Becoming a consistently successful day trader can take years, but it's possible.
- Day trading is not a way to get rich quickly.
- Day traders are going to lose trades.
- It's extremely risky to make trades with anything other than disposable income.
- Becoming a profitable day trader can require years of thorough research.
- Commissions can cost a day trader thousands of dollars annually.
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."
- 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."
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.
- Momentum – Momentum trading is based off 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.
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.