If the term “day trading” conjures images of red-faced stockbrokers dashing around a stock exchange on Wall Street — don’t worry.
While this can be riskier than some other investment strategies, it doesn’t have to be as nerve wracking as Hollywood might make it seem. Once you’ve honed your strategies for day trading and learned the ins and outs, you can transform it into a casual pastime or a significant source of income.
Before you jump headlong, make sure to review the following basics to ensure you’re equipped to make the right decisions.
What is day trading?
As the name suggests, it involves purchasing and selling financial instruments during the same day (or even several times over the course of the same day).
This contrasts with other long-term investment strategies in which investors typically sell securities after months or years of holding onto them and profiting off of dividends or increases in value that have happened gradually over time.
Only certain types of financial instruments can be used for day trading. For example, futures contracts, forex, or stocks. On the other hand, other types of investments (like bonds, ETFs, real estate, etc.) are reserved for long-term strategies.
Before you jump into trading of futures, forex, AND stocks, first consider how much money you’ll want to invest (and how much you feel comfortable losing). You can get started in forex trading with about $50. However, futures trading requires a minimum investment of around $1,000 whereas stocks trading requires around $25,000.
The market you choose to dive into is up to you, but when you first start out, it’s generally advisable that you hone in on just one.
Is day trading risky?
It can be. Many beginner day traders lose more money than they make because they don’t take the time necessary to prepare. Some experts recommend creating a demo account and practicing with a market simulator and studying for 3-12 months before you start investing real money.
You should first learn the ins and outs of day trading, form a strategy, and learn to control their emotions to avoid making fear-based investment decisions.
When you get started trading on your demo account or with real money, remember to continuously monitor your risk-reward and win-loss rate ratios.
- Risk-reward ratio — A comparison of your profits to your losses (winning trades ÷ losing trades = risk-reward ratio). To make money as a day trader, your risk-reward ratio should be over 1.
- Win-loss rate ratio — The percentage of trading deals from which you profit. For instance, if you have a total of 50 trades over the course of one month and you profit off of 35 of them, your win-rate ratio is 70% (which is great). While you don’t have to profit off of all of your trades, you should “win” a minimum of 50% of them. If you don’t, you may want to stop trading real money and re-examine your strategy.
What do I need to start?
A common misperception is that only extremely wealthy folks with access to stockbrokers and financial analysts can get involved in day trading. While that may have been true in the past, today technology and low-cost options make it accessible to many of us.
To get started, first find a platform that allows you to play with imaginary money in a market simulator. There are a ton of free, virtual day trading platforms that cater to investors interested in futures, forex, or stocks. Some even offer lessons or online academies to help you learn about the process while using their simulators.
To use your demo account, you’ll need a computer or a mobile phone with reliable internet access.
After you’ve spent time honing your day-trading strategy, you can pick a platform to facilitate your trades with real money. Consider one that offers the trading options you’re interested in (futures, forex, or stocks) as well as broker options that won’t ruin your profit margin.
Time and patience
Crafting a strategy and learning to control your emotions will require months of concentrated work and patience. Once you get started trading real money, you’ll also have to carve out time to watch the market and make your trades.
With a bit of practice and time, you can begin your journey to becoming a day trader. Whether or not you decide to turn it into a full-time job is your decision, but don’t forget that investing and saving aren’t luxuries only for the mega-rich.
For more ideas on how to start investing, check out the rest of our library.