While many people dream of making a living from day trading, it’s not as easy or profitable as it might seem. It takes specialized tools and equipment, as well as a solid strategy and discipline.
You’ll also need a good broker. NerdWallet’s online brokerage comparison tool can help you find one with low commissions and other fees.
1. Learn the Basics
There are many things to know about day trading before you dive in. For starters, it’s essentially gambling on the random price movements of stocks. It’s a high-risk activity that requires considerable skill and knowledge, but can be lucrative for those who succeed. It’s also a demanding profession that can be difficult to balance with other responsibilities and may require significant capital to start.
Some day traders use strategies that involve buying when prices rise and selling when they fall. This is called trend following. Others, like the contrarians, go against the market herd by shorting a stock when it’s falling or buying it when it’s rising. This requires a lot of presence of mind and rapid decision-making, which can be difficult for beginners. Other strategies, such as scalping and trading the news, rely on short-term movements in order to make profits.
One of the most important things to learn is how to read a chart. It’s a good idea to choose a broker that allows you to view order flow, the list of orders lined up to buy and sell a stock. This helps you identify when a stock is likely to hit “support,” a price at which other traders will buy it and the price will rise, or “resistance,” a price at which more sellers step in and the price will fall.
Beginners should also be aware of the fact that even experienced day traders lose money sometimes. For this reason, it’s advisable to only trade with funds you can afford to lose. It’s also a good idea to focus on only one or two stocks during each trading session so you can track them and spot opportunities.
2. Get a Trading Simulator
The most successful traders spend a lot of time practicing their trades on a trading simulator before they put any real money at risk. This is a critical step in shortening your learning curve and minimizing your emotional cost of trial and error. Knowledge Eager emphasizes the importance of this step before dipping your toes in day trading.
A trading simulator is a virtual platform that mimics your broker’s trading environment and allows you to practice your trading strategies with “virtual” cash. These platforms are very similar to your actual brokerage account and allow you to experience different market conditions, simulated trading orders, and even the effects of news on stock prices.
Most brokers provide a free trading simulator that gives you a set amount of virtual dollars to use when you sign up and login. For example, eToro has a simulator that provides new traders with a $100,000 budget and offers a number of other tools to help you get started.
When you begin using a trading simulator, it is important that you practice with the exact same trade size and strategy management that you would apply to your actual brokerage account. This is the only way to truly evaluate your skill and develop an edge in the marketplace.
The best online trading simulator providers offer a feature called market replay, which allows you to select any trade and play it back on the simulator. This is especially useful when you are working through a specific type of trading setup, such as a head and shoulders pattern or a reversal from a rounded bottom. You can then create a playlist of the trades that you want to review and practice, just like how you would organize music on Spotify.
3. Get a Broker
A successful career as a day trader requires more than just research and a solid strategy. A beginner must also find a broker who works with their trading style. A good broker will understand the regulatory environment and have detailed online tools that support quick decisions.
Investing in a brokerage firm that has a reputation for customer service is important, as well. A broker should also offer low or no commissions on day trades to minimize the amount of money lost on each trade. If a broker does not offer low or no commissions, it is best to look elsewhere.
Many professional day traders work on margin, meaning they borrow money from their brokers to make larger investments than what they have available in their own accounts. This can dramatically increase profits and losses, making it even more important to use a sound risk management plan.
Some day traders use technical analysis to pinpoint buying points in a stock. They can use candlestick chart patterns, trend lines and triangles to help make informed trading decisions. In addition, they must keep up with news and events that may affect the price of a stock, such as earnings reports or Federal Reserve meetings.
Another common strategy for a day trader is to buy or sell stocks within one day, also called intraday trading. This is possible because stocks move quickly at the beginning of the day when investors and traders begin placing orders, which can cause prices to fluctuate. However, the market is less volatile toward the end of the day, when order flow slows down and stocks are more likely to hold their ground.
The first rule of day trading is to never hold a position overnight in the hope that it will rebound from a loss. This practice can incur additional costs, such as brokerage fees and the chance that a loss can balloon due to unfavorable overnight market moves. Moreover, it can lead to emotional and psychological biases that can undermine the effectiveness of a trading strategy.
4. Get a Trade Plan
When you’re starting out in day trading, it’s important to create a trade plan. This will help you stay disciplined and keep your goals and motivations in mind. It will also help you learn from your mistakes and triumphs.
To develop a trade plan, start by assessing your skills, goals and weaknesses. For example, if you’re not particularly good with money management, it might be best to avoid day trading altogether. Also, consider your risk tolerance level, and try to avoid trades that are outside of your comfort zone.
A successful trading plan will involve a clear strategy, detailed market analysis and meticulous news monitoring. It should also outline the amount of money you’re willing to lose. NerdWallet recommends setting aside a percentage of your savings to cover potential losses. It’s also a good idea to choose a broker that offers low commission rates and plenty of tools for research.
Finally, you’ll want to set a time of day when you’ll be trading. The rush hours are typically the most volatile, so it’s best for beginners to steer clear of them at first.
A trading plan will also include a profit target, or the point at which you’ll decide to sell your stocks. It’s crucial to have a clear profit goal because it will help you stay disciplined and make consistent profits. The most successful day traders have a clearly defined profit target and can use it as a guide to their trading decisions. They’re also able to analyze their wins and losses, so they can replicate their successes and avoid repeating their mistakes.
While many people have dreams of making a fortune by day trading, it’s important to know that this is not a get-rich-quick scheme. Even seasoned professional traders have days when they lose money. You need to be ready for that and have a plan to cope with it.
There are a number of strategies that new traders can try to maximize their profits. These include following the trend, scalping and trading on news. Scalping involves buying and selling stocks quickly, taking advantage of the difference between the seller’s asking price and the buyer’s offer. It requires a high level of speed and decision-making that can be difficult for beginners. Following the trend is a popular strategy that works on the assumption that prices will continue to rise or fall as they have done before. This is also a good strategy for beginners to use.
It is important to determine how much of your trading capital you’re willing to risk on each trade. You can then make sure your losses don’t exceed that amount. It’s also a good idea to start with a small account so that you can build your confidence and practice winning trades before investing real money. It’s recommended that you earmark only 1% to 2% of your trading account for each trade.
Most beginning traders begin by using paper trading accounts, or trading on a simulator, before moving on to their real accounts. This allows them to learn the ins and outs of different trading techniques, test out their strategies and prepare for the ups and downs that will inevitably occur. It’s recommended that you consider a zero-commission broker such as Robinhood or Webull to save on trading fees.