What is Day Trading in Stocks?
Day trading is an independent profession in which the goal is to apply technical analysis rules by buying stocks cheaply and selling them back at a higher price.
Day traders should not be confused with investors. While both buy and sell stocks, investors—in contrast to traders—do not try to earn their living from the market. A day trader plans in advance how much money to risk with each trade, whereas the investor may, during tough times, discover that most of his or her money has evaporated. Day traders sleep peacefully knowing that most of their money is in cash, whereas the investor is continually exposed to market fluctuations.
Day Traders Focus on Short-Term Profits
This distinction can be drawn in many other fields of business. An art dealer, for example, behaves much differently than an art collector. The art dealer will not buy famous paintings and store them in a safe for decades in the hope that their value will rise. The art dealer buys a painting only if he or she sees some profit potential in a short-term sale. Like all of us, the art dealer needs to pay a mortgage, put food on the table, and cover other living expenses.
The day trader is just like the art dealer: both buy and sell in order to create the profit that provides for their livelihood. Professional day traders buy stocks at a price they know is too low, with the intent of selling at a price they know is too high. Day traders sometimes make mistakes, but the ones who succeed more often than they err can make a living from the profession. As day traders, our goal is to succeed in about 65% of the trades that we make over time.
Day Trading is Both a Science and an Art
Day trading is simple in concept, but difficult to implement. It’s simple because the rules of technical analysis are easy to understand. It’s difficult because it requires us to overcome the psychological inhibitors of fear and greed.
Finally, it’s important to note that day trading is both a science and an art. A winning trader is one who is able to apply the rules of technical analysis in creative ways that result in profitable day trading strategies. A day trader who uses only technical analysis will not be successful. If that’s all that was needed, engineers and accountants would be the most successful day traders. A good book or set of training videos can provide you with the trading education that you will need to get started, but the artistry is mostly up to you to develop as you accrue experience.
Do You Have What it Takes to be a Day Trader?
Do you have it in you to be a self-employed day trader? Are you prepared to work without a salary and risk your money? Are you psychologically ready for the risk?
Truth be told, not everyone is suited to being a day trader, just as not everyone’s suited to being self-employed. Setting up a business requires commitment, responsibility, investment, and risk.
Day Traders Must be Willing to Risk Losing Money
Stock trading is an independent business. When you trade in stocks, you’re exposed to financial risk, as in any business. A salaried employee who fails will never give back his salary to his employer, even if the employer incurred a loss. At the worst, the salaried employee will be fired. A self-employed person will pay for every error with his or her own money. Even so, a self-employed person who is successful and is willing to talk to a day trading mentor will earn far more than the wildest dreams of the average salaried employee.
Being salaried is not bad, but to be independent, you need to be made of something tougher. A self-employed day trader can work less, enjoy more, and profit 10 times greater than a salaried employee, but must be willing to take the risk. Without the willingness to risk your money, you’ll get nowhere in trading.
Day Traders Must Have Persistence and Self-Control
Have you heard the claim that 90% of day traders lose? It’s 100% correct! The great majority of those losing traders are people who think they can trade without learning the trade! There’s no need for a license or diploma, or to take an official day trading course to become a day trader. The conditions for joining the profession are simple, and anyone without the slightest previous experience can learn to uphold them: open a trading account, deposit funds, and begin buying and selling. Anyone filling these criteria can be defined as a “day trader.” Is it any wonder, then, that the probability of success is so low? No more than 10% of new traders will be stubborn enough to survive. The ones that do, accruing experience and knowledge, whether through working with day trading mentors or taking a day trading course for beginners, are the ones who will profit from the funds of those who don’t invest in knowledge. The more you learn, the greater your chances of success.
Statistics show that only one in five new businesses survives and becomes successful. Is that a good reason not to open a business? Of course not! It’s a good reason to open five businesses in the hope that one of them will succeed! If you’re a reasonable person with a high level of determination, persistence, self-control, willingness to learn, and reasonable capital, you’ll succeed where most have failed. The ball is in your hands. Don’t let statistics scare you. The human race would not have gotten far if no one had ever been willing to take a risk.
How Much Money Do You Need to Start Day Trading?
One of the first questions asked by aspiring day traders is, “How much money do I need to get started live trading?” The answer depends on where you live and what type of account you plan to use.
If you are a resident of the United States and want to open your own day trading account, you will be required to deposit a minimum of $25,000 in your account. You also will be limited by a rule that prohibits U.S.-regulated brokers from providing margin greater than 4:1. (These rules do not apply to residents of other countries on condition that they operate via brokers that are headquartered and regulated outside of the United States.)
Avoid Day Trading with an Account that is Too Large
If your annual income is going to be limited by the amount of money in your stock trading account, should you consider depositing more? Eventually that might be the right move, but initially it is not. To trade with larger sums requires being psychologically prepared for larger fluctuations in profit and loss. The mental ability to cope with these fluctuations is acquired only after years of trading. Taking online trading courses with stock trading mentors can help prepare you to handle these fluctuations. Each of us has our own level of psychological limitation. Therefore, trading too early with sums that are too large may lead to losses. As time passes and you gain experience, your psychological resilience will strengthen, and you will hopefully trade a larger account.
If you are a beginner day trader with only the basics hoping to immediately earn a livelihood from stock trading, your chances of success are far lower than for those who simultaneously maintain their original source of income. Plan to succeed slowly and safely, knowing that you have a secure amount of money coming in from another job, and make a point to a day trading mentor to understand the risks. This will reduce the pressures to generate immediate income. If you’ve left your job or are between jobs, don’t rely on trading profits. If you don’t place all your hopes on trading profits, you’ll do much better. If you feel pressured to profit, you’ll end up losing.