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How to Become a Day Trader
When some people think of successful day traders, they think of multimillionaires lounging in a beach town, making trades and relaxing. That reality is rare, and day trading isn’t as easy or lucrative as it might seem from the outside. Despite challenges, some people elect to day trade as a part-time job, or they take on day trading as their full-time gig. If you know your stuff and follow a strategy, you can make money over time through day trades.
If you’re interested in the idea but unsure of how to become a day trader, we’ll take you through the steps. We spoke with experts about the perks and perils of day trading, and they shared insights on how someone can break into the industry.
What is a day trader?
Before you can become a day trader, you need to know what a day trader is. In its most basic form, a day trader is someone who buys and sells securities within the same day. A day trader ends the day with zero open positions in the market.
For example, a day trader could buy stock in the morning and make trades throughout the day in hopes of profiting off daily fluctuations in stock price. At the end of the day, however, a day trader won’t own any shares.
This is different from a swing trader. A swing trader makes trades over multiple days in hopes of profiting off longer-term fluctuations in the stock market. Swing traders may sell some of their securities one day and buy more a few days later, but the idea is to allow more time for the investment to go through peaks and valleys while still owning it during that process. Normally, swing traders own securities for a few days or weeks. Day traders don’t do this, as they only own securities for a day, although both day traders and swing traders perform a type of short-term trading.
There are a few other key terms that day traders should know:
Forex market – This term stands for the foreign exchange market. The forex market and stock market are two marketplaces where day traders commonly make trades.
Professional day trader – A professional day trader is someone who day trades for a living and is licensed to trade. If you’re looking to become a professional day trader and work for a brokerage firm or something similar, make sure it’s registered with the SEC.
Pattern day trader – According to the Financial Industry Regulatory Authority (FINRA), a pattern day trader is one who “day trades (buys then sells or sells short then buys the same security on the same day) four or more times in five business days, provided the number of day trades are more than 6% of the customer’s total trading activity for that same five-day period.”
1. Perform a personal audit.
If you want to pursue day trading, you need to understand the challenges. You’re going to have days when you lose money. It’s going to take a lot of time to understand what you’re doing. Even once you understand different strategies and all the terminology, you still might not find success. Day trading is hard, and there’s no guarantee you will make any money at all.
“Becoming a day trader is something that a lot of people see as an easy way to make money where you don’t need much experience – just click a few buttons and hey presto, you’re rich! But nothing is further from the truth,” said Deeyana Angelo, a managing director at Blahtech and Market Stalkers. “Day trading is a very difficult performance discipline, much like becoming a professional football player or playing a musical instrument to a virtuoso level. You first need to have a natural talent, followed by years of practice.”
According to Angelo, who has over a decade of experience with derivatives trading, day trading is a difficult task. She said it requires an analytical mind and that many people she’s seen succeed have backgrounds in industries that require years of schooling and practice. If you want to become a day trader to get rich overnight, you’re going to end up losing large amounts of money. It takes time and practice to become an effective day trader.
That being said, there are day trading success stories. If you understand a marketplace and develop effective trading strategies, it’s possible to be a successful day trader.
“Having trained multiple clients who’ve gone from cubicles with small trading accounts between $10,000 to $37,000 to successful, full-time day traders, making millions in just a few years, I have verified proof people can make the leap from their career to trading full time,” said Jason Bond, co-founder of Raging Bull, a trading, coaching and mentoring service. [Interested in accounting software to help you stay on top of your trading activities? Check out our best picks and reviews.]
2. Research the market, strategies and potential platforms.
Whether you’re going to use the forex market, the stock market or any other marketplace, you need to understand how that market works before becoming a day trader. There’s an idea that being a day trader can make you rich quickly and allow you to spend most of your time relaxing, but that couldn’t be further from the truth. Succeeding as a day trader takes significant research and effort.
Researching the market and eventually developing strategies also requires learning from successful day traders.
“The best way to become a day trader is to learn from existing profitable day traders,” Bond said. “There’s an overwhelming amount of theoretical material on the internet about how to day trade, but nothing beats learning from someone who is currently successful at it.”
Your research should also include finding additional detail on trading strategies within that market and regulations surrounding day trading. FINRA’s website is a good place to answer any detailed regulation questions regarding day trading.
We found a few trading strategies that are commonly recommended or used by experienced day traders:
Breakout – A breakout strategy refers to a sizable fluctuation, or a breakout, on a stock price that has been relatively still for a prolonged time. For example, if a stock has been between $30 and $31 for three weeks and suddenly you notice it’s either dipping or rising dramatically, it might be a good time to trade. That volatility should be enticing to a day trader.
Scalping – This is an easy strategy for beginners. Scalping means you sell your stock immediately after the trade becomes profitable. This isn’t too complex in terms of when to sell, so it’s an easy way to get your feet wet with day trading.
There are many other strategies and nuances you can implement as you become more adept at day trading.
In addition to understanding regulations and picking a strategy, it’s important to look for an online broker with detailed trading tools. Day trading requires a lot of quick decisions, so you don’t want to be hampered by lackluster online tools or a slow internet connection or any other tech issue. Depending on the online platform you use to trade, you may be subject to commissions on those trades. According to The Motley Fool, which used TD Ameritrade as an example, trading 30 times a day across 250 trading days would lead to over $50,000 in commissions in a year.
Depending on the platform you use, you might need to earn thousands of dollars in profit to break even on your day trading. Research is tremendously important when selecting what platform you’re going to use to day trade. These are a few of the top day trading platforms we found in our research:
Platforms vary, and there are plenty of other options that draw good reviews and have strong reputations. When selecting an online trading platform, it’s important to seek out customer reviews and find a well-respected company that aligns with your needs.
“When I started day trading back in 1998, I was a total gunslinger, averaging 550 trades per day,” said Merlin Rothfeld, investment strategist and instructor at Online Trading Academy. “This caused me to be reckless in my trade selection and execution – not to mention that my broker was making a killing off the commissions I was paying on all those trades. Over the years, I have come to realize just how big an expense commissions are for the average day trader. For this reason, I recommend that every day trader set a maximum number of trades to take in a day. Think of it like having a six-shooter: You only have six bullets in your gun, so you better make them count. This helped me really focus on finding and executing the best trades each day.”
3. Start small.
Once you’ve completed sufficient research, it’s important to start small like Rothfeld suggested. It takes time to learn how to day trade, and putting a lot of money on the table to start is a big risk. The risk associated with day trading also means you should use money that you’re comfortable losing.
“Day traders typically suffer severe financial losses in their first months of trading, and many never graduate to profit-making status,” the SEC’s website says. “Given these outcomes, it’s clear: day traders should only risk money they can afford to lose. They should never use money they will need for daily living expenses [or] retirement, take out a second mortgage, or use their student loan money for day trading.”
Since losing money is part of the learning process for many day traders, it’s a good idea to start slowly and learn as you go. It’s also important to stick to whatever trading strategy you’re implementing. One of the biggest mistakes day traders make is creating a well-thought-out strategy only to completely go against it in a rushed trade.
“Quite often, day traders will take trades because they are just sitting in front of their screen all day,” Rothfeld said. “A forced trade is generally going to be a losing trade. Always follow your rules.”
Understand the risks and challenges of becoming a day trader.
Day trading isn’t easy, and there are several areas of complexity that require research for new day traders. If you decided to become a day trader, it’s important to understand that day trading isn’t a get-rich-quick scheme. You will lose money along the way, and not all your trading strategies will pay off as you expect.
To become a successful day trader, you need to be willing to put in months and years of hard work to understand the markets, develop a strategy and execute your plan consistently over time.
THE PROCESS OF TRADING OPTIONS FOR A LIVING
Watch our video on day trading options for a living.
TRADING OPTIONS FOR A LIVING: CAN I MAKE IT?
- Trading options for a living? Here’s how you can make it:
- First and foremost, make sure you study options
- Determine whether you are long or short biased
- Determine your risk management tolerance
- Find out what options strategy you’re drawn to most
- What are you looking to make per year?
- Break it down to daily income goals
- Calculate what options strategy will help you realistically reach your income goal
- Stick with your daily plan, cut your losses quickly and let your runners run
- Options trading for a living is hard but is doable with the proper discipline and mindset
In this blog post we are going to talk about trading options for a living. If you’re wondering can I make a living trading options. then Yes, you can trade options full time and make a comfortable living doing so. First, you need to know the proper way to trade put and call options.
If you’re looking to enter the wonderful world of trading options for a living, then learning technical analysis is key. Finding your entry and exit strategies are the best way to make a living with stock options. When holding options contracts overnight, buy near the close of the day.
Buying as close to the 9 EMA (exponential moving average) gives the best momentum entry possible. You’re buying at moving average support. Trading weekly options is also a popular options strategy.
You can see in this example we have $AMD breaking out above the light blue (9 EMA) moving average and running to the top of the trend channel (orange line) resistance before trading sideways and eventually selling off to the 50 SMA (Purple line) support.
1. BASICS OF TRADING OPTIONS FOR A LIVING
Look at the daily chart when purchasing an options contract and pay close attention what the indicators are showing. If they are bullish, buy a call as you believe that stock will go up the next day. If they are bearish, buy a put as you believe the stock will go down the following day.
For example, I use the 9 EMA, 20 EMA, 50 SMA and 200 SMA on my daily charts. If I see that the price is riding above the 9 EMA and there are no moving average crossovers, then I’ll consider that a bullish sign.
I also look at the RSI (Relative Strength Index) and the MACD (Moving Average Convergence Divergence). The RSI shows whether the stock is overbought or oversold. MACD shows the trend of the stock. Lastly I draw trend lines and find patterns as well as horizontal resistance levels.
The Ichimoku cloud is a helpful trading indicator to use with options.
You’ve looked over all the indicators and know which way you believe the stock will move. You must make sure you give yourself enough time on your options contract for your plan to materialize.
In the beginning, I have found myself in a sticky situation when I didn’t give myself enough time on the option. All options expire. That’s why selling options is a great trading strategy.
So if you choose an options contract that’s only a couple days away, yes that may be cheaper, but you don’t have the wiggle room if the stock decides to take longer to make its move to your profit zone.
Are you still wondering can I make a living trading options? If so, then learn options more in depth by taking our options course.
HOW MUCH MONEY DO YOU NEED TO TRADE OPTIONS FOR A LIVING?
- Here’s how much money you need to trade options for a living:
- If you’re looking to make unlimited day trades then you need at least $25,000
- If you are going to be a short term swing trader then you’ll want at least $10,000
- $5,000 is good for small accounts buy will make it a bit difficult to create a living
- Having the money is great but what’s most important is proper risk management
I personally love trading options for a living. You can get in on the action of high priced stocks that trade at a price level that would otherwise be outside of your budget. You may not be able to buy even one share of Amazon, but you could afford a call or put option at around $500.
Above is an options chain on $AMZN showing a couple different strikes. Options traders look at the bid vs. ask to get the best entry on the contract they are trying to buy. Because $AMZN is so expensive, and moves so much (dollar wise) the bid and ask are usually pretty wide, when compared to the popular ETF $SPY.
Something to consider is how long you plan to hold the option for. You can day trade the stock option or hold it for a swing trade, depending on the setup. Although options are used mostly for swing trades, if you buy an option in the morning sometimes taking profit the same day is the best course of action, if resistance is encountered or a desired profit level is achieved.
HOW MUCH DOES AN OPTIONS TRADER MAKE?
- It’s realistic for an options trader to make at least $100,000 per year or more full-time but it’s important to realize that most traders won’t make this amount. It takes hard work, mental discipline and having the proper capital for a trader to make this kind of money. The average trader makes between $1,000-$10,000 per year trading options part-time.
Can I make a living trading options? If you’re trading options for a living, taking your profits and not letting greed get a hold of you is paramount. I know from personal experience that wanting a larger profit rather than being happy with the smaller profit level can cause you to end up losing a large amount of your options contract value.
Not every options contract is going to make you $1,000. Sometimes it’s $150. Sometimes it’s $50. You never go broke taking a profit. You can always re enter that trade if you like the second setup. Keep it simple. Buy at support and sell at resistance.
We teach how to map out support and resistance on our live daily streams. Check out our trading service to learn more.
FINAL THOUGHTS: CAN I MAKE A LIVING TRADING OPTIONS?
Trading options for a living can be an emotional roller coaster. Watching the price action fluctuate can wreak havoc on your emotions and cause you to panic sell or FOMO buy. I have watched a stock climbing and thought to myself that I had better get in because I am missing a big profit, only to buy at resistance and watch that stock fall back down to support.
I have also had an option contract that I applied proper technical analysis on before buying and got a good entry but news made the stock fall and I panic sold for a loss. Then I watch as it climbs back up and I could have made a profit.
Above: In this chart, $GM released news on 2020 Q1 guidance early, ahead of earning (highlighted yellow). The info sounded good at first but then the market analyzed the information further and determined the financial news was not all that great. So the stock rallied only to fall back into its original trend, and is now heading back to the lower dark blue trend line (support).
How to Become a Trader – Guide to Reach the Pros
There are a lot of misconceptions about online trading especially in depicting the real job of a pro trader. This time we will show what it takes to become a professional trader, what are the different paths you can experiment with.
What type of trader you want to be?
First, let’s make it clear what the trader is. Trader as a category, is so broad, that it is almost meaningless. Basically, you can differentiate two types of trader: retail trader and institutional trader.
Before we jump in, let’s see some example of professional traders:
Describing the group of retail traders is like analyzing the animals of a zoo. But in the end, there are only two types of retail traders. The ones that get fed up with losing, and the ones that carry on and eventually become successful. The bright side of the story is that from being successful, you can build your own brand and influence others like Tim Sykes (later on him). Also, retail traders can earn money from social trading – our eToro review will introduce you to this topic – or from collecting subscribers to webinars and special mentoring.
Institutional trader as a category refers to the employee executing trades at the big investment bank, brokerage firm, or other companies. You will get fix salary and hopefully a hefty bonus at the end of the year.
However, this job requires that you can work under huge pressure and take the risk. You will risk your firm’s money. But guess what happens if you don’t get the market pulse for a couple of weeks or simply just lay back for a while until the next trading opportunity arrives? You are fired.
This handy table highlights the pros and cons of the retail and institutional traders.
|Institutional (market maker)|