How to Become a Day Trader (10 Steps)

Many people dream of becoming day traders – being your own boss, working from anywhere, racking up endless profits – but few succeed. Why is that? Read on to find out how you can buck the trend…

What Do Day Traders Do?

A day trader buys and sells securities every day, often several times a day, but squares off all buy/sell positions before the market closes, so they don’t carry any open positions forward to the following day. This is different from being an active trader, who might hold the same position for several days, or an investor, who might hold on to their investments for years. Day traders also increase their exposure to intraday trades by using leverage.

How to Become a Day Trader

  1. Take a Good Look at Yourself

Day trading isn’t right for everyone. Despite what you might think, it isn’t easy money – or an easy life. Here’s what it actually takes:

  • Long hours of work
  • Very few holidays
  • Teaching yourself – constantly and without guidance
  • Facing constant risks
  • Endless commitment to daily tasks

You need a sound understanding of maths, finance, and behavioural psychology – your own as well as other people’s. And most importantly, you need the right mindset to be an entrepreneur. If dedicating your time to this, learning independently, and mentally preparing yourself to face risks and cope with losses doesn’t sound like your idea of a good time, day trading isn’t for you.

If you’re not sure, you can find out more about day trading and whether it’s a good fit for you by reading books like The Psychology of Trading by Brett N. Steenbarger and Trade Your Way to Financial Freedom by Van Tharp.

  1. Take a Good Look at Your Bank Account

You need to be financially, as well as mentally, capable of handling losses – because they’re an integral part of day trading. You might make losses eight days in a row and only turn them into profit on the ninth.

That means you need a decent amount of capital to have any hope of success. If you’re looking at quitting your job to become a full-time day trader, you want at least £75,000 in the bank. If you’re a novice, you can start with smaller amounts, depending on the trading plan you choose, how frequently you trade, and other costs.

Forex markets are popular with beginners because the initial minimum deposit is only about £250. Binary options deposits may be as low as £10, but those are traded without margin, meaning you likely won’t make much back. Futures are more expensive, and stocks require the highest investment of all. It’s best to pick one asset class and stick with it when starting out.

  1. Learn How the Markets Work

You need a good understanding of the markets before you start day trading – not just the simple stuff like the trading hours and holidays of the different exchanges, but also complex information like margin requirements, which tradable instruments are allowed, and how current events affect the markets.

  1. Study Securities

Each kind of security (stocks, options, futures, mutual funds, and ETFs) trades differently from the others. For instance, you need to know the impact margin requirements for options, commodities, and futures have on trading capital, and how the exercise of an option position or an interim assignment can completely destroy your trading plan.

If you don’t understand the trading requirements and quirks of the security you’re trying to trade in, you’re likely to fail, so do your homework.

  1. Choose a Trading Strategy

Start by choosing two or more established trade strategies. Having more than one is important so you have a backup in case one fails or is short on trading opportunities. You can add more (and more complex) strategies as you gain experience.

Because the trading world is so dynamic, a trading strategy that’s been a sure earner for ages can suddenly fail. So keep a close eye on your strategy’s effectiveness, and be ready to adapt it or dump it for a new strategy.

  1. Create a Trading Plan

Once you have your strategies, you need a plan for each strategy. Work out:

  • How you’ll use the strategy (entry and exit strategies)
  • How much capital you’ll use
  • How much money you’ll use per trade
  • Which assets you’ll be trading in
  • How often you’ll be trading
  1. Practice Money Management

How much money should you use for your first trade? What happens if your trading strategy promises that seven out of 10 trades will succeed, but your first three fail? How are you supposed to allocate your capital to your margin money requirements when trading options or futures?

Studying money management will help you answer these questions and work out how profitable your strategy is actually likely to be. Plan, structure, and practice the trades according to the principles of good money management, and you might still win even if only four of those 10 trades turn out profitable.

  1. Research Brokerage Charges

When you’re making trades every day, you end up with high brokerage fees, so do your research before picking a brokerage plan. If you’re only planning to make one or two trades a day, a per trade basis plan will work for you, but for higher trading volumes you want a staggered or fixed plan.

As a novice, avoid brokerage plans that offer extra features at an extra cost. Go for a basic package, and you can always upgrade later.

  1. Simulate and Back Test

Before you try out your plan in real life, try it out with virtual money on a test account (most brokers provide these). You can also backtest your strategy by looking back at historical data and seeing how it would have worked. Remember to factor in brokerage costs and any subscription fees for utilities when you’re doing this maths.

  1. Start Small

Even if you have plenty of experience and capital, don’t make big trades when you’re starting a new strategy. Test it on smaller amounts first, and raise the stakes once you’re seeing long-lasting success.