“How to become a day trader?” is one of the most common searches I see going through on my site. Prior to becoming a day trader in 2005, I faced this question myself. Day trading is in my blood, and maybe you are feeling like it’s in yours too. How to become a day trader is both a simple a complex question. So here are few simple things you need to know about day trading. After that we will get into the details of these points.
- You don’t need to be a “finance person” to be a day trader. You don’t need any formal education at all. Day trading is mostly self-taught or you find yourself a mentor–someone willing to show you the ropes–and then you apply yourself to the day trading…just like an apprentice.
- You can day trade for someone else, who may provide a training program, so you don’t need to fund your own day trading account and thus you don’t need much capital to get started.
- Most people think of day trading stocks, and while that is one choice available, if you are going to trade on your own, the Forex or Futures markets are likely better alternatives since you can leverage your account more extensively than with stocks. This means it is less capital intensive, and you can therefore hopefully make a living off a smaller amount of capital.
- When you start day trading you still need to live. Money isn’t going to flow in immediately, or consistently. You need to plan ahead for how you will cover your bills as you learn to day trade (other job, savings, etc), up until the point in time where you can make a living off your day trading. That could be a year or several years away.
- You’ll need to find or come up with a trading strategy, and then stick to it through good times and mediocre times (hopefully there aren’t too many BAD, BAD times). If you don’t think you can do that, do something else with your money.
- Day trading can be quite boring, compared to what you might think. You have a strategy and you wait for opportunities to implement it. That means a lot of the time you are sitting around doing absolutely nothing. Don’t get me wrong, your heart rate may be skyrocketing during a big trade, but quite a bit of the time you’ll just be sitting on your hands.
- A day trader opens and closes positions within the same session. No holding overnight–this is very relevant if you trade stocks or futures.
Now let’s going into these points in a little more detail.
How to Become a Day Trader - Education? Proprietary Trading Firms?
You don’t need an education, you don’t even need to be smart. Trading provides opportunity for almost everyone, and doesn't discriminate. No matter what your background you can be a day trader…although it will take a lot of work. You’ll need to teach yourself or get yourself a mentor to teach you how to become a day trader.
If you join a proprietary trading firm, they will provide you with hopefully some good training as well as capital to trade once you have completed your training. Generally you don’t get a salary with a proprietary trading firm. Instead, they train you and provide you with capital. After that it is like you are trading for yourself. They will keep a cut of your profits, but you didn't need to fund your own account. So proprietary firms are a good option if you don’t have the money to fund your account, or want hand-on guidance.
If you are new trader and decide to join a prop. firm, make sure to ask them if they teach you a strategy. If they only teach a general trading course, you will need to come up with strategies on your own, which means it will likely take longer to become profitable than if they teach you a consistent trading method.
How to Become a Day Trader From Home - Stocks, Forex or Futures?
Stocks aren't the only game in town, forex and futures are excellent trading alternatives, and in my option often superior. It should be noted that stock and futures exchanges are regulated in each country, so the requirements for each will vary. Here we will look at the US.
If you make more than 4 day trades a week in the stock market you are considered a pattern day trader in the US. This means you must maintain a $25,000 minimum stock trading account at all times, otherwise you won’t be able to day trade . For more on US day trading requirements look at this little Securities and Exchange Commission (SEC) pamphlet: Margin Rules for Day Trading.
If you trade futures you are not held to the same rules. Therefore you can open an account for about $5000. To trade one S&P Emini futures contract requires $500 in capital. For each tick the market moves you will make or lose $12.50. There are 4 ticks to a point–or $50–and most days you are going to see at least 10+ points moments between the high and low of the day (normally much more). So if you can grab a even a tick or more day you are making a great return assuming you can keep your commissions low. You will need more than $500 though since you need to accommodate for losses and intra-day fluctuations on positions. Therefore, $5000 will get you started. Although starting with $10,000 to $15,000 is recommended.
I am of course assuming you have a proven winning strategy. If you don’t have a proven strategy then you’ll likely blow through this amount in a very short time frame. No strategy? Trade a demo account until you are consistently profitable. You should be profitable–over and above commissions and costs–for at least 3 months before trading real money.
Forex also provides great leverage, up to 50:1 (higher in some countries), therefore, similar to futures trading you can start with a smaller amount of capital than stocks and likely be able to make a better return. I would advise starting with $3000, or more, when forex trading.
If you want to practice stock trading, futures trading, forex trading or options trading you can download the TD Ameritrade ThinkorSwim trading platform for free and practice on real-time data with fake money-https://www.thinkorswim.com/tos/displayPage.tos?webpage=paperMoney
Remember, You Still Have to Live
Funding your account is not your only cost, and even if you day trade for a firm/another person (provide capital to you to trade and pay you based on performance, but there is no salary) you face costs. You won’t be profitable right away. Assume at least several months– preferably 6 or more–before you start making consistent income. Likely a year or more before you can live on that income. If you are a workaholic or already have a winning strategy you may be able to reduce this time estimate. If you work, and are learning in your spare time, you may need to expand this time estimate. And remember, some traders never make it to the stage where they are consistent or can live off day trading.
Are You Cut Out for It?
I do think anyone can become a day trader given enough time, and dedication. But some people are just not suited for it. If you have a gambling mentality, then you will likely lose everything. Also, you need to be highly disciplined, at least when you trade. Losing your discipline, especially when trading a leveraged account can be mean your account is wiped out rapidly. Day trading can also be very boring at times. There are slow times in the market, during the day and often months at a time where the market does very little. This means there are few opportunities and most of your time will be spent just staring at your screen. Being patient is key during such times, as trying to make trades when there aren't high probability opportunities can bleed your account dry.
How to Become a Day Trader: Summary
Ask yourself if you have enough money both to fund your account and pay your bills until day trading pays off. If you have the money, you can go at it alone trading from home. If you want some direction or someone else to provide you with capital, search out proprietary trading firms in your area. Ideally you are a disciplined and patient person, otherwise you’ll likely need to do a lot of internal work to be success day trading.