The world of the day trader sounds pretty exciting, but is it really possible to dip into the market for a fast profit and be done for the day? I’m sure you know what my answer is.
Download the key points of this post as PDF.
Can you be a day trader? Absolutely. But you can’t just dive right in and expect to thrive. That’s a sure-fire way to lose all your capital in the blink of an eye. Don’t do it.
If you want to day trade for a living, then you need to start with the right mindset and dedicate massive time and effort to your trading education. I want you to get started the right way, so read this first.
This guide will give you the information you need to get started. Let’s do this.
Table of Contents
- 1 What Is Day Trading?
- 2 How to Become a Day Trader in 5 Steps
- 3 Day Trading Account Requirements
- 4 Key Tips on How to Become a Successful Day Trader
- 5 The Bottom Line
What Is Day Trading?
Day trading is buying and selling a security within the same trading day. The pure day trader ends the trading day in a cash position; nothing is held overnight. Most day trading is done in the stock and foreign exchange (forex) markets, but it could be any market.
For example, let’s say you buy shares in Company X because you expect the price to go up that day. Then, you sell your shares on the same day. If you did your research and opened and closed your position at the right times, you ended up with a profit.
Day trading is different from buy-and-hold investing and swing trading.
Buy-and-hold is just what it sounds like: you buy shares of a stock and hold them because you believe in the fundamentals of the business. You believe owning the stock will give you long-term returns.
Swing trading is similar to day trading. The difference is, you hold the position open overnight or even for several days or weeks. Some day traders make some swing trade plays. I don’t recommend it for beginners, but once you get to know the game, it’s another strategy to use.
Benefits of Day Trading
Day trading is the ultimate laptop lifestyle. You can trade from anywhere with a laptop, trading software, and a high-speed internet connection. Want to trade sitting by the pool in Bali? It’s awesome. But to get there, you have to do your homework. You can’t cheat success in the stock market.
There are other benefits, of course. You don’t have to go into some office for a J-O-B. You’re your own boss and you can start small and work your way up. Unless, of course, you trade for some big bank, which I don’t recommend unless you’re obsessed with that sort of thing. Not for me.
Life of a Day Trader
Is it true a day trader only works a couple of hours a day? That’s misleading. There are some dishonest trading coaches out there who push this idea. While it’s true you might only trade for a short time each day, you have to include time for research.
When I was learning, I put in hours and hours every day. I skipped classes in high school and college to research and trade. I call it the hustle and the grind. I hope you’re getting the idea that this is a marathon and not a sprint. Yes, I have several millionaire students, but they put in the time.** They studied their asses off and they keep learning.
How to Become a Day Trader in 5 Steps
You might see the term ‘active trading’ as you continue to learn. Active trading is more of a general term. According to Investopedia, it means “the act of buying and selling securities based on short-term movements to profit from movements on a short-term stock chart.” So, day trading is a type of active trading.
Do you want to know how to become a day trader? There are some concepts you need to understand. Let’s take a look.
1. Risk Management
I encourage you to trade small when you’re first starting out and lack experience. You can always get more aggressive later on. The other thing I recommend is to cut losses fast … or as my student Tim Grittani says, “cut losses intelligently.”
Every big loss I had back in 2003 and 2004 happened when my ego got the best of me. I threw my day trading risk management out the window trying to force trades that weren’t there. I was so focused on trying to prove myself to attract investors into my hedge fund, that I broke all my own rules. They were near disastrous mistakes.
2. Technical Analysis
I don’t just pick any random stock, I want the stocks to prove themselves. This means I’ve done my homework, I know what the company is about, I’ve searched for news and watched the charts. Technical analysis starts with being able to read a chart. Here’s a quick infographic for you on how to read a stock chart.
3. Stock Market Patterns
One of the most important things I teach is to recognize stock market patterns. These patterns pop up again and again. You can learn to take advantage of these patterns even trading conservatively. I’m not saying that I’m gonna win every time. Don’t misunderstand me. It’s a question of preparation. If you know the patterns inside and out, then you can act.
4. Day Trading Software
Day traders use software, or electronic trading platforms, to chart and trade. There are a lot of choices when it comes to trading software. Not all are created the same. For example, some software allows you to trade only stocks or funds. Other software is geared toward forex or futures.
To help you choose your software consider the answers to these questions. Does the platform support the type of trading you do? If you want to trade penny stocks then your trading software has to include those kinds of stocks. Does the trading software connect with your online broker? And does the software have the features you need for research on the go?
I’ve used a lot of different trading software over the last 20 years. One of the things I found annoying was that some of the software wasn’t set up to deal with penny stocks. Another thing I found was I had to visit a bunch of sites to get the information I needed to make a trade.
Finally, I was inspired to build a better platform. One designed by traders for traders.
We worked our asses off to create what, in my opinion, is the best trading platform out there:
StocksToTrade.com (Check it out!)
5. Choose the Best Online Broker for Day Trading
What are the best online stock brokers? What are the worst brokers? What are the safest brokers? What are the most dangerous brokers? These are all valid questions. I’ve tried dozens of brokers in my life — maybe even hundreds.
One thing to consider is different brokers are good for different strategies. Lately, I’ve been dip buying. I use E*Trade and Interactive Brokers but you could use Schwab, Fidelity, or TD Ameritrade for dip buying penny stocks.
You want a big, well-known, broker that has decent execution and does the job you need it to do. While you don’t want to overpay on commissions, don’t be afraid to pay them. I look at it like this: If you cheap-out on your broker it’s like cheaping-out on your education. Don’t do it. Instead, educate yourself. Invest in your education.
Be wary of offshore brokers. Offshore brokers are not FDIC (Federal Deposit Insurance Corporation) insured. E*Trade, for example, is FDIC insured. This means if something goes terribly wrong with the financial markets you are insured up to $250,000. But if you’re trading with an offshore broker you aren’t insured.
Order Execution Time is Key
You need to understand this: There are brokers who charge little or no commissions but you get screwed by bad order execution.
So you might save $5 or $10 per trade but you lose $50 or $100 because they don’t execute the order fast enough. This is one of the reasons I stick with big, safe companies like E*Trade.
Remember, it’s all about the bottom line. Profit or loss. So don’t try to get away without paying commissions. In many ways, commissions are a good thing. When you consider the commissions it keeps you from overtrading. I see people throwing money out by making these tiny trades because they don’t have to pay a commission. They throw $50 on this or $20 on that … with no strategy.
E*Trade or Ameritrade
I get this question often: “Which should I use, E*Trade or TD Ameritrade?” I can’t make that decision for you because it depends on your requirements. I use E*Trade but that doesn’t mean it’s better, it only means it suits me better. As you learn to become a day trader you’ll have to make some decisions. Do your homework.
To reiterate: Look for a company with good order execution time and one that does everything you need it to do. If it takes having accounts with two companies, so be it.
Day Trading Account Requirements
There are some requirements you need to consider if you’re going to be a day trader. Thankfully, there are a couple of regulatory bodies with everyone’s best interest in mind. There’s the Financial Industry Regulatory Authority (FINRA) and the Securities and Exchange Commission (SEC). FINRA is a not-for-profit self-regulatory body for the financial industry. The SEC is a government body created to protect individual investors.
SEC Regulation and the Pattern Day Trader Rule
The pattern day trader (PDT) rule defines a day trader as someone who makes more than four trades within a five-day trading period. The rule requires the trader to maintain an account balance of at least $25,000. Keep in mind some brokers have their own requirements that exceed this industry standard.
The SEC supports the PDT rule on your behalf and FINRA supports the rule on the behalf of the industry. There was a time I didn’t like this rule. But since I’ve been teaching for the last decade I’ve come to appreciate it. It keeps inexperienced traders from getting into the addictive trading behavior. It’s there for your protection as you start your trading journey.
You can still trade with a smaller account, you just can’t trade as often. But that’s good because it makes you do more research and be more careful about each trade you make. It will help you develop better habits and self-discipline.
Key Tips on How to Become a Successful Day Trader
How can you become a good day trader? Let’s put it all together into a nice, workable plan. Keep in mind that before you make a single trade you have some studying to do. But this will help you along the way. I recommend my Trader Checklist as a good place to start.
#1 Cut Losses Fast
When I first started trading I didn’t have enough money in my account to let losses run. Little did I know how important that was for my success. I had no choice but to cut my losses fast. It became a habit to cut losses. There were only a couple of times when I broke my own rule and I paid dearly, so it was ingrained. Until I got cocky, that is …
Remember me telling you about my losses in 2003 and 2004? Those losses happened because I tried to force trades and ignored my own rules about when to get into a trade. At that time I was shorting stocks and my rule was to wait for sideways price movement before I got in on the short. I also wanted to see important price level breakthroughs before I started shorting.
Instead, I let my ego get in the way. I got impatient. I had one three-month run where I lost over $100,000 each month. Not because I followed my plan — because I went against my own rule to cut losses fast.
So learn this now, before you even start: Cut losses quickly.
#2 Fine Tune With Small Accounts
Since I started teaching, every year I take one of my accounts and bring the balance down to $12,000. To help my students, I go back to the beginning and trade my way up in that account. I do this for two reasons: First, it forces me to think like a beginning trader in regards to the PDT rule. Second, it forces me to make smaller trades and be more careful.
I force myself to play small to be a better teacher and a better trader. I’m more conservative and I don’t let my ego get in the way. I recommend you have several small accounts once you’re ready — spread it out and fine-tune your strategy and discipline.
#3 Avoid Leverage
Don’t use leverage. Ever. I hope you heed this advice.
There are times when you’ll use a margin account. Specifically for short-selling. Using a margin account for short selling doesn’t have to involve leverage. You can learn how to do this with my Pennystocking Silver lessons.
At first, keep your margin account separate from your regular account. This goes back to having more than one small account as you develop your strategy.
#4 Never Stop Learning
You’re going to hear (or read) this from me again and again. I can’t repeat this enough: Never stop learning.
Keep studying. Learn from your winning trades and learn from your losing trades. Apply what you learn and don’t let your ego get in the way!
Day trading penny stocks is not a get-rich-quick scheme. There are other so-called gurus out there who want you to believe you can get rich quick. Or that once you know a play you’ve got it for life. That’s bullshit.
You have to keep learning. Did you know that the word guru means to bring from darkness into light? Even though I don’t like to call myself a guru I want to bring you from lack of knowledge into the light of knowledge. Never. Stop. Learning.
Join My Trading Challenge
There’s a ton of crap out there on the internet. There are over five million hits for ‘how to become a day trader with $100.’
You can spend hours lost on a ‘how to become a day trader’ Reddit thread. You’ll find so much information that it’s almost impossible to decipher real from fake.
I want students in my Trading Challenge to avoid the boneheaded mistakes I made along the way.
Want to join a community of humble badasses on their way to freedom and the laptop lifestyle?** Apply to join the Trading Challenge today. I look forward to seeing you there.
The Bottom Line
What does it take to be a day trader? Now you’re more informed. Go back and read this post again and then bookmark it. Also, check out the links I shared in this post to get more information on those specific terms, concepts, and related topics. Believe it or not, this blog actually isn’t about me — it’s about you and your future.
The life of a day trader can be pretty damn good, but you have to get an education. Learn to manage your risk, master the patterns, and set yourself up with some rules.
Have you started day trading? Are you ready to start? What’s holding you back? Leave a comment below.