How to Become a Day Trader

What is day trading, and how does it work?

Day trading refers to buying and selling securities and stocks, then selling them within the same day with the goal of making a profit. At the close of the market day, a day trader will have closed all their positions and realized any gains or losses.

Day trading is the opposite of a long-term investment strategy, in which one holds stocks or securities in hopes that they appreciate in value over time. Instead, day trading is about buying the dips and selling high in the short term – the long-term prospects of a stock or security mean far less than immediate volatility.

Day trading can be risky. Day traders are inevitably going to lose money on trades, and it can be quite difficult to become a profitable day trader.

What is a swing trader?

A swing trader is similar to a day trader, but they are not the same. 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.

Key trading terms

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.”
• Margin trading. To fully understand what a pattern day trader is, it helps to understand margin trading. Margin trading is when traders use borrowed funds from a broker to trade. Due to the risk involved here, margin trading takes place through the use of a margin account. FINRA has specific requirements related to this for pattern day traders. The organization says, “Under the rules, a pattern day trader must maintain minimum equity of $25,000 on any day that the customer day trades. The required minimum equity must be in the account prior to any day-trading activities. If the account falls below the $25,000 requirement, the pattern day trader will not be permitted to day trade until the account is restored to the $25,000 minimum equity level.”

How to become a day trader

These tips could be helpful to day traders of all types, both experienced and new to the market.

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. 

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 detailed regulation questions regarding day trading.

Start small.

Once you’ve completed sufficient research, it’s important to start small as 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 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 decide 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. 

How to determine the best day trading stocks

Losses are the only guarantee in day trading. Still, a careful analysis of the market is critical if you hope to turn a profit. When analyzing a stock, consider the following methods.

Price-to-earnings (P/E) ratio

The P/E ratio of a company can give you insight into a company’s growth potential compared to competitors in the same industry. It is determined by the current trading value of a stock compared to its earnings per share over the past 12 months. A company with a current value 10 times its earnings would be seen as stronger than a competitor with a stock value of two times earnings.

Price-to-earnings growth (PEG) ratio

The PEG ratio can help you understand how a company might grow over the next year or two. It is determined by taking the stock’s P/E ratio and comparing it to the company’s expected earnings growth. The higher the PEG ratio, the higher the company’s growth potential.

Debt-to-EBITDA ratio

A debt-to-EBITDA ratio can give you a sense of whether a company is a high-risk investment or not. A high debt-to-EBTIDA ratio suggests that the company’s debt is outpacing its earnings before taxes, interest, depreciation, and amortization. A lower debt-to-EBITDA ratio suggests a company might be less risky.

If you aren’t sure how to apply these approaches, identify two to three stocks you like based on their fundamentals (don’t overthink it) and track them over the course of a quarter. What happened, and did it surprise you? What did you notice about the stock values? What affected them? Keep notes.

After tracking these stocks, consider the most important fundamental factors. Consider these elements first when analyzing any stock.

Day-trading strategies

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: Scalping means you sell your stock immediately after the trade becomes profitable. This isn’t too complex in terms of when to sell; it’s an easy way to get your feet wet with day trading. Scalping is also referred to as taking advantage of “the spread,” because traders are profiting off the difference between the sellers asking price and the buyer’s offer.
• Momentum: Momentum trading is based on trending news and information. Whether it’s a new earnings report or different breaking news, day traders use news events to project rising and falling stocks. This requires a good bit of research to do well, but it’s still a good option for beginners.
• Fade: Fading is acting contrary to the prevailing trend that is apparent in the market. It is a high-risk strategy that bets against conventional wisdom. Is everyone investing in a stock you expect to go belly up? Why not short it at its peak? The risk, of course, is that conventional wisdom can be a potent factor in the stock market.

There are many other strategies and nuances you can implement as you become more adept at day trading.

Day-trading platforms

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:

• Interactive Brokers
• TD Ameritrade
• Ally Invest
• Charles Schwab
• TradeStation

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.”

What happened with GameStop stock?

The trading world was recently rocked by an unusual development involving shares of GameStop, a brick-and-mortar video game retailer. Last summer, GameStop stock was worth $4 per share, and many hedge funds – including Melvin Capital Management and Citron Research – shorted millions of dollars in GameStop stock, expecting the price to fall further.

A short is when one party borrows stock from another party. Expecting the price of that stock to go down, the borrower sells the stock immediately, expecting to buy it for a lower price in the near future. The idea is to return the borrowed shares to the other party having profited off their decline in value. Short contracts specify a specific term; the borrowed shares must be returned by the end of that term, regardless of what the stock price is.

Unfortunately for Melvin Capital Management and others, Reddit took notice of their big bet against GameStop.

A group of Redditors on r/WallStreetBets recognized that hedge funds shorted more shares of GameStop than existed, and decided to stick it to them. When these online investors began using investment apps like Robinhood to purchase GameStop stock en masse, the price slowly began to increase. Just two weeks ago, the stock was worth $40 per share as others joined in on the trend. At the time of this writing, GameStop shares are trading at $338.

This is bad for the hedge funds that bet heavily against GameStop. Melvin Capital Management, for example, closed its position in GameStop after suffering losses of 30% in the first three weeks of the year. The hedge fund reportedly required a $2.75 billion financial support package from Citadel and Point72 Asset Management in the wake of the GameStop trading frenzy.

This scenario is atypical of day trading and, while GameStop stock was up 80% at the time of this writing, such dramatic movement rarely occurs in such a short time.

Day Trading FAQs

These are common questions asked by aspiring day traders.

When is the best time to day trade?

Generally, the biggest movement occurs around 10:30 a.m. ET, about an hour after the market opens. Later in the day, the market typically cools off, and there is less volatility. Volatility is how day traders make money (buying the dips and selling high), so the less volatile the market, the less appeal to day traders. Of course, every market day is unique, and there could be extenuating circumstances that drive volatility in the afternoon as well.

How much can you make day trading?

The amount of money a day trader can make depends on the fluctuations of the market and their positions. Day traders could make or lose a significant sum of money at any given time. There are no guarantees of profit when investing in the stock market, especially in the fast-paced world of day trading.

How much money do you need to start day trading?

Theoretically, you only need enough money to purchase one stock. If you were incalculably lucky, you could turn that one stock into a fortune, however unrealistic this theoretical example is. In reality, day traders often lose money long before they make a profit. So, it is best to only invest disposable income in day-trading activities. Day trading with retirement savings or borrowed money is never advisable.

Day trader tools

Some of the most popular software and tools available to day traders include:

• TD Ameritrade: TD Ameritrade’s platform charges $6.95 per trade in commissions, which is somewhat pricey, but also avails users to a detailed reporting platform that can help them analyze stocks and make strategic investment decisions.
• Interactive Brokers: Interactive Brokers offers a platform specifically geared toward day traders rather than long-term investors. The platform also offers discounts to the highest volume traders, rewarding day traders that are especially active.
• Robinhood: Robinhood is a platform that offers commission-free stock trading, which makes it great for beginners who want to avoid incurring significant commission expenses.
• Webull: Webull is also a zero-commission platform that also has no deposit minimums. It is another good choice for beginners who are just testing the waters.
• E-Trade: E-Trade offers new traders 60 days of free trading when they open an account with a $10,000 deposit. However, E-Trade’s commissions are $6.95 per trade, making them slightly more expensive than some competitors.

Additional reporting by Adam Uzialko. Some source interviews were conducted for a previous version of this article.