Day trading is one of the most misunderstood trading styles.
When you think of day trading, what comes to mind? A lot of people think of smarmy traders like in “The Wolf of Wall Street.” Sure, that movie is based on a true story … but it really doesn’t represent the reality of being a day trader.
Day trading is a legitimate career choice … if you approach it intelligently. For me, day trading low-priced stocks has proven to be the ultimate laptop lifestyle and my gateway to financial freedom.
Ready to explore this niche? I’ve created this guide to help dispel myths you might read on day trading sites and educate you on what it actually involves.
Read on to find out how to get started day trading. You’ll learn what it is, how it works, and how to avoid common mistakes I see people make all the time.
Table of Contents
- 1 What Is Day Trading?
- 2 How Does Day Trading Work?
- 3 How to Start Day Trading Stocks
- 4 Best Broker for Day Trading
- 5 Best Day Trading Platform for Beginners
- 6 Best Computer and Software for Day Trading Beginners
- 7 Day Trading For a Living –– Is It Possible?
- 8 What kind of stocks should I day trade?
- 9 When To Sell Stocks to Be a Successful Day Trader
- 10 Basic Day Trading Strategies
- 11 Day Trading Tips for Beginners
- 12 Day Trading Rules
- 13 Trading Challenge
- 14 Conclusion: Is Day Trading For You?
What Is Day Trading?
Day trading refers to buying and selling shares of a stock within a single trading day. So, between the time of the market open and close, you open and close your position.
This doesn’t mean that if you ever hold positions overnight you’re no longer a day trader. That does happen. But the strictest definition of a day trader is one who holds positions for a day or less.
For this article, I’ll stick with that definition. And generally, the stocks I refer to are penny stocks — stocks priced under $5 per share — because that’s what I trade.
How Does Day Trading Work?
The goal of day trading is similar to just about any other method of trading or investing: to earn a profit. But the way that you actually approach that goal is a little different with day trading.
For instance, if you buy shares of a blue-chip stock, you’re basically committing to a long-term relationship. This is a company you believe in –– or at least you believe their stock will increase in value.
Day trading is a lot more like a one-night stand. You don’t buy a company’s stock because you believe this company has what it takes … and you don’t intend to stick around for long.
You choose stocks based on price action. The stock could be going up for a variety of reasons — big news, a shiny new contract, or a hot new product. You hope to take advantage of short-term price fluctuations.
On the flip side, you might short sell based on negative news that could cause fluctuations.
These movements can be very short-lived, so day trading requires extreme vigilance and carefully planned entry and exit points. These are often determined by looking at a stock’s historical data.
Day Trading Taxes
For day traders, taxes can be more complicated than just punching the entries from a W-2 into an online tax platform.
This is important: short-term investments or positions of less than a year are taxed at a different rate than long-term investments.
Note: This is in no way legal or financial advice. Always consult a professional licensed before making tax or legal decisions.
Take the $84,201 to $160,725 income bracket. Long-term investments within this bracket are taxed at 15%, but for short-term investments, the rate is 24%.
For more detail on trading and taxes, see this post.
How to Start Day Trading Stocks
What’s necessary to actually execute day trades? That’s pretty easy: you’ll need a brokerage account to execute trades and trading software to help you find and track stocks. Often, these two things are combined into one program to work seamlessly.
Best Broker for Day Trading
You need a broker to execute trades, but what broker should you choose?
Choosing a broker is a personal decision. It depends on your opening balance, the features you need, your location — a number of factors.
I can’t tell you the “best” broker for day trading, because I don’t know your specific circumstances. Every broker has its advantages and disadvantages. These are my favorites.
I will say this: DON’T just go for the cheapest broker or the first one you find. Do your research.
This organization will handle your account and your trades –– make sure they execute trades quickly and reliably and don’t have a ton of hidden fees. You don’t want someone shady handling your money.
My advice: do your homework. You should be comfortable with all the tools you use, including your broker. They should be an asset to your trading venture.
Want more? Here’s a comprehensive guide to finding the best penny stock brokers for day traders.
How to Select Stocks for Day Trading
There are thousands of stocks to choose from … so how do you find the “right” stocks?
Don’t worry, it’s not as mysterious as it might seem.
It all starts with establishing and maintaining a watchlist. That’s a list of stocks that you’re tracking.
A stock screener is an invaluable tool for helping you make and maintain this list. Plus you can use your screener to filter stocks based on criteria that you set.
For instance, maybe you’re looking for big percent gainers or stocks with an upcoming earnings announcement. Every trader has specific preferences. A screener can help you filter and focus on what works for you.
Best Day Trading Platform for Beginners
If you ask me, hands down StocksToTrade is the best day trading platform. It’s a trading platform and stock screener all in one.
Full disclosure: I helped create the StocksToTrade platform. The goal? To help create an ideal platform for the way I trade and the way I teach.
We all worked our butts off to get this platform up and running. It’s got built-in scans, access to news, and a video channel. It also has broker integration, so you link many of the top brokers to your account for seamless trading right from the platform.
It also has a great paper trading (virtual trading) module, which is a great tool for day trading for beginners. It lets you test out different strategies without actually risking real money.
If you think of the stock market as a battlefield, StocksToTrade is like having the best weapon.
Best Computer and Software for Day Trading Beginners
In terms of software, all you really need is your online brokerage account and a stock screener. We already covered those, but what kind of computer should you use?
Once again, totally personal decision. Some traders prefer to trade on a bigger monitor or even multiple monitors.
Others prefer the #laptoplifestyle like me.
Since everyone wants to know –– I use a MacBook Pro. As I’ve shared on YouTube, I own a few laptops but do most of my trading from just one. But I always have a backup … just in case.
Looking for computer guidance? I outline some top picks for laptops in this post.
How Many Stocks Should I Trade Per Day?
Day trading isn’t a free for all. The pattern day trader (PDT) rule limits how many trades most beginners can execute within specific time periods.
The PDT specifically limits traders who have less than $25,000 in their accounts. Yep, that’s gonna be most new traders. So, if your account is under this amount, you can only make three day trades in a five-day period.
That doesn’t mean you’re limited to three trades per week, period. You can hold as many overnight positions as you want.
And I don’t think the PDT rule is a bad thing, especially for new traders. If you really want to be smart … focus on making great trading plans and waiting for the right setups — not how many trades you can make per week.
Two or three good trades a week is all you need. Yes, it takes time to build an account this way, but it’s time well spent as you learn the smart way to trade.
Day Trading For a Living –– Is It Possible?
Is day trading for a living possible? Short answer: yes. But wait! The longer answer is that you shouldn’t count on it to happen quickly or assume that it will happen at all.
About 90% of traders fail. In my opinion a big part of the reason why is that people want too much too fast. They don’t take the time to learn how the stock market actually works before they start trading.
Just look at one of my most successful students, Tim Grittani. Tim is currently over $8 million in profits. These results aren’t typical … and they didn’t happen overnight.
He actually wasn’t profitable at all his first nine months of trading! He experienced some staggering losses before he began to really focus on his education and turn things around. Even now he still has losses.
Tim’s results are far from the norm. But it’s worth remembering that not even the most successful traders strike gold right away.
What kind of stocks should I day trade?
Day trading isn’t limited to a specific price point or sector. However, the method that’s helped me find success –– and what I teach my students –– is day trading penny stocks.
There are many reasons I think penny stocks are perfect for day trading, but here are two of the biggies:
- First, they’re low priced. This makes them accessible to traders who have small accounts, which is most of my students.
- Second, they’re volatile. The volatility with penny stocks means it’s possible to experience huge gains in small periods of time … this makes it possible to grow your account fast.
When To Sell Stocks to Be a Successful Day Trader
When should you sell stocks? Ultimately, you’ve got to learn to make that choice for yourself.
As a day trader, you should ALWAYS make a trading plan. You need to know when to sell the stock –– either to take profits or cut your losses. Remember to set reasonable goals. Don’t get greedy.
As for losses … My #1 rule for day trading is that you MUST cut losses quickly. So if a trade doesn’t your way, it’s time to sell. Just get out. Learn the discipline to stick to your plan.
Need help figuring out how to make a trading plan? Check out this post.
Basic Day Trading Strategies
Everyone has a unique trading style. There are a ton of different strategies and approaches to day trading. Here are just a few you should know about.
Note that these styles aren’t all completely independent. For instance, it’s possible to be a trend-following trader who uses ranges or to be a scalper who follows the news and price action.
Trends are everywhere, even the stock market. In terms of stocks, certain sectors might heat up due to things like increased news coverage or legislation changes (like weed legalization).
Trend-following traders try to identify trends ahead of the curve or during dips, then try to ride the momentum.
This means going against the flow. For instance, if you believe a stock is pumped up, you might attempt to short sell, anticipating that it will go down in value.
With range trading, you rely on support and resistance to set buy and sell points.
Scalping refers to a day trading method where a trader makes frequent trades, hoping to make money through multiple tiny gains. It’s often based on quantity rather than quality, and I don’t suggest this method for new traders.
This is a style of trading where you short sell right from an ECN (electronic communications network) to get a rebate for the transaction. Really, it’s trying to game the rebate system for profits. Not my thing.
Playing the news
News moves stocks! If you’re playing the news, you’re looking for opportunities based on increased volume and volatility of a stock related to news or press releases.
With this style of trading, you’re looking specifically for a stock’s price movement. This means looking for big percent gainers and making trading decisions based on price movements rather than looking at the fundamentals.
Artificial Intelligence – Algorithmic Trading
Robo-trading! Also referred to as algorithmic trading, this style of trading relies on algorithms. AI programs can actually execute trades for you based on criteria you set.
Day Trading Tips for Beginners
The following stock trading strategies are what I teach all my students. They’re also what I practice.
Tip #1: Don’t Use Leverage
Leverage lets you borrow shares from your broker to increase your position size. The idea is that by taking a bigger position, you could make much bigger profits.
Problem? You can really get yourself in the hole this way, too. Leverage is the ruin of most traders, especially newbies. You don’t need to use leverage. Don’t do it.
If you lose, pretty soon you’ll get the dreaded call from the broker asking you to deposit more money to cover your losses.
If you can’t cover your losses, it could be game over. Not worth it.
Tip #2: Follow Stock Chart Patterns
When you start to really look at the price action of penny stocks, you’ll see that they move in patterns. These patterns can create opportunities for traders.
How? Well, over time, patterns repeat. If you really study, you can learn patterns, understand how to recognize them, and know when it’s time to pounce. At first, you should learn a few patterns and get good at spotting them.
In my free Penny Stocking 101 course, I’ve devoted several chapters to stock chart patterns. [Hint: if you want to gain insight into stock chart patterns right away, start at chapter seven. But make sure you go back and read chapters one through six.]
Tip #3: Create Your Own Stock Portfolio
“Stock portfolio” sounds awfully serious, but don’t get intimidated. This just refers to the different stocks that you trade and the positions you hold.
With any type of portfolio, it’s important to make your own decisions about the securities you choose. Yes, it’s fine to get information from a number of sources. But ultimately you’re the one responsible for the trade, so do your research.
Additionally, be sure to curate a diverse portfolio. Things change quickly in the stock market, so you never want to put all your eggs in one basket. If you only trade within a certain sector or at an exact price point, you could get burned.
Even with trading penny stocks, there’s a huge variety of sectors and price points to choose from. You might trade tech companies that go for fractions of a penny, or fashion companies that go for about $4 a share.
Want more? Check out my infographic on how to get started building a stock portfolio. It’s an easy-to-follow portfolio breakdown.
Tip #4: Trade Volatile Stocks
Volatility isn’t a trait you might look for in a romantic partner or best friend. But in terms of stocks, volatility is your friend.
Volatility is a measure of a stock’s price movement over time. When you study charts, you’re looking for price movement patterns.
High volatility is what you see when there’s a lot of up and down. If there’s no movement, you can’t make a profit.
Day trading for a living means embracing volatility. Volatility is also good for the overall market, even for buy-and-hold investors. At some point, most investors want to sell their shares, right? Without volatility and trading volume, it’s difficult to sell.
Tip #5: Use Mental Stops
Mental stops are one of my personal day trading secrets. A mental stop differs from a physical stop — you don’t set a stop with trading software. Instead, you’re pinky-swearing to yourself that you’ll enter and exit a trade at the points you set.
One of the best ways to do this is to focus on the risk-reward ratio.
For example, imagine you have a play on a $4 stock. Your target upside is $1 per share. You might choose to cut your losses at 25 cents per share. That makes your risk-reward ratio 4:1. You want to see risk-reward ratios of at least 3:1 or 4:1. Anything lower — like 1:1 or 2:1 — and there’s just not enough in it for you.
By using mental stops, you can still take advantage of the liquidity of penny stocks but with lower risk. Here’s the key: once the trade hits your mental stop criteria, get out. Close the position.
Some people ridicule me because sometimes I close out positions too soon and don’t make as much profit. Guess what? I don’t care. I’m still profiting, even if it’s small.
Tip #6: Never Stop Learning
When you think you know it all, your trading career is doomed.
The market has an uncanny way of knowing when you’re cocky. It can humble you all too fast. All it takes is a little change.
You must learn to adapt as a trader, and that means that you can never stop learning. There’s value in every experience. My biggest losses have been some of my biggest teachers … so have some of my biggest wins.
But how can you actually learn from them? Keep a trading journal.
This is a log where you note things like your entry and exit points, what you did right, what you did wrong, and how you could do it differently. Over time, as you flip back through your entries, you might notice patterns that can help inform future trades. It can help you reduce mistakes and streamline what’s working.
Tip #7: Set Aside Funds
Never trade more than you can afford to lose. In this recent video, my student Michael Goode talks about how he started out investing all his profits into the next trade. That’s a great way to grow your account … or blow up your account.
Don’t take the risk. Whenever you profit, save some of those proceeds. Don’t just reinvest everything.
Tip #8: Start Small
Scale up over time. Instead of going all-in every time, start with small amounts. You gotta learn what works and what doesn’t in a trade.
Then, and only then, should you start scaling up the amount of money you risk.
Remember: even if you don’t make tons of real money in your brokerage account, your education account is growing. Knowledge will serve you most as a trader.
Tip #9: Manage Your Risk
Cut losses quickly!
This is one of the most important and simplest lessons I can teach you. It’s also one of the biggest lessons that new traders ignore.
Day trading comes with risks. Penny stocks come with risks. But you don’t have to love risk to day trade penny stocks. In fact, I’d prefer you didn’t love risk. I don’t, and I think it’s one of my keys to staying in the game this long.
As a trader, I want to do everything I possibly can to reduce my risk: setting specific goals, having a plan, doing the research, and being disciplined about my mental stops.
If the price action reaches where I said I’d take profits, I do. The stock might go higher –– that’s OK. I’m fine with a smaller win if I stay safe.
But managing risk also means cutting losses quickly. If a trade doesn’t go your way, don’t wait around. Cut your losses, learn from the experience, and move on.
Day Trading Rules
Discipline is SO important for day trading.
I have rules that I follow as a day trader … and usually, when I mess up it’s because I broke my own rules.
Don’t think that you can jump ahead of the line. Be diligent, work hard, and follow the rules. Ready to learn? Here are 17 of my vital trading rules.
My Trading Challenge is set up to help you speed up your trading learning curve. It’s a comprehensive training program that can help you become a disciplined, self-sufficient trader. But it’s not just for anyone.
You’ve got to apply for the Challenge. I won’t let just anyone in … especially people who think they’ll get rich quick. Wake up! That’s how the stock market works. People who get rich quick are very few and far between. You have to be willing to work for it.
Day trading prowess won’t come overnight. It requires dedication, hard work, and plenty of studying. It takes time to begin to understand how the market works and how to decipher and use its movements to your advantage.
Thing is, if you’re willing to take the time to establish a strong foundation, you’ll be a stronger, smarter trader in the long run.
In the Challenge, you’ll have access to thousands of videos, DVDs, webinars, and plenty of other learning tools. You’ll also have access to an engaged community of like-minded traders who are learning and motivated, just like you.
This is the resource I wish I had when I was starting out as a trader … and it’s my way of helping others reach their potential.
Conclusion: Is Day Trading For You?
The first step to becoming a day trader? Getting educated on what day trading actually is and how it works. You’ve taken that step here … does it interest you?
And yeah, it’s easy to get started as a day trader, but that doesn’t mean it’s easy to be a day trader. It requires meticulous planning, loads of research, and plenty of time studying stock charts, stocks, and news.
Sound like a challenge that you’re up for? If not, move on. These things are non-negotiable.
But if you’re up to the challenge and willing to put in the work, day trading could be a good fit for you. In that case, your next step is to begin investing in your education. Knowledge is power when it comes to day trading!
There are plenty of resources on my site, like my PennyStocking 101 guide. Once you’re ready to take it to the next level, consider joining my Trading Challenge. I look forward to helping you grow and work toward your goals.
Are you ready to start day trading or have you already started? What’s your story? Leave a comment below!