Choosing to become a day trader is a potentially life-changing decision. You can earn a good living by investing a few hours of day to day trading. However, it takes months of learning to get the hang of how to trade successfully.
Your first year in day trading is usually the hardest as you will be met with the inevitable ups and downs. The goal for most beginners is to try and not lose their entire investment. If you’re willing to do what it takes to become a successful day trader, here’s what you need to do to prepare yourself for the journey.
Learn or develop a good trading strategy
Successful trading relies on a good trading strategy based on gathering and analyzing market data. You can begin to develop a strong sense of the market by studying freely available live charts of assets you’re interested in. Some of the things you need to learn include:
- Getting into and out of winning/losing trades
- The amount of risk you’re comfortable with
- Calculation of the probability of profit/loss
- Recognizing patterns
The most effective way of learning the above and more is by testing a trading strategy for a sufficiently long period and tracking its performance. Developing a good strategy can take a lot of time and research. If you’re like most day trading beginners, you’re better off researching on various well-documented strategies that suit your risk profile and investment goals.
Get a lot of practice
As with any worthwhile skill, a lot of practice and trading education is needed to develop your day trading skills. Practice is especially important for day trading considering the sizable investment that typically goes into it. It is, therefore, unfortunate that many first-time day traders don’t practice enough before they start trading with real money.
Demo accounts are used to practice. Use the practice period to methodically test out various trading strategies. Different strategies for day trading produce varying results and the market is unpredictable. The market may appear to be stable for a while only to become suddenly volatile. Sufficient practice will equip you with the insight needed to recognize good and bad signs.
Before you sign up for a practice account, research on various trading strategies and identify one that you believe suits your investment goals and philosophy. Once you sign up for the account, stick to that strategy until you know it well. This will help to build your confidence and you won’t doubt yourself when you make the switch from a practice to a real account.
It is often a good idea to stick to trading with a practice account until you’ve made it profitable, and only then graduate to day trading with real money.
Figure out how much capital you need
To a day trader, capital is equivalent to a storeowner’s inventory. You need it to be in business. Furthermore, the amount of capital you have and your strategy for deploying it directly impacts your income.
The minimum required to day trade in the US is $25,000. However, it is advisable to deposit at least $30,000 to give yourself a buffer. There’s no legal minimum for Forex day trading but start with no less than $500 so that you’re not limited by the number of trades you’re allowed to make. To make a sizable monthly income, you need to start with at least $5,000.
Start with no less than $2,500 to day trade futures. However, the recommended starting amount is between $7,500 and $10,000. The cost of trading varies from one contract to another, but if you’re planning to day trade S&P 500 E-mini futures, that amount of capital will be enough. Generating an income is not easy but with these recommended amounts for deposit, it’s possible.
Take into account your investment goals and the constraints
Before you start learning day trading strategies and practicing on a demo account, it is important to define your investment goals and limitations. Some of the things you need to think about include:
- The amount of capital you have. If you don’t have enough capital, save up. Meanwhile, you can learn and practice strategies using demo accounts.
- The amount of time you have to practice. To effectively practice day trading, you need to invest several hours every day.
- The amount of time you have to actually trade. Once you start live trading with real money, you need to set aside about three hours a day despite your other commitments.
- When to start live trading on a fulltime basis. Only make the switch from part-time to fulltime live trading when your live trading income at least matches the income from yourday
- Reaching a level of day trading in which you’re consistently profitable requires several hours of practice each day for several months, even longer if you’re practicing part-time.
- If you’re planning to eventually transition into full-time live trading, realize that it may take more than one year before you generate enough income to replace your
Select a good trading broker
As you learn and practice live trading, identify a good broker to work with. You can use the same broker you opened your demo account with. Choosing the right broker is among the most important you will make because you will be entrusting them with all your capital. Qualities to look for in a good broker include competitive fees, a good reputation, and good customer service.
Closing thoughts
Learning how to day trade successfully requires a lot of time. You can research on strategies that have been known to work and select one that you prefer. Open a demo account and practice that strategy thoroughly until you’re confident that you can consistently make a profit from it.
Take into account your goals and constraints, including questions such as how much time and capital you can invest and whether you’re interested in live trading on a fulltime basis. Making the transition from demo to live trading is difficult, but with proper planning and diligence, it is achievable.
