Day trading can have a reputation for being an action-oriented and fast way to making profits at the markets. It sure comes with many opportunities and potential success but there is also risk and the chances of losses if a day trader is not ready for the job yet.
For a job that involves continuous buying and selling of securities in order to catch the short-term movements to make money, day trading is more like being in your own business. The day trader too is no less than a businessman and to be a successful one, it is critical to know the steps to become one.
The Role of a Day Trader
A day trader, essentially, is one who continuously buys and sells securities with the purpose of registering a profit. Typically, day traders make multiple trades in a day and close the day to start the next trading day on a clean slate. This is contrary to other forms of trading where a swing or a position trader retains an open position in anticipation of making a profit over an extended period of holding.
Given the nature of the trading style, which is of a very short duration, day traders give less prominence to a company’s fundamentals. Instead, they are more focused on the technical charts and the opportunities found in the behaviour of the securities. The profits are, typically, made of the intraday movements in the stock prices. These short-term fluctuations offer day traders avenues to trade, with a stock picked up low and sold higher or sold and bought lower.
As long as they cash out by the end of the day and do this with multiple trades, they have done the job of a day trader. In the process, if they are able to retain a positive position overall, they can claim to have had a successful session of day trading.
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The Steps to Becoming a Day Trader
So what does it take for someone to start off, work his or her way into the profession and become a day trader? Clearly, there are some key qualities that an aspiring candidate should bring to the job. With the right attitude and discipline, it is also possible to inculcate some of these traits if you do not already have them.
Here we take a look at the top 10 steps that, if practised, can be the stepping stones to successful day trading.
1. Get ready for a brutal self-assessment
Do you have the capabilities to become a day trader? That is an assessment you must do to evaluate whether you are the right person for the job. It will draw on your total commitment and mean an extremely hectic day without a moment’s rest or relaxation. The working hours will be long and taking time off can be difficult.
You will need to steel yourself up for both the physical demands and the mental challenges that are part of a high-pressure job. Clearly, while you should be passionate about your work, it is equally important to be cool and collected as well.
Also, at the skill and knowledge levels, you will need to come up with an exemplary record. Day traders are required to understand the market and the industries inside out. They also need to be skilled at reading charts and interpreting analytics. You will also need to have an appetite for risk and a hunger for profits.
Only if you honestly think that you tick all the right boxes to be a day trader par excellence should you take the plunge into the hurly burly of day trading.
2. Get your funds and working capital in order
Trading requires money as working capital and day trading can have its own specific demands. Before anyone plans to be a day trader, he should have identified his sources for raising funds and keeping them ready before entering the trading arena. While a new trader is not likely to begin big scale and aggressive trading, you will have to line up at least $25,000 as a balance in your trading account.
It will all depend on the scale of your operations and, hence, deciding on an initial working capital, how much trading to be done and its frequency would need to be ascertained.
Day trading is fraught with its fair share of risk and a trader should apportion a buffer for days when the calls do not go as per plan.
3. Get a proper understanding of the markets
The markets will be your playground and your workplace. So it is important to get a complete understanding of the space and how it works. Gather all possible information about the processes and procedures, the terminologies and the conventions and so on.
With time, you should also understand the market movements, the way external forces affect it, the tips to trade smartly, how to evade the risk element and watch out for opportunities.
4. Understanding the securities to be used
There is a range of assets used in day trading and each asset type has its own characteristics and unique requirements and variables. From stocks and mutual funds to futures and options, to name the prominent ones, each deserves your attention and understanding. Unless a trader is familiar and knowledgeable about their complexities, behaviours and trends, there are chances of a trade going wrong and losses registered.
For instance, futures and options require you to know about margin requirements while the liquidity trends of some stocks may pose problems. These are the tools of the trade and every day trader should be fully conversant with them.
5. Finding and setting up a trading strategy
For something as complex and challenging as day trading, having a solid, working strategy is paramount. There are a slew of strategies used that each has their own distinct purpose and relevance. But the proven and most applied among these are the Simple and the Seahawk strategies. It all depends on your style as a trader and also the market conditions. For instance, the Simple strategy relies on trends and utilising them for stop losses with decent upsides too. The Seahawk, however, is for traders planning for a bigger winning margin and uses the scalping technique. There is also the Ping Pong strategy that works better in a sideways market.
Finally, it is about your comfort level and what suits the market conditions. As a day trader, you will have to adapt and customise for a given situation and be on top of it.
6. Integrating the strategy into your trading plan
Being clear about the strategy you intend to use is a good start. But, beyond that, you have to look at your overall trading plan and integrate it to make it all work. This calls for a review of your preparedness and the following steps need to be considered.
- How much investment should be infused as working capital?
- What are the assets being considered for trading?
- The amount to be allocated per trade.
- The frequency with which trading will be done.
- How the strategy should be used in relation to the entry and exit of a position.
Thinking through these various aspects will ensure the strategy adopted blends into the plan well.
7. Learn to manage money
One of the key skills every trader should pick up is money management. It is all the more relevant for a day trader who works within a trading duration as brief as intraday. The challenge here is to be able to use the limited funds at your disposal and make multiple trades concurrently. It is all about the optimal use of capital allocation and structuring your trading such that you make profits.
Once you understand your trading success rate, you should be able to estimate how much to invest in each trade and the number of trades you can attempt. Similarly, if you are trading in futures or options, knowing how to balance your capital and the margin money will be the key to your money management efforts.
8. Understand the brokerage charges
As a day trader, you will be expected to make multiple trades and make money off these. Whether you are raking in profits or have to contend with the odd losses, there is an element of overheads that will eat into your earnings. These are the brokerage charges that will be fairly substantial.
Study the options available as, typically, lower volumes work better on a per trade brokerage plan while higher numbers merit opting for staggered plans. Besides brokerage, there are other overheads like fees and charges for market intelligence – charts, reports, alerts – and infrastructure such as trading software, platforms and other utility heads that will need to be paid regularly.
It is best to understand the various expenses beforehand and evaluate which ones you would need and the ones that are avoidable. This way, costs can be kept to a minimum.
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9. Testing it out by simulation and backtesting
Even after all your learning and planning, making the cutover from the theoretical stage to the practical stage will require time and testing. Starting directly in the real world with real securities and real money can be risky. It is always best to spend time and effort simulating the action through a test account. There is also the option of virtual money that can insulate you from an actual risk and loss, should things not go to plan.
There is also the alternative of using historical data to try out back testing. This is another way of simulating the real world. In all this, always remember to factor in overheads like brokerage and fees that eat into your capital and your profits.
10. Make small beginnings before scaling up
Once you have checked all the steps so far, it is time now to start the action. Even if you are ready with all your preparation and understanding, it is important to start small. Take every opportunity to learn, especially from your mistakes, and your initial trading days to constantly hone your skills.
Only once you feel you are gaining ground and confidence should you scale up your operations, that too gradually.
These are also some vital steps anyone planning to be a day trader should follow to become a professional and competent day trader.
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