Day trading is becoming increasingly popular, with more people picking it up as a result of the pandemic, according to a recent survey sponsored by robo-advisor Betterment, with 49% of day traders doing it for less than two years.
However, day trading also has its pitfalls. We don’t normally recommend it, as it is antithetical to our approach of “lazy trading.” Day trading requires focus, time, and energy. On top of that, there’s a high failure rate, despite how alluring it can seem at first glance.
Sometimes called intraday trading, this type of trading focuses on buying — and then selling — securities on the same day. In most cases, the goal is to capture profits by entering and exiting trading positions based on price fluctuations and momentum.
For example, you might decide to buy 1,000 shares of a stock at the beginning of the day, for $30 per share, putting $30,000 on the line. When the price rises to $35 per share later that day, you might turn around and sell for $35,000, seeing $5,000 in gross returns (any margin costs and trading fees will reduce your net gain).
Many people engage in day trading using online tools. Additionally, it’s popular to use margin when day trading. The ability to leverage your position can potentially lead to larger profits based on small price fluctuations.
With intraday trading, you rarely hold an investment for more than a day. As a result, paying attention to trading fees is important so that your costs do not outweigh your profits. You also need to have a high risk management tolerance since it’s also possible to see big losses as well as large profits.
If you want to start day trading, there are some steps you can take to move forward.
The Betterment survey found that 58% of respondents chose to start day trading as a way to make more money in a short period of time. For those who manage success, there are various popular day trading strategies that you can use to become profitable. The key to making money with intraday trading is to have a strategy and stick with it. You might decide to tweak your strategy or even to change strategies, but it is best to be consistent at first. Sticking to your strategy is one of the best ways to make money in the long run.
Here are three strategies that can help you get started at making money by day trading.
With trend following, you identify certain trends in the pricing charts. You can see how pricing movements are settling in, so you take advantage of them. When an asset starts trending higher, you enter a buy order. Then, you pay attention to the trend. Once the price turns and starts trending lower, it is time to sell. If you buy and sell based on these trend sentiment indicators, you’re more likely to make money in the long run.
Another alternative is to trade based on ranges during daily trading. You can look at chart patterns that show price and volume indicator to get a feel for how an asset moves during the day. Get a feel for when the typical lows and highs occur. When you have an idea of the range an asset often trades in, you can buy when that asset is at its low point. And, because you have an idea of when the price and volume are likely to be near their peak, you can prepare to sell the asset when it gets close to the top of its daily range.
Rather than trying to use charts and other tools to determine the best times to buy and sell an asset, scalping is about taking small profits immediately. Basically, it is about using small price changes to consistently see profits. You enter a position, and then as soon as the position becomes profitable, you exit the position with the profits. While profits are generally small, they can add up, and it also increases your chances of turning a profit on each trade.
The idea behind intraday trading is that you only hold your positions for hours — or even minutes. In general, day trading doesn’t involve holding positions overnight. Here’s how it works:
One of the most successful and well-known day traders is Ross Cameron, the founder of Warrior Trading. According to Warrior Trading, Cameron made more than $4.5 million in profits day trading in 2020.
Almost no one will make that much, though. In fact, according to an analysis of day trading in Taiwan, only about 20% of traders made money in any six-month period. On top of that, median net profits for U.S. traders in a six-month period were about $4,200.
If you want to move forward, though, here is an example of how day traders potentially make money. Let’s say you have a target of $0.04 for a stop loss and a profit target of $0.06. If you have $35,000 in your account, and you’re sticking to the 1% rule, the most you want to risk on any trade is $350. As a result, each trade you make should be 8,750 shares. This will keep you within your limits for losses.
Now that you have the basics, let’s say you trade.
This seems promising at first, but when you consider the success rate, your ability to truly profit is much lower.
A more realistic example might be someone who actually has a retail account of $100,000 and manages to generate 20% in gains for the year. After intense trading, $20,000 in profit can seem like a big deal. However, if you only make $20,000 in a year, you won’t be able to retire and live the luxurious lifestyle so often portrayed by online gurus peddling their courses.
However, even though there is potential for profits, it is important to note that there are risks involved with intraday trading. For retail investors with small accounts and no proper training in day trading, it can actually be quite hazardous to get involved. Make sure you receive proper training and practice before you risk your hard-earned cash as investing for beginners is risky.
As you begin trading, cultivate a few characteristics that will increase your chances of success.
One of the most important characteristics of a successful day trader is risk management. The ability to limit your losses is vital to long-term profitability. Every day trader ends up with losing positions at some point. The key is to manage risk and limit those losses. One way of doing so is using the risk reward ratio.
As discussed earlier, Another way to manage risk is to make sure you do not risk more than 1% of your account on any one trade. You should also set stop-loss orders to trigger when the price of an asset falls to a certain point. Stick to these mitigation strategies, and you are more likely to keep the losses to a minimum while taking profits when they come.
Next, come up with a successful trading strategy. Some of the easiest strategies to master are those discussed above, including trend following, range trading and scalping.
When you come up with a strategy and stick to it, you have a system you can use to reduce the emotion involved. Your system can mean the difference between success and failure as a day trader. Find a strategy that suits your style and stick with it.
Successful day traders have discipline. They set their loss limits and stick to them. There’s also disciplined traders when it comes to taking profits. If you set your profit-taking level at $0.06, as used in our example, you have the discipline to exit the trade at that point rather than hanging on to run your profits.
When you have a strategy, the discipline to stick to it can make or break you as a day trader. Additionally, it’s important to have the discipline to avoid risking more money than you can afford to lose. Be careful of using too much margin in an attempt to make up for earlier losses.
As a day trader, your ability to follow good timing and manage the selection of your assets is important. Pay attention to the timing of your trades and select assets that you understand. You shouldn’t trade assets you don’t know about.
Management of your account is also important. Don’t lose track of margin and the true profitability of your trades. Keep track of fees you pay and manage your tax bill. Don’t forget to track which trades were profitable and which were losers. Staying on top of your account so you can manage and make tweaks as needed can help you succeed over time.
Successful day trading also requires access to a reliable platform that can help you execute trades when needed. You need to be able to enter and exit positions immediately. A reliable trading platform can help you set parameters and trade quickly. Day trading requires quick positions, and some degree of automation can help you build reliable profits more effectively.
Good charting software can also help you as you day trade. As you evaluate trends and ranges, your charting software can make a big difference. Learning how to read the software can help you determine the best times to enter and exit trades, and increase the chances that you’ll earn profits.
When deciding whether to get involved with day trading or swing trading, it’s important to understand the advantages and disadvantages.
First of all, it’s important to understand the differences between day trading and swing trading.
Day trading focuses on quick trades that take place within a day. It’s rare to hold a position overnight. Swing trading, on the other hand, focuses on holding positions over days or weeks. While both types of trading rely on market volatility and taking profits from short-term market movements such as a market correction, swing trading focuses more on developing trends while day trading is more about minute-to-minute changes.
Even though there are certain requirements for “pattern day traders” using margin, you don’t need $25,000 to get started. It is possible to open some brokerage accounts with as little as $100 and start day trading. With the right strategy, it is possible to grow a small amount of money to a bigger amount, until you can start making bigger trades and seeing bigger profits.
However, when you start, percentage-based, risk-adjusted returns on small amounts will be fairly small. If you use the 1% rule to limit losses, and you are starting with $500, that means that you need to focus on smaller traders where you are only risking $5 on each trade. While this is possible to do with some assets, your profits are likely to be much smaller until you start building them. As you accumulate small profits, you’ll be able to start making bigger trades and see bigger potential profits.
Realize, too, that over time your gains and losses are related to the strategy you employ and the effectiveness of your risk management. When you stick to a profitable strategy, you should be able to build on your small gains over time — as long as you have the right tools at your disposal and you invest in the assets most likely to provide you with the ability to start small.
The main problem with day trading is that it is time intensive, and the rate of success is relatively small. You can start small, but growing to substantial profits takes time and effort that could be spent elsewhere, with a better potential for success.
Once you start thinking about day trading, it is time to consider whether it is the right move for you.
If you have the risk tolerance for day trading, it could be a way to quickly make profits. However, you’re likely to be limited if you can only start with a small amount of money. You also need the available time to do your due diligence and learn how to trade effectively and take profits.
Consider trying it out for a few days and testing your strategy before you risk a lot of money. This is especially important since you’re more likely to lose money than see huge profits.
As you choose a day trading platform, there are a few items to consider.
When deciding to start day trading, there are a few platforms that stand out to us. Review the available platforms and choose what’s likely to work for you and your trading style.
If you’re interested in forex trading, IG Index can be a good choice for day trading. Owned by IG Group, which was founded in 1974, this is one of the OGs of trading. IG Index offers a variety of choices for trading and makes it easy for advanced and beginning traders alike to begin taking profits.
Social trading is the main focus for eToro, which was founded in 2006. The idea is that you can set up to copy trades made by others. This can make day trading a little easier, as you can learn from the way experts trade. However, the copy feature only applies to cryptocurrency assets.
Founded in 2002, XTB focuses on Forex and CFDs. It’s considered one of the premier brokers in Europe for these asset classes. One of the features is its powerful trading platform, xStation 5. XTB offers trading for more than 2,100 financial markets.
If you are looking for a place with a wide range of automated tools, AvaTrade can be a good choice. Part of the AVA Group of companies, AvaTrade is compatible with several different platforms, including MetaTrader platforms. The main focus is Forex, and the company has been around since 2006.
Another broker focusing on Forex and CFDs, First Prudential offers access to many low spreads that can make it more cost-effective to engage in day trading. FP Markets was founded in 2005 and primarily uses the Metatrader 4 platform.
Founded in 1999, Forex.com offers traders in the United States access to Forex trading. It is also possible to day trade with metals using this website. Forex.com is known for its advanced charting and the technical indicators and drawing tools that make it easy to track what is happening.
This platform provides robust news and analysis so you can get an idea of what’s influencing the markets. City Index was founded in 1983 and offers a focus on spread betting, CFDs and forex trading. Day traders looking for these assets are more likely to find what they’re looking for with City Index, especially when trading the news.
This Fintech company offers access to several markets, including traditional markets, virtual goods and cryptocurrencies. Founded in 2015, this platform offers wallet services and the ability to make trader-to-trader transactions. On top of being able to trade on your own, it’s also possible to access social trading so you can see what others have used profitably.
There are various resources you can use to learn about successful intraday trading.
No matter how you proceed, watch out for fake gurus and do your due diligence. So much information out there hypes the successes of few traders. On top of that, many Instagram accounts, TikTok videos and courses do not adequately address the failure rate. Be careful of getting information from these sources, since it can lead to big losses later. It’s up to you to make sure you’re getting information from a reliable source.
As you learn more about intraday trading, there are some strategies you can use to take things to the next level.
No matter where you get your information, it is important to do your own due diligence. Test out strategies before risking your money, and watch out for fake gurus who don’t have a proven track record of success.
Day trading can be a way to make money and grow your portfolio. It offers the opportunity for quick profits and can allow you to start small and grow to bigger trades. However, it can also be considered risky. Research from Berkeley indicates that individual traders often trade to their own detriment, so it is important to have a strategy and stick to it, all while making sure you do not risk money you cannot afford to lose.