So you want to learn how to start day trading, eh?
For some people, day trading conjures up scenes from the movie “The Wolf of Wall Street.” While the movie is based on a true story, it doesn’t represent the reality of being a day trader.
Day trading is a legitimate career choice. In my opinion, it’s the ultimate laptop lifestyle.
But you need to learn how to do it in a way that makes sense. I created this guide to get you started the right way and help you avoid some common mistakes I watch people make.
How to Start Day Trading Stocks
When it comes to day trading for a living, you can’t cheat success. Here’s a quick list of vital prerequisites to start day trading stocks:
- Have a plan. When are you going to trade? What time of day is best? What stocks will you trade? What strategy will you use?
- Practice first. Use a paper-trading platform. For beginners, this is essential. You want to test your strategy over the course of several weeks or months before you risk your own money. StocksToTrade is an online trading platform with paper trading built in.
- Stick to your plan. Once you start using your own money to make trades, you’ll see that things move fast. It’s important to stick to your plan. Understand your risk/reward ratio and have your exit strategy in place.
As you can see, you need to gain some knowledge. Are you a beginner and know nothing about trading? This list of 40 key stock trading terms for beginners is a good place to start. I’ll do my best to define key terms as we go, but check out that infographic. Save it and study it.
You also need some money to trade. You don’t need a lot of money, but if you only have $100 to your name, that’s not enough. Do something to raise more money. Get a part-time job or provide a service to your community. Save up — but study while you save.
My first millionaire student started with $1,500 and now he’s over $6 million.** I have others who started with a few thousand. I started with $12, 415. And it’s better to start small. I have a few trust-fund kids — students who came at this with a lot of money — who didn’t listen to me and lost a lot. I say start small. Learn how to do this the right way.
Knowledge is the difference. People with a lot of money are usually the worst because they take their money for granted and don’t study. If you don’t have money then what you do have is time. You have more time than money. Use your time to study. Be grateful because there’s no way to go but up and you have time to study!
Let’s get into day-trading basics now …
Day trading is just what it’s called. You open and close your positions — buy and sell stock shares — within the trading day.
Now, to clarify, I do teach some strategies where you might keep a position open overnight. But let’s stick to day trading in the strictest sense to start. We’ll also stick with penny stocks because that’s what I trade.
As a day trader, you’ll have a brokerage account with money in it. You’ll have a computer with trading software on it. That’s your trading platform and your real-time view of what’s happening in the market. You can watch trades as they happen. And you can make your trades based on the trading strategy you use.
So you have your setup, you have your plan, and now you want to make a trade …
For example, let’s say the strategy you use is to buy the dip. This means the stock price is falling but you expect it to bounce back up. You see the dip happen, the stock turns and is on its way back up. You open your position or buy your shares.
Say you set a target for a 20% uptick. You sit back and watch. When the stock moves up 20%, you close your position. Now, it might not close at exactly 20% difference from when you purchased. There are all sorts of factors involved. But, for the sake of simplicity, you get your 20%.
How Does the Stock Market Work for Beginners?
The stock market consists of stock exchanges. A company lists shares of their stock on a specific exchange where buyers and sellers act as a market. When you watch the news and see the numbers for the NYSE or Nasdaq, those are exchanges.
Stocks are shares in a company created and sold to raise money. Often this is to grow the company through R&D or expanding into new markets. Whether you are a buy-and-hold investor or a trader, you own a piece of the company when you buy shares.
To buy shares of a stock you will need to have a brokerage account. These days, most people use online brokers like E-Trade or Interactive Brokers. Even industry stalwarts like Fidelity and Schwab offer online brokerage accounts.
How to Select Stocks for Day Trading
Finding stocks to day trade isn’t as difficult as you might think — but you do need to know what to look for. First, you should have a watchlist. In a recent post, I put together some tips and examples to develop your watchlist. Definitely check it out.
Here are a few quick ideas to get you started. As a trader, certain industries are big at any given time. For example, in 2018 weed stocks have soared. Why? Because Canada voted to legalize marijuana.
Small companies with weed-based products often list shares on the over-the-counter bulletin board (OTCBB). Because of the new law coming into effect, these companies are in the news. When they introduce a new product or sign a deal with a bigger company, they put out a press release.
This is the kind of information day traders love because it moves the stock price. It increases volatility. I’ll explain more about volatility in the six tips below, but first, back to our weed stocks.
For example, let’s say that armed with this information, you now go search for weed stocks or pot stocks in the news. You find Puration Inc. (PURA) in the cannabis beverage market. You see they’ve recently made some press releases. Bingo. Ok, now you check for big price percentage gains, increased trading volume, and volatility. Sweet, it’s looking good. This stock goes on your watchlist.
This is the way a trader thinks. It’s how I’ll teach you to think if you join my .
How Many Stock Trades Per Day?
One thing you need to understand as a beginning day trader is the pattern day trader (PDT) rule. What is the PDT rule in stock market trading? It’s a rule to limit the number of day trades you can make per week unless you have an account with enough money in it.
The rule says you can make four day trades per five days of trading. If you make more than four trades, you’re considered a pattern day trader. Pattern day traders must maintain at least $25,000 in their trading account. If you go under, your broker will contact you and ask you to top up your account.
If your account remains below the $25,000 threshold, you won’t be able to trade this account. The PDT rule was put in place to protect traders from going broke by trading too much — especially new traders.
The PDT rule keeps trading addicts from self-destruction. For a long time, it pissed me off. I wanted to be able to trade as much as I want when I want. But since I’ve been teaching for 10 years and trading for 20, I’ve come to respect the PDT rule. It protects you from yourself.
Keep in mind that with the day-trading strategies I teach, you don’t need to trade 20, 50 or 100 times a week. Two or three good trades a week is all you need. Yes, it will take time to build up your account this way, but it’s time well spent as you learn the smart way to trade.
Best Brokerage Account for Day Trading
What’s the best brokerage account for day trading? I’ve seen many online brokers come and go. The reality is, what’s best for one of my students might not be the best for another. Don’t think just because you saw a slick TV commercial that a broker is the right one for you.
One of the best stock trading tips I can give you is this: Do your homework. The tools you use, including your broker, should make you feel comfortable. They should be an asset to your trading venture. Here’s a complete guide to finding the best penny stock brokers for day traders.
Best Trading Platform for Beginners
What’s the best trading platform for beginners? There are many trading platforms available. Unfortunately, most of them are not designed for penny stocks. I saw this as an opportunity to create a platform perfect for the way I trade.
I can’t recommend StocksToTrade enough. My team and I worked our asses off getting this ready. It has built-in scans, access to news, and a video channel. It has a ton of features. If you think of the stock market as a battlefield, StocksToTrade is like having the best weapon.
And now, without further ado …
6 Day Trading Tips and Strategies for Beginners
The following stock trading strategies are what I teach all my students. They’re also what I practice.
Tip #1: Do Not Use Leverage
I’ve seen it dozens of times: Some noob comes along, thinks they’re the next hot trader, and loses everything. Leverage is the ruin of most traders, especially newbies. You don’t need to use leverage. Don’t do it.
Why? To start, leverage works both ways. Yes, you have the potential for more profit. When things go right, that is. But what about when they go wrong? That’s right, you lose more. The potential losses might be more than you have in your account. Then you get the dreaded call from the broker asking you to deposit more money to cover your losses.
If you can’t cover your losses, that’s game end. It’s not worth it and you don’t need to do it. I teach you to trade the same way I trade. I give solid, experience-based day-trading tips. Heed them well. Take action, learn my day-trading strategies and live the laptop lifestyle. Whatever you do, do not use leverage! It’s tip numero uno for a reason.
Tip #2: Follow Stock Chart Patterns
Penny stocks move in patterns. When you start following stocks on your watchlist you should be looking for chart patterns. There are several stock-charting sites out there. Old school BigCharts.com and FreeStockCharts.com are two examples.
Over time, patterns repeat. Through study you can learn patterns, understand how to recognize them, and when to make your play. 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
At first, the idea of creating your own stock portfolio can be intimidating. Between information overload and the risk of getting it wrong, many investors and traders give up before they start. But it doesn’t have to be that way.
The level of risk that suits you determines your portfolio choices. I’ve made it easy with this cool case study on how to get started building a stock portfolio. It gives a really nice, easy-to-follow portfolio breakdown. You can even download it.
Tip #4: Trade Volatile Stocks
Volatility is your friend. Remember this.
What is volatility? It’s a measure of the movement in the price of a stock over time. Going back to tip #2, when you study charts you’re looking for patterns in the price movement. 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 — because at some point most investors want to sell their shares. Without volatility and trading volume, it’s difficult to sell them.
Tip #5: Use Mental Stops
Mental stops are one of my day-trading secrets. A mental stop differs from a physical stop in that you don’t set the stop with your trading software. Instead, you do it based on your mental stop criteria. 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 $0.25 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. The key is, once your mental stop criteria are met, get out. Close the position.
Some people ridicule me because I close out positions too soon and don’t make as much profit. Guess what? I don’t care. I’ve been trading this way since the beginning, and it’s paid off.**
It can potentially work for you, too — but you have to have discipline.
Tip #6: Never Stop Learning
My biggest mistakes as a trader taught me valuable lessons. Big wins also taught me lessons. I see it this way: Every trade is a lesson. Win or lose, there’s something I can take away. If you’re serious about achieving the laptop lifestyle, you need to study like crazy.
One of the best teachers is your own portfolio. After a losing trade, look for signals you missed and how to make better decisions in the future. After a winning trade, look for any patterns or reasons behind your decisions. Can you spot them again in the future? Can you learn to do it faster and with even more accuracy?
Want to live the laptop lifestyle? I want you to live it. It’s amazing. But understand this: Most traders lose money because they try to do it on their own. I created my as a challenge to myself. The challenge? To build an exclusive community of traders and students who work hard every day on a quest for success.
The Bottom Line
Here, I’ve laid out the steps you should take to get started in day trading. Go through the list and make sure you have each point covered before you start trading.
First, have a plan. To choose your plan you need to gain knowledge. You can do so on your own or through one of my trading courses.
The next thing you need to do is get practice — lots of practice — on a platform with paper trading like StocksToTrade. Every minute you spend paper trading can make the transition to real trading easier.
Then stick to your plan, develop and maintain self-discipline, and keep learning.
Finally, follow the six tips above to get started in the stock market. Let me know how it goes.
Are you ready to start day trading or have you already started? What’s your story? Leave a comment below!