How To Become A Day Trader?

Last Updated August 31st 2021

7 Min Read

Among the many challenging and rewarding careers that the world of finance encompasses, the stock market attracts and fascinates many. But even in the domain of the stock market that pulls in countless investors, the job of a trader is unique.

The term trader is a broad one and there are many types and these are, primarily, differentiated by the duration they hold a position for. From really short term to medium and to long term, traders function in each of these categories. Among those who work with stocks for the shortest duration, the day trader is one who is often talked about in the trading world.

What Is Day Trading?

Across the spectrum of trading functions, there are various types of the profile active in the stock market. These are all based on the duration of the position held by a trader.

While at the longest end, there is position trading which involves a trade held for months, even years, there are shorter variations too. In the middle, there is swing trading, a form of trading where a trade is held between a few days to over a month.

But day trading, as the name implies, involves the trading activity happening in the course of one day. Both the buy and the sell or vice versa takes place between the opening of trading hours to the closing in the same day. A position has to be liquidated before the close of trading and cannot be carried forward.

Day trading is less about going by the fundamentals of a company and the long-term prospects of the stock. Instead, it is more about analysing patterns of the movement of its prices. It is the analysis of the technical charts that is more relevant here and the decisions for purchase and sale are grounded in the variation in the stock’s behaviour.

Who Is A Day Trader?

In line with the definition of day trading, a day trader is someone who engages in trades that he opens and closes during the same day’s business hours. Given the short window that a trader has to work with, he would need to make several trades in a day.

As per the definition of a day trader, the number of trades has to be four or above across five days and these also have to exceed 6% of all trades done during the period. There is also a minimum equity mandated for the broker which should be $25,000 or greater. These are as per the guidelines laid by the SEC and the NYSE. As a day trader has the advantage of leverage to manage the day’s trading, there is a risk he is exposed to. This mandatory equity helps cover any possible losses that might arise.

Among day traders, there are both individuals and professionals who are in business. The opportunities that exist in the intraday market is high and this is one of the most sought after trading arenas.

Professional traders are associated with financial institutions and have enough resources and infrastructure to trade competently. For them, it is as much about recording high profits day on day as it is about rising in their careers within the company. As they are representing an organisation, they work with company funds and don’t have to risk their personal money.

Individual traders are representing themselves and are bringing their own equity and have to arrange their own resources and infrastructure. Whether it is getting access to market information or trading analysis, they have to gather everything by themselves. They can avail of cash or loans in their margin accounts that have both risk and opportunity, depending on how they perform.

A day trader can trade in forex, stocks, cryptocurrency, futures and commodities.

Check Out: 10 Steps to Becoming a Day Trader

How To Become A Successful Day Trader?

Day trading may hold enormous opportunities to make successful calls and earn money but it is anything but betting or gambling. In fact, like all professions in the financial market, a day trader’s job is not to be taken lightly.

It comes with more than its fair share of risks and stress and you should only resolve to becoming a day trader if you feel you are ready to give your full time and attention to it. But, with the right approach and practices, it is possible to become a successful day trader.

Here are some tips that will help get you on the right track.

Assess your readiness

Even for those who understand what trading entails, it is important to understand the nuances of the fast and high volume world of day trading. Unlike the position and the swing trading genres, this demands your constant time and attention. Can you afford that and are not already into another occupation?

You will have to be always updated and have a good grip on the market and stocks. Are you confident about that enough to make informed decisions? Also, the trading style will be taxing and calls for a dispassionate approach to results. Would you have the maturity to keep a check on your emotions?

If you still think you will enjoy day trading and can also succeed in it, you are probably ready to become a day trader.

Research well

Day traders have to be completely clued on to not just the basics of trading the stock market but also be continuously updated on the minute to minute developments.

This calls for a solid research and updating schedule that must be religiously followed to ensure that both the meticulous planning and the split-second decisions can be executed alike.

There are plenty of resources out there for an aspiring day trader to study and update oneself on. From the printed media to books, to online forums and websites, paid subscription to news alerts, use them all to your advantage. For the stocks that you plan to trade in, follow them closely and keep a watch out for updates and developments on their front.

Make modest beginnings

Even the best of day traders find the job challenging enough and are wary when staking too much. For those starting off or even in their early days in day trading, it is all the more important to be cautious about how they pace themselves.

It is wiser to start modestly and to cap your per stock allocation. Once you are comfortable trading, based on the situation, this can be increased. Even then, keep an upper limit whenever trying a new strategy.

Mental make-up

Many aspiring day traders get attracted to the field after observing successful professionals or hearing of one-off jackpots their acquaintances have had. But the reality also needs to be understood.

True, like any form of trading, day trading also can be lucrative, if done well. But what is most important is to have a full understanding of the challenges and the risk involved. You have to come with the right mindset and have a disciplined approach to handle such a high pressure, high volume and high risk work profile.

Avoiding emotions

Another trait of successful day traders is avoiding excessive emotional connection with the stocks they trade in. Getting too personal with a trade might sway you into delaying a sale. Similarly, there is no place for ego or remorse if a stock bought does not farewell. Rather than holding on to it just to justify your decision or in the hope that it will revive, a prudent day trader should just exit the position and move on to the next trade.

To acknowledge that you will lose some and win others is important. At the end of the day, regardless of the stocks you lost out on, the overall record should be positive.

Don't Miss: 10 Day Trading Strategies for Beginners

Having a trading strategy

As in all forms of trading, day trading also demands a clear, well thought out strategy to be devised and followed. As a day trader, the action in the market can be quite fast and intense and decision making would need to be done in a split second. There is often high volatility and positions have to be closed by the end of the day. With the spread being quite low, there are multiple trades that a day trader needs to do to record a decent profit in a day.

Few of the prominent day trading strategies is scalping, contrarian trading, news-based trading, pattern breakouts, range trading and momentum trading.

Handle risk well

All trading categories have an element of risk and, as a day trader, you have to be aware about it. The number of trades done is much higher and these all have to be squared off by end of the day. Typically, even the most experienced and established traders face up to 50% of their trades not recording a profit.

Any beginner, therefore, should adhere to the strategy laid down and resist the temptation to deviate too much from it. Try not to attempt trades in stocks you are not familiar with or in those that have a bad track record in liquidity or consistency. Also, it is important to allocate a maximum percentage of exposure to one single trade so that you have a good risk spread.