Although day trading is diametrically opposed to more passive forms of investing, it does have its advantages. The reasons day trading isn’t as often recommended will become clear as we begin to break the topic down.
The Basics: Brokerage Account
There are many different places where you can open a brokerage account, and it’s really up to you as far as which one you prefer.
However, you may occasionally find that certain brokerages don’t offer certain stocks. As a result, your best bet is to go with one of the more well-known firms such as Schwab, Fidelity, or E*Trade.
Once you open your brokerage account, there is just one more step before you are ready to start day trading.
Funding Your Account
However, there are some specific rules you need to know related to day trading, so we’ll also cover those here.
The first thing you need to know is that the Financial Industry Regulation Agency (FINRA) requires you to maintain at least a $25,000 minimum equity. This is required for all pattern day traders.
In other words, if you have less than $25,000 in your brokerage account, you must add money to your brokerage account before you’ll be permitted to day trade again.
Because that money must be in your account, you also can’t tap into that $25,000 for day trades. There are some securities that are considered eligible to be part of your minimum balance; otherwise, you must have $25,000 in cash at all times.
What is a Pattern Day Trader?
As mentioned in the link from FINRA:
“You will be considered a pattern day trader if you trade four or more times in five business days and your day-trading activities are greater than six percent of your total trading activity for that same five-day period.”
Day Trading Knowledge & Skills
The things we mentioned so far are just the basics you need to get started, but having those pieces in place certainly will not guarantee success.
Having a brokerage account with the minimum balance is like having a car with a license plate, insurance, and so on. Those things are necessary to have, but they won’t do you much good if you haven’t learned how to drive yet.
Day trading is no different; it is a “trade” in more ways than one. It’s an art as well as a science and does require you to acquire some knowledge before taking the plunge.
Resources to Help You Get Started
It does get easier after a while, but having some guidance to point you in the right direction can be invaluable. If you think that would be helpful, considering looking into Investors Underground, which is a day trading service and community that helps people make better trading decisions.
When you are first getting started with Investors Underground (read this Investors Underground review to see if it’s right for you), it has two online courses to help you learn the basics – Textbook Trading and Tandem Trader. The former is a more basic course (but includes some advanced concepts), and the latter shows you the nuts and bolts of actually trading.
Another resource that can be helpful when you are new is a practice trading account. Many brokerages offer this, including eToro and many others.
This account is exactly what it sounds like: it works much like a real brokerage account except that you trade with “fake” money instead of real money. This is definitely a great way to learn the ropes and hopefully avoid making costly mistakes.
Time (and Mental) Commitment
Another thing you are going to need to start day trading is the ability to make a time commitment – and a mental one.
While it is possible to day trade on a more part-time basis, it is still going to need more time than other types of trading, such as swing trading, buying and holding real estate stocks, and especially passive investing.
Plus, you have to be able to trade during the day. More specifically, you’ll have to be trading while the markets are open, between 9:30 a.m. and 4:00 p.m.
You don’t have to be trading for that entire time, but you must have some ability to trade during that window, or day trading won’t be possible. If you work a 9-5 job, you may want to consider swing trading instead.
Day trading requires a mental commitment, too. It can be a stressful way to trade, particularly if you have several trades that are not going so well. When you invest more passively, you won’t see the ups and downs quite so up-close.
The reality is that it’s not for everyone, but those who enjoy this style of trading can do quite well with it.
And a Constant Willingness to Learn
The last thing you should have if you want to be a successful day trader is a constant willingness to learn. Although every day trader has a style of trading that works for them, and you will hopefully find your own niche, that doesn’t mean you stop learning. Take advantage of the different online learning platforms available.
Things in the market are constantly changing, not least due to new companies going public – and others going defunct. Plus, there are plenty of macroeconomic trends and market regulations that could well influence your trading decisions.
So even if you’re an old dog, don’t be afraid to learn new tricks. Doing so is key to being a successful trader.
With a willingness to learn (and with proper guidance, especially when starting out), you’ll be well on your way to becoming a successful day trader.