So to start with how do you even become a trader? Because there are tons of different types of traders, not just day traders. Day trading specifically refers to the buying and selling of securities within the same day using short-term changes in price. This is different from other trading styles like swing trading, which relies on overnight changes and can sometimes last up to a few weeks.
Surprisingly, a common question about day trading is whether or not it’s illegal. Maybe it’s because it seems too good to be true, but no — day trading is not illegal. And learning how to day trade won’t wind you up in jail.
You may be thinking that day trading is kind of like the wild wild west — untamed and lawless. You’d be wrong though. There are some very clearly defined rules to day trading that every trader must follow to get in the game.
Rules For Getting Started Day Trading
1) Don’t Trade What You Can’t Lose
The first rule is really important: don’t trade money you aren’t comfortable with losing. Every successful trader, regardless of expertise, will tell you the only way to become a trader is to trade money you can part with. You’ll come to find that the emotional and psychological aspects associated with trading plays a huge factor, and this is a way to alleviate some of that struggle. If you’re okay with losing the money, then you’ll come out better because there’s no way around it — you’ll lose money in this business. Everyone does at some point.
At Simpler Trading we like to say to trade a smaller account, you need at least $2,500 for your portfolio. You can trade with more, you can trade with less, but this is a good starting point, so you can afford to purchase a few expensive stocks here and there.
2) Open Up An Account
Once you’re ready, you’ll want to open up an account with a brokerage firm and charting platform. Feel free to research which one you like best, but we recommend TD Ameritrade and their charting platform, Think or Swim. If you’d like to check them out, you can follow this LINK. Then once you’ve got a charting platform set up, you’ll want to establish when and how you want to trade.
3) What Time To Day Trade
There are several key times to day trade. The ideal times to watch the market heavily, is in the morning right at the open and for about an hour and a half after, and then 30 minutes before and up until the close. The reason? These times are the most volatile and the market is actually changing.
As a day trader you need liquidity and volatility to make any sort of financial splash. During the morning, the market is reacting to whatever news was released the night before. During the close, especially during earnings season, companies are up for earnings and that affects the selling price of stocks during the close right before they have to report (and right after). Headlines create volatility generally, and during the middle of the day things have calmed down from whatever pre or post market news was released.
You can definitely still trade periodically throughout the day, but you can see the most growth potential during the open and close.
4) Picks The Stocks You Want To Day Trade
If you’ve decided you’re more of a morning or afternoon person for day trading, then you can move onto the next step. Now you need to establish what stocks you actually want to follow and trade. This can be incredibly overwhelming at first because there are thousands of stocks out there. You can do it the old fashioned way which involves a ton of research every morning before the market opens. What this entails is keeping up to date on market news, headlines, and checking every stock out there to find ones that fit your risk parameter, trading plan, etc. It can be time consuming for a beginning trader. Or you can take a trick out of trader’s book – a short cut. Several of them use the Scanner built by David Starr, which scans for stocks with a high enough volume to be big players for the day every morning before the open. It essentially searches for your predetermined criteria to find stocks that work for you, almost like an assistant!
If you’d like to check out the Scanner go HERE.
You can also hone in on three to four stocks that fit your trading plan (i.e. risk, portfolio, etc.), becoming an expert on those, and just trade those. That takes the hassle out of pre-trading work because you always know what you’ll be trading for the day!
5) Pick The Right Strategy
Picking what stocks to trade works in contingency with the idea that you need to pick one or two strategies that work for you as well. You don’t have to be the master at everything, just be the master at one simple setup that you can use time and time again. Like momentum trading, which is where you jump on a stock that’s price is moving up or down. Hence the title ‘momentum’. This type of strategy focuses on shifts in market direction, which could be cause by an earnings report for example. Or another strategy like scalping, which involves a trader setting buy and sell targets and sticking to those predetermined levels. The idea behind this strategy is that over time the small wins add up to make a significant profit. Or you could use a strategy formed around strict technical analysis, like Fibonacci extension levels. This involves understanding and interpreting the natural Fib levels that occur in the market constantly.
Consider checking out our course “Fast Fibonacci for Day Traders” for how to utilize Fibonacci levels in everyday day trading. Fibonacci levels could provide you with that one simple setup you’re looking for, and it’s time tested and proven! This class will show you how to time entries and exits with greater confidence.
With these beginning five rules, you’re off to a sound start, but if you’re still a little nervous about jumping in head first that’s completely normal. So the parting piece of advice is this – consider paper trading. Think or Swim allows it for free on their platform, and it’s a fantastic way for trying out strategies, establishing your trading plan, and managing risk. Think of it as Monopoly money — no attachment, no issue.
Keep in mind as you continue this journey — there will be times that are difficult. The fact of the matter is that unfortunately most day traders, especially men, aren’t successful. What’s measurable for success though? Being able to consistently turn out profits for several years. How many do that? Only about 4%. Women seem to have a higher conversion rate, but generally speaking, almost 95% of people who try to become day traders just lose money.
Does this mean you should throw in the towel before you’ve even taken it out? Not necessarily. You just need to be mindful of the pitfalls that most traders fall into and learn how to avoid them. That’s why John Carter founded Simpler Trading – to form a community of shared trading knowledge.
If you want that extra edge, consider joining us in our Foundation membership. It’s only $47 a month, and it’s designed to create a solid understanding of the fundamentals of trading — it’s never a bad idea to get back to the basics. Check it out HERE.