Digitization of finance has introduced a new level of personal freedom. Bossless and independent of residency, day trading options have spiked in popularity during pandemic-induced lockdowns.
As sports bars, gatherings, and casinos closed, day trading has become a favorite pastime for millions. If you want to make it more than a side hustle, however, you should learn how to start day trading properly.
This Guide Contains:
Ups and Downs of Stock Market Trading
Interestingly, the percentage of adults participating in the stock market was at an all-time high in 2007, at 65%. In 2020, it was 55%.
Predictably, the Financial Crisis of 2007–2008 and subsequent bank bailouts greatly eroded the public confidence in the centralized financial system.
Fortunately, as shown in the movie “The Big Short” featuring Christian Bale as Dr. Michael Burry, it was a rather unique event that is not likely to repeat.
What truly broke the ceiling for young people to enter the stock market was the launch of Robinhood’s zero-fee trading app. Since then, almost all trading platforms have eliminated trading commissions, with eToro taking the lead with over 20 million users.
After the GameSpot (GME) scandal in which Robinhood intercepted retail trading of the stock, apparently on behalf of the Citadel hedge fund, its reputation has been shattered. Nonetheless, Fidelity, eToro, TD Ameritrade, and a wide variety of crypto trading apps are more than happy to pick up the slack.
What Exactly is Day Trading?
Instead of investing for the long haul, as a diversified portfolio for retirement or some other purpose, day traders engage in speculative trading based on market trends and technical analysis (TA).
In other words, day trading is opening a position on an asset or a stock and closing it on the same day.
Let’s take one of the world’s most popular blue-chip stocks as an example of day trading — Tesla (TSLA).
For a while, its value had grown so high that Elon Musk had been christened as the world’s wealthiest person, soon to be topped by Jeff Bezos of Amazon again. However, in March, TSLA stock suffered a severe drop of 22%.
Tesla’s drop was not that surprising, especially since it has been long-considered an overvalued high growth stock. Moreover, there was no specific news about the company at this time to cause the stock plunge. Therefore, an informed trader would have expected the drop and keep an eye on the stock as:
- Growth stocks are influenced by fears of inflation. Such anxiety is pretty high right now as the Federal Reserve has gone into overdrive with the money supply increase.
- Growth stocks are also influenced by rising bond yields, which had jumped from 1.1% to 1.6% in a month.
Accordingly, a day trader would take a look at the Japanese candlestick chart above and look for price supports and resistances.
Between every red and green candlestick body fluctuation, there was an opportunity to make money.
For instance, by buying at the lowest price and selling at the highest price, as it occurred between March 8 and 9. Such a strategy is commonly known as “buying the dip”.
In short, day trading is all about risk management — reading charts, price moves, and indicators to exploit the volatility of the market.
The more volatile a market is, the more day trading opportunities present themselves.
This especially applies to penny stocks and cryptocurrencies, but all assets can become volatile given the proper circumstances or specific news, be they positive or negative.
Tools and Skills Needed for Day Trading
Before risking day trading with real money on the real market, it is essential for you to first master these skills and knowledge.
- An in-depth understanding of day trading lingo, fundamental and technical analysis.
- Selecting a day trading strategy, practicing it with a free demo account. You will find that most trading platforms offer such accounts with virtual funds. More importantly, real market data is fed to the charts in order to commit simulated trades more effectively.
- Achieving a respectable profit returns ratio on a demo account, meaning that at least 70% of your trades of the month were profitable.
- A charting platform such as TradingView, which also serves as a stock scanner and screener. Scanners feed real-market data into the platform, allowing you to act in a timely manner. Screeners seek the stocks that fit your search criteria for volatility, producing lists of stocks you can start trading with.
Fortunately, much of the educational material is free to learn all the relevant terminology, how to read dozens of price indicators and patterns. You can start your day trading for beginners’ journey with this guide on how to read charts.
When you find the right stocks, those that have a relatively high volume, your day trading option should be more successful because there is a greater chance for price breakouts. Such stocks are also called “stocks in play”.
Money Involved with Day Trading Options
Although most trading apps have near zero-commissions on transactions, you still need to buy them — opening a position — in order to make a profit from selling them — closing a position. Outside of withdrawal fees, you should count on at least $100 to get you started on fractional stocks or penny stocks.
With penny stocks, which trade under $5 per share, $100 gets you 20 stocks. A $1000 investment for day trading will get you between 200 and 500 stock shares.
With a budget of $1000, if a stock is at a minimum of $2 per share, you would need it to go up by 20 cents to materialize a daily net profit of $100.
Therefore, it all depends on how much you are willing to invest.
The higher your budget, the likelier is your daily trading profit, if you had thoroughly practiced on demo accounts. Speaking of accounts, you need to pay attention on the difference between two types of trading accounts:
- Margin account – offers a limited number of trades for a specific time period. Usually, 3 trades within a 5-day period, if your account holds less than $25,000.
Additionally, a margin account gives you 2x buying power (if below $25k) and 4x buying power (if over $25k). Such leverage on borrowed funds enables you to buy more shares than your cash reserve allows for, but it also increases the risk of losing more money than you have in reserve.
- Cash account – low-risk account with which you can trade as many times you want, as long as it is topped up with funds. Be careful, though not to trade with not yet settled funds. This may get you suspended.
Experienced scalpers and day traders prefer the margin account, as they can make small trades to yield larger gains. Furthermore, take note that FINRA instituted some restrictions on margin trading accounts in 2001, following the dot-com bubble burst. One of them is the pattern day trader rule (PTD).
If you make four trades within five business days, your accounts will be designated as PDT.
Once you are marked this way, you have to fund your account with $25k for day trading, which gets you a leverage of 4x the buying power. Of course, as previously noted, if you have less than $25k, you are then limited to 3 trades within 5 business days.
Given the fact that FINRA is a US-based federal agency, the way around the PDT rules is to create an offshore account. One of them is TradeZero.
How Much Can Day Traders Make?
According to Glassdoor data, based on 1,579 surveyed salaries as of March 25, 2021, a trader’s national average is quite respectable at $97,161 per year.
Comparatively, an average computer programmer makes about $70k per year.
In the United States, such salaries should further be impacted by migration and machine learning. As you can see, going financially independent as a day trader may prove fruitful in the long run. However, this all depends on how committed you are to your trade.
Aside from daily discipline, your success will depend on:
- Your initial investment – if you start with just $1000, it will take much longer to reach your desired lifestyle than if you start with $10,000. For margin trading, $25k is the bare minimum.
- The types of markets you engage with — stocks, futures, forex, cryptocurrencies…each have their own advantages and drawbacks.
- Patience – if you don’t achieve results in a month’s time, it doesn’t necessarily mean you are a bad day trader. Rather, you should further educate yourself and tweak your trading strategy.
In short, you should not view day trading as a hobby or a side gig. Top day traders tend to make money from leveraging tiny price movements in indexes that have mid to high volatility.
Likewise, liquid stocks. These are the stocks that resist price drops if they are quickly sold. For example, the previously mentioned Tesla (TSLA) is a liquid stock, just as Apple (AAPL), which has tighter bid/ask spreads.
Quick Overview of the Most Commonly Used Day Trading Terms
You have already seen some of these terms throughout this day trading for dummies guide. Let’s take a closer look at those that make the core of day trading:
- Bid – the price a buyer sets for buying an asset
- Ask – the price a seller sets for selling an asset
- Spread – the price differential between bid and ask — this is where you make your money!
- Candlesticks – a chart consisting of candlesticks, each one denoting price’s high, low, open, and close within a timeframe
- Bearish – asset’s downward trend, colored red on candlestick charts
- Bullish – asset’s upward trend, colored green on candlestick charts
- Trend – direction of the asset’s price moves, which can go up (bullish) or down (bearish)
- Cover – buyback of shares that were sold short
- Short-selling – Trading strategy that counts on the stock to decline. The seller opens the position by borrowing for the purpose of buying them after they reach a low point.
- Resistance – a price threshold at which sellers overpower buyers. For example, Bitcoin had numerous price resistances during the last six months, all broken after institutional buyers showed up to break them.
- Support – the opposite of price resistance — buyers overwhelm sellers, making it difficult for the asset’s price to drop.
- Breakout – when an asset moves outside of defined support and resistance levels
- Scalping – exploiting minor changes in prices within short time periods
There are dozens of more terms to explore, but behind each exploration hides a new trading strategy to explore.
Decide Your Commitment Level After Practicing with a Demo Account
In conclusion, day trading is so complex that one needs to explore and experience many strategies before committing to this calling.
Once you learn the proper terminologies and understand the technical analysis toolsets, spend at least 4 hours per day with a demo account.
This is the best way to gauge your skills, discipline, and patience. Your minimum ratio of lost vs. won trades should be around 4:6 out of 10 trades. Day trading can be a highly rewarding experience.
Unfortunately, it also tends to generate addictive behavior due to the brain’s chemistry. This is more prominent among young investors, according to a British FCA study.
Lastly, eToro is launching its stock trading in the United States. This platform has an excellent social trading network facilitated by its OpenBook feature. Likewise, it holds a huge repository of training materials.
More importantly, eToro allows you to copy trades from established professional traders. Needless to say, this is an excellent method to boost your confidence and learn working trading strategies at the same time.