How To Start Day Trading: A Quick Start Guide

Day trading involves buying and selling stocks, options, futures or currency pairs in short timeframes to make profit from small changes in price. Although it can generate lucrative returns, it is not an easy career to get into. To become a day trader, you must fully be able to analyze a market, and execute your rules based trading strategy. It goes much further than just that tough. You’ll also need a risk management framework in place to mitigate your potential losses. To follow that framework, you’ll need high degrees of self discipline and tough enough skin to admit when you’re wrong.

This guide provides a very brief overview on how to start day trading responsibly and should not be thought of as a comprehensive breakdown. We’ll cover basic market understanding, strategy development, goal setting, broker selection, and risk management tactics. Remember, day trading is not suitable for most investors due to the potential for significant losses.

Understanding Day Trading

Day trading, refers to the act of buying and selling stocks, options, futures, currency pairs (really any tradable asset) within a single trading day. It involves capitalizing on short-term price movements in highly liquid assets. A lack of liquidity often means that traders can’t get in and out of a trade efficiently enough without giving back profits to the spread. Day traders aim to buy assets at low prices and sell them at higher prices before the day ends. They are completely “flat” or position neutral when each day starts and ends. Day trading is a high-risk market strategy that demands screen time, knowledge, and discipline, with no guaranteed success. It requires a strong nerve and should not be considered an investment strategy.

Developing a Strategy

Building a day trading strategy involves a deep understanding of the market before using any funds. Simply having a basic knowledge of the stock market is insufficient; you need to understand the mechanics of trading, how to interpret technical candlestick charts, and how other traders’ psychology can be used to your advantage. Many successful day traders choose to specialize in a specific type of trading, enhancing their expertise and decision-making abilities. This could range from penny stock trading, to biotech breakout trading, to mega-cap tech options trading and everything in between.

To figure out what is right for you, start by researching real trades and strategies, such as contrarian or trend-following approaches. Recognize that all trading styles at the end of the day are speculative in nature. Some strategies involve more risk than others, and you should only ever use a strategy that aligns with your psychological tolerance to risk. There are an overwhelming amount of free online resources to observe live trades, study stock charts and trends, and access financial analyses. However, this is often overwhelming, and without taking a methodical approach can lead to bad habits forming. If you’d like to learn from the Trade Brigade, we do offer an organized course with a logical approach to building strategies. Click here to check it out and see if it is right for you.

Here are a few strategies, or rather ideas to kickstart strategies from. Keep in mind trading is far more complex than “buy low sell high” and a complete strategy has a set of rules that allow you to enter a trade, or prevent you from taking a trade in the first place.

• Price Action: Focus on recent and past price movements to guide buying and selling decisions, often relying on technical analysis tools to identify chart patterns. All of the subsequent ideas are built on the foundation of price action analysis.
• Trend Following: Understand when an asset is in a trending environment and trade in that direction. The most straightforward strategy, “The trend is your friend.”
• Range Trading: Identify when an asset is respecting highs and lows within a specific range during the day Buy low, selling high.
• Contrarian Investing: Buy and sell stocks against the prevailing trend, trying to capitalize on mispricing caused by crowd behavior.
• Scalping: Generate profits from small price changes by executing multiple trades aiming for frequent small gains.

Using a Demo Account: Practice Responsibly

When you’ve landed on a strategy that fits you psychologically, assess your ability to think like a trader. Start looking at charts and determine optimal buying and selling points, define acceptable risk levels, and evaluate the potential outcomes of implementing your trading strategy. The best way to do this with minimal risk, is to use a demo or ‘paper’ account. The reason that it’s not totally risk free is because you do risk building unrealistic expectations of markets or bad habits if the demo account gives you overly optimal order execution. In the demo account, prioritize exploration, and testing, not perfection. Remember that you likely will not get the strategy right on the very first try.

Once you have a firmer grasp on the strategy you want to use, focus on becoming profitable in the paper trading account. Stop experimenting and prove to yourself that this will work with a live account. Before ever moving to real money, you should be very profitable on a demo account, not just break even, or have a thin margin of profitability. Trading will always be more difficult when real money is on the line, and the imperfections of real time spreads impact your trades.

Starting With Real Money

Before actually opening a live account, it is critical to establish a realistic financial limit that you are willing to put toward this endeavor. If you cannot afford to lose your trading working capital, day trading is not suitable for you. End of story. No strategy can shield you from unexpected market downturns caused by unforeseen events. Like gambling, the large wins can be captivating, but trading can also lead to financial ruin if you are trading with money you can not afford to lose. Day trading is not your last ticket to escape hardship. More often than not it will only make your situation more difficult.

When it comes to the amount of money needed to start day trading, it varies depending on your individual circumstances and trading goals. There is no specific minimum requirement, however having a sufficient amount of capital is required for success. Some brokers have minimum deposit requirements and to use their platforms, you will need to meet that amount. Generally speaking, the account size should be substantial if you have proven your success and are looking to generate a livable income from trading. In the US, $50k or more is a good starting point and will also be enough to qualify as a pattern day trader.

An account of this size will allow for flexibility in executing trades and managing positions. Additionally, having a larger capital base enables you to diversify your portfolio and take advantage of different trading opportunities. Remember, the more money you have, the more you can potentially allocate to various trades and implement risk management strategies effectively.

Day Trading Taxes: Don’t Forget To Pay Uncle Sam

We’ll touch on this topic briefly but please contact a financial advisor, accountant, or tax specialist regarding the treatment of day trading profits during tax season. We are not accountants, and tax regulations can vary between countries, states, and even between individuals considered “investors” and those deemed “traders” who engage in day trading as a profession. If you are a futures trader or trade index options on the SPX, ensure your accountant knows about the 60/40 rule. 60% of those profits will be taxed under long term capital gains, and only 40% on short term capital gains.

Depending on your income bracket short term capital gains tax has historically been between 10-37%. A general rule of thumb is to immediately take 30% of profits and keep them in a separate tax savings account. This way you won’t be left scrambling to come up with the tax amount if you suffered any losses after the reporting window closed. If you do have to scramble, it will likely put too much psychological pressure on you as a trader and impact your execution.

Conclusion

If you are going to start day trading, take the responsible approach. Build a solid understanding of the market, a well-defined strategy, disciplined execution, and effective risk management frameworks. Practice in a demo account, set realistic goals, set some aside for Uncle Sam, and be a continuous learner. With careful preparation and ongoing learning, you can increase your chances of success in day trading.