slippage and transactional will be a hugely limiting factor!

Fading.

Fading which to some extent resembles mean reversion, is a contrarian approach to day trading. It’s based on the belief that a market is likely to return to its average price after having performed a strong movement. This is partially a result of traders who take profit after having made some money from the last move.

Some faders use market sentiment indicators to find out when a market is becoming overly optimistic or pessimistic, to find potential turning points.

Momentum and Breakout

Momentum day trading could be said to be the opposite of fading. Instead of taking a contrarian view, we buy in line with the market strength.

Momentum day trading relies on the principle that something that moves is likely to continue moving in the direction of the momentum. Thus, momentum day traders tend to act on price patterns like breakouts over recent highs or important support and resistance levels in the market.

Which Day Trading Strategy Type Should You Go For?

The most important factor when choosing a day trading strategy isn’t the particular characteristics of the system, but how it works with your particular market. For instance, big blue-chip stocks will behave quite differently from the forex market, while the latter will show some tendencies that might not exist in the gold market, just to name another example.

In the third step of the guide which is right around the corner, we’ll show you how you should go about to arrange your day trading so that it suits the market you want to trade, be it forex markets, stocks, or futures.

The Most Common Day Trading Markets

There are many markets to choose from as an aspiring day trader. Here are the most popular day trading markets:

Stocks

As a stock day trader, you literally have thousands of markets to choose from, and as a result, finding opportunity tends to be easier than if you were focusing on one or a few specific markets only. In addition, you have a wide variety of exchange-traded funds to choose from that offer access to otherwise inaccessible markets like gold and energies.

Forex

The forex market is the world’s most liquid market which makes it an attractive market for many day traders. There are many currency pairs to choose from, and with high liquidity, slippage shouldn’t be too much of an issue like it might be in other markets.

In addition, the forex market is open 6 days a week, 24 hours a day, which means that you may trade at a time that suits you, provided that you have a strategy that works well during those hours you choose to trade.

Futures

The futures markets are great for daytrading, since they offer great liquidity and access to some markets that would otherwise be inaccessible. For those who don’t know, futures contracts, in short, are agreements to take delivery of or deliver a predetermined amount of the underlying asset, at a future price and date.

Another great benefit of trading futures is that they’re heavily leveraged instruments, which makes it possible to open quite big trades even with a limited capital size.

CFDs

CFDs are financial contracts that may seem quite similar to futures contracts at a first glance. However, the similarities don’t go much beyond that they’re both leveraged contracts that require an initial margin to open a position.

CFD contracts track an underlying asset, such as a stock, an index, or a commodity, and are often offered for a wide variety of markets. However, unlike futures contracts that trade on a regulated exchange, CFDs are run by the CFD brokers themselves, who are those who set prices. This often leads to unfavorable pricing models that can be quite expensive compared to regular futures contracts, which tend to be quite cheap options to gain exposure to various markets.

What Do We Trade?

Here at The Robust Trader, we prefer to day trade futures, but also have day traded stocks in the past. Here are the advantages of futures in our view.

• We can trade with a lot of leverage
• We have easy access to a whole range of markets
• The liquidity is often high, compared to other securities that track the same underlying.
• We can diversify across many different markets and commodities, which means more money and a lower overall risk level.

However, as we mentioned earlier, stocks are hard to beat in the sense that there are thousands of them to choose from, of which at least a few will present some signals most days.

Part 3: How to Start Day Trading

Step 1: Learn Technical Analysis

The first step is to learn some basic technical analysis. You don’t need to become an expert right away, but the important thing is that you understand how to define market movements with the help of technical indicators and price patterns.

Our complete guide to technical analysis covers a lot of this topic

However, don’t get too bogged down into how patterns, indicators, and other concepts should work in trading. That’s something we’ll discover ourselves. As a matter of fact, most of the traditional concepts in technical analysis don’t work that well, and need to be tweaked if you want to get something tradable.

In step four we’ll take a closer look at how you should go about to construct a trading strategy that has a chance of working in real trading!

Step 2: Choose Your Market and what to trade!

The second thing to figure out, is what you’re going to trade. Take a look at the quick overview we provided in part 2, and see what fits your needs and desires.

We recommend that you go with securities that trade on regulated exchanges, since that tends to be a more safe option. In other words, it better to go with futures than CFD contracts, since the latter means that you’re at the whim of the CFD broker and the way that they set their prices. For instance, during a heavy market downturn, it’s not uncommon to see CFD brokers impose restrictions on how their contracts can be traded, which could have detrimental effects on your trading performance.

Another thing to keep in mind is to stay away from penny stocks. As we mentioned earlier in the guide, penny stocks are some of the most scam ridden instruments, and with often low liquidity, you’ll likely incur a lot of slippages which will eat into your trading profits.

Step 3: Open a Trading Account

As you’ve decided what markets and types of securities to focus on, it’s time to choose a broker through whom you’ll be executing your trades.

Today there are options on the market that range from the big and well-known brokers who have stood the test of time, to newer market players who you might never have heard of before.

Regardless of the broker you’re choosing, there are some things you should look out for. In the list below we have gathered some of the most important things to consider:

1.Commissions and transactional fees

As a daytrader you’re doing a lot of trades, with the average trade being quite small. Therefore the impact of recurring trading related costs, like commissions and other transactional costs, will have a huge impact on your results. And as a result, you should try to lower your transactional costs as much as possible, in order to retain the lion’s share of the profits you make.

Unfortunaaely, some traders forget about transactional costs, and don’t realize the impact it will have on their trading strategies and methods. In fact, many times it will be a break or make factor, where higher transactional costs could even turn a profitable trading strategy into a losing one. Therefore it’s paramount that you account for these costs when evaluating a trading system.

For instance, if you decide to trade a strategy where your average gain is $2, and have commission costs of $3 per trade, you’ll be trading a losing system.

Be sure to check out the cost structure of your broker before making a final decision!

3. Account Fees

Continuing on the theme of keeping costs lows, you also need to consider other types of fees that some brokers may choose to impose. Here are some of the most important ones to consider:

• Annual fees
• inactivity fees
• Subscriptions for market data
• Trading platforms subscriptions

Many brokers won’t charge you most of the fees above, but it’s always worth taking an extra look to ensure that youäre not paying any unnecessary fees.

3. Watch out for account minimums

Some brokers may demand a minimum initial investment, like $500 or $1000, which could be an issue if you’re looking to start off with a small amount.

4. Consider your need for education and technology

Some brokers, like TradeStation, offer advanced trading platforms at no cost for all their clients. Other brokers just offer very rudimentary order execution platforms, that lack many of the features you may wan’t as a trader.

If the trading platform and its features are important to you, we recommend that you have a look around to see what’s offered by the various brokers. Even if many of the bigger platforms are available even to those who don’t have an account with the specific broker, there isually is a quite high monthly fee for non-clients that you want to avoid.

In addition to the trading platform itself, you might want to also consider the educational reosurces that are offered to you as a client. Many brokers attempt to increase the attractiveness of their brokerage services by including vast libraries of educational material.

Conclusion

According to us, the main consideration you should have as a trader is to keep your costs as low as possible, to keep as much of your profits for yourself as possible.

However, if you do need some sort of trading platform or another service that’s offered by a certain broker, you also need to account for the cost of finding a similar software somewhere else. Sometimes this will mean that the broker with the lowest fees might not be the cheapest options for your personal needs!

Step 4: Build a Trading Strategy

Now we have come to the part of the trading process that most traders never master, which is building a day trading strategy that works and will last into the future.

While there are many day trading strategies to read about online, which allegedly are profitable, our experience is that very little of what’s out there works when put to the test. We know this, because we always verify the strategies we’re about to trade, before we risk any of our own money.

To be frank, no day trader should expect to be able to take what’s online, and trade it profitably right away. Instead, the concepts found need some massaging and tweaking to be turned into profitable day trading strategies.

In fact, a day trader who doesn’t know how to build his own day trading strategize won’t be long-lived in the markets. As strategies sometimes stop working, we need to replace them with new, fresh concepts that we’ve come up with.

So, here is the short guide to how to build a day trading strategy. If you’re interested in a more thorough guide, our article on how to build a strategy covers the process in greater depth.

Step 1: The Trading Idea

This is perhaps the most creative phase of the strategy creation process. It’s where you take anything you can think of, be it trading indicators, price patterns, or a combination of both, and try to formulate what is going to be your trading strategy.

While we find that most of the concepts presented online don’t work, you definitely could take inspiration from it and tweak it into something unique! Soon you’ll start to hatch ideas on your own, and before it, there is an endless stream of ideas for you to investigate.

Here are some examples of what a trading idea might look like:

1. The market gaps above the high of the previous bar on the open of the trading day. ADX is higher than 30, showing a strong trend.
2. The market performs three bars that all close higher, with each candle being formed with a bigger range than the previous candle.
3. The market is at its longest distance from the moving average for a certain amount of time. If this is true and the close is above the average we go long. If the close is below the average, we go short.

Generally, you should never discard an idea just because it doesn’t resonate with what you’ve heard should work, or think should work well. In fact, many of our strategies that perform well use the exact reverse conditions of those that are normally shared and liked online.

For instance, you could try and see what happens if you reverse the rules of some popular candlestick patterns, or fade breakout over recent highs, which by many are considered worth following

Step 2: Testing the Idea

The next step is another thing that many traders forget about. You simply cannot take the rules found online, or some that you have come up with yourself, and expect that you’ll get a fully functional trading strategy out of it.  The concept you intuitively believe will work in the markets simply seldom are those with a real edge!

When we build a trading strategy, we have to come up with tens of trading ideas before we stumble upon something that seems to hold some type of edge. This means that we would be mostly losing day trading strategies, were we to just accept any truth that’s thrown at us.

To ensure the validity of day trading strategies we trade, we backtest our strategies to see how the idea has fared on historical data with the help of a backtesting platform. Once we’ve coded our idea we’ll get a performance report with an equity curve like the one below, and quickly get a sense of whether the strategy is worth spending more time on or not.

Now, there are many backtesting platforms to choose between, but in our opinion, the best ones out there are TradeStation, Multicharts, and Amibroker. Of these three, TradeStation and Multicharts both use the Easylanguage programming language, which is the perfect programming language for a beginner.

Step 3: Validation

Now, if you find a day trading strategy that you think looks great, it’s time to validate the strategy to ensure that it’s robust.

Many traders assume that they may trade anything that comes off well in the backtest. While that might a logical assumption, it won’t take you very far profit-wise.

The issue lies in that most of the market movements are random, which means that we very well may have fit our rules to past, random market noise, rather than true market behavior. In trading, this is referred to as curve fitting.

Now, if you have curve fit a strategy, it isn’t going to work going forward, even though it looked great in the backtest. And to avoid trading strategies that stop working as soon as they’re deployed, we have to employ some quite tough robustness testing of our day trading strategies.

So, what do we mean by robustness testing?

Well, there are quite many methods that are designed to help us detect strategies that are curve fit. Here are two common methods:

Out of sample/ In Sample Testing

This is a method where we divide the data into two sets. The in-sample is used for the initial testing, while the out of sample is used to validate the performance of the strategy.

The rationale is that true market behavior should be consistent throughout both data sets, while some random behavior will appear only in one of the data sets. Thus, any strategy that works in both data sets is less likely to be the result of curve fitting.

Forard Testing

Forward testing simply is when you build a trading strategy and let it sit some months for validation. Then you see if the strategy continues to perform well, or if it just fall apart.

This method is quite similar to regular out of sample testing, but it has the immense benefit that futures data is unseen. Many times traders will go back and forth between their two data sets until they’ve tweaked their strategy to work well on both data sets. What they effectively have done is to convert the out of sample into in sample, which renders it useless. This is something you avoid if you use futures, unseen data as validation!

If you want to know more about how to validate a day trading strategy, our guides to backtesting and how to build a trading strategy cover the topic in more depth!

Step 4: Repeat

If you repeat the process outlined above, you’ll soon have a flow of trading ideas that turn into trading strategies, of which hopefully some will pass your robustness testing procedures and become strategies that you may employ in live trading!

Just remember that building a good day trading strategy takes time and effort and many failed attempts. However, once you find something it certainly will be worth the effort!

Step 4: Trading a Day Trading Strategy

Once you have day trading strategy that works, you have finally come to the step that you have been waiting for! Now it’s time to take the plunge and trade your strategy in the markets, and since you have all the rules clearly defined as part of the backtest you carried out, you may choose to auto-trade the strategy. This is how we trade most of our own trading strategies, and there are many benefits involved.

For instance, it’s less psychologically demanding, and the order execution will be faster and more exact.

However, the biggest benefit according to most people is that you don’t need to monitor the strategies all the time, but can do other things as the strategies trade for you!

We won’t go so deeply into automated trading, but if you’re interested in learning more, we really recommend that you look at our guide to algorithmic trading which deals with automated trading in more depth!

Regardless of the type of order execution you choose, there are two things you need to keep in mind. Those are:

Monitor the Strategy

Do monitor the strategy, and have a plan for what you’ll do if it fails. As we have touched on several times in this guide, trading strategies don’t live forever. Be sure to limit the losses you’ll accept from a particular trading strategy before you go live. Otherwise, you risk taking irrational decisions in the heat of the moment!

You need to keep track of yourself

We recommend that you keep a trading journal where you keep track of things like your own emotional state, the mistakes you made, and other relevant metrics. While it might not seem that useful in the beginning, you’ll discover a lot of areas for improvement as you review your journal entries.

Final Tips for Beginning Day Traders

Don’t Focus too much on Trading Psychology

While we don’t want to belittle the importance of the psychological part of trading, we often see that beginning day traders explain their losses with that they lack the psychological strength to carry out their strength. However, what we see is that the lack of psychological strength isn’t the main issue. Instead, they don’t have a properly tested and working trading strategy, even though they believe they do.

Do remember that nobody can become a profitable trader without a profitable strategy, regardless of how strong they happen to be mentally! 

Be Patient and Use Backtesting!

One of the biggest factors affecting whether you’ll be successful or not as a day trader, is how patient you are!

Being one of the hardest trading forms to master cannot expect to do well just as you’re starting out, in the same way as a layman won’t expect to be able to perform advanced surgeries without many years of studies and training.

Just be sure to use an evidence-based approach where you employ backtesting to rule out what works and not. Otherwise, you’ll be spending your time as most other aspiring traders, namely on futile attempts to perfect trading strategies that show no promise whatsoever.

Use a Stop Loss

It’s important that you use some type of stop loss to control the maximum amount you risk on each trade. If you don’t the chances of you accumulating losses at a pace that will take you to drawdown that are hard to recover from, increases.

Generally, you should risk no more than around 2% on each trade.

If you want to learn more about stop losses, do have a look at our guide to stop loss orders.

Related reading: Can I Live Off Day Trading?

FAQ

Requirements to Become a Day Trader

One of the first questions people have when considering a career as a day trader is whether or not they need a college degree. The answer is no, a college degree is not a requirement to become a day trader. However, some basic education in finance, economics, or business can be helpful in understanding the markets and making informed decisions.

In addition to education, there are some other requirements that may vary depending on where you live and the specific brokerage firm you choose. These may include:

A minimum amount of capital: Some brokerage firms have minimum account balances or funding requirements.
A clean criminal record: Some firms may require a background check before approving your application.
Age requirement: Some firms have age requirements, such as being at least 18 or 21 years old.
Trading experience: Some firms may prefer to work with traders who have some experience, either through a trading internship or other related work.
Learning the Skills Needed to Become a Successful Day Trader

While a college degree is not a requirement to become a day trader, there are certain skills and knowledge that can help you succeed in this field. Some of the key skills you’ll need to develop include:

Market analysis: Day traders need to be able to quickly and accurately analyze market conditions and trends in order to make informed trading decisions.
Risk management: Day traders must be able to manage risk effectively, including setting appropriate stop-loss orders to limit potential losses.
Time management: Day traders need to be able to manage their time effectively, as they may be making multiple trades in a single day.
Discipline: Day traders must be able to stick to a trading plan and resist the temptation to make impulsive trades.
There are many resources available for learning these skills, including online courses, books, and trading forums. It’s also a good idea to consider interning or working with an experienced day trader to gain hands-on experience and mentorship.

Getting Started as a Day Trader

Once you’ve developed the necessary skills and met the requirements, the next step is to find a brokerage firm and open an account. When choosing a brokerage firm, it’s important to consider factors such as fees, available trading platforms and tools, customer service, and the types of securities you can trade.

Once you’ve opened an account, you’ll need to fund it with the capital you’ll use for trading. It’s generally recommended to start with a smaller amount of capital, especially if you’re new to day trading, as this will allow you to learn and build your skills without risking too much money.

Potential Risks and Rewards of Day Trading

Day trading can be a risky endeavor, as the markets are volatile and prices can change rapidly. It’s important to understand and manage risk effectively to minimize potential losses.

On the other hand, there is also the potential to earn significant profits through day trading, especially if you’re able to accurately analyze market conditions and make informed trades. However, it’s important to keep in mind that past performance is not indicative of future results, and there are no guarantees in the markets.

How Much Money Do I Need to Start Day Trading?

The amount of money you need to start day trading will depend on your goals and the specific brokerage firm you choose.

As mentioned earlier, some firms have minimum account balance or funding requirements. It’s generally recommended to start with a smaller amount of capital, especially if you’re new to day trading, as this will allow you to learn and build your skills without risking too much money.

However, it’s important to keep in mind that day trading can be a risky endeavor, and it’s possible to lose money as well as make money. It’s crucial to have a solid trading plan and risk management strategy in place to help mitigate potential losses.

Types of Securities You Can Trade as a Day Trader

As a day trader, you’ll have the opportunity to trade a variety of securities, including stocks, bonds, futures, and options. The specific securities you can trade will depend on the brokerage firm you choose and the markets they offer access to.

Choosing the Right Brokerage Firm for Day Trading

When choosing a brokerage firm, it’s important to consider factors such as fees, available trading platforms and tools, customer service, and the types of securities you can trade. It’s also a good idea to read reviews and do some research to get a sense of the firm’s reputation and the experiences of other traders.

Some common mistakes that novice day traders make include:

• Not having a solid trading plan: It’s important to have a clear strategy in place to guide your trades, including risk management and exit strategies.
• Trading on emotions: Impulsive trades based on emotions rather than analysis can lead to poor decision-making and significant losses.
• Not properly managing risk: Failing to set appropriate stop-loss orders or overleveraging can lead to significant losses.

Regulatory Bodies Overseeing Day Trading Activities

Day trading is regulated by various bodies depending on the jurisdiction in which you’re trading. In the United States, for example, day trading is regulated by the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA).

It’s important to familiarize yourself with the regulations and requirements of the specific jurisdiction in which you’ll be trading, as failure to comply with these regulations can result in penalties and legal consequences.

Conclusion

Day trading can be a rewarding career path for those with the right skills, knowledge, and discipline. While a college degree is not a requirement, some basic education in finance or business can be helpful. It’s also important to learn the necessary skills through courses, books, or mentorship, and to choose the right brokerage firm.

There are risks and rewards involved in day trading, and it’s important to understand and manage risk effectively. There are also regulatory bodies overseeing day trading activities, and it’s crucial to familiarize yourself with these regulations to ensure compliance. With the right preparation and mindset, day trading can be a fulfilling and profitable career. In this guide to day trading we have tried to gather as much useful information as possible, to ensure that you’re as prepared as you possibly can be on your journey towards becoming a day trader.

Now, the most important thing that you should focus on now, is getting your trading strategy ready! Without it, you don’t stand a chance in the markets, which is why you should keep it your first priority.

Again, our guide on how to build a trading strategy deals with this topic in more depth.