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Although many see the stock market as a way to make long-term investments and secure (or multiply) funds for the future, there’s also a much more immediate way to make money through trading.

Day trading is the practice of buying and selling stock within a short period of time, most often during a single day. It’s an extremely lucrative form of trading due to two reasons.

For one, it offers almost-immediate results, whether they be positive or negative. And secondly, it offers, at least in theory, the possibility of huge earnings with a (relatively) small starting capital. Then, there is also the fact that it’s a fast-paced job that offers an adrenaline rush similar to gambling.

But the fact remains, day trading isn’t for everyone. It’s a job that requires a keen eye, fast fingers, and a lot of luck. It’s also one of the more stressful jobs out there. After all, only those willing to take the risk of losing more often than earning should try their hand at it.

If you believe that you have what it takes, and would like to give day trading a shot, here’s what you need to know in order to make it your living in the next decade.

How Day Trading Works

The idea behind day trading is to make a small profit on multiple buys and sells within a single day. Sometimes, it can even involve purchasing and selling the same stocks over and over again. More than anything, this type of action relies heavily on the market’s volatility and the way it fluctuates even within short periods of time.

When done right, this type of investing can bring in large profits. Unlike investing in shares of blue-chip stock, day trading focuses on the short-term, mainly based on the trader’s familiarity with the stock itself. Positive or negative events (news stories, annual reports, product launches) can greatly influence stock, even within a single day, so staying informed is key.

Furthermore, looking for certain patterns in the stock’s movement can be a way to predict how it’s going to behave during the course of the day.

Common Day Trading Strategies

There are several strategies day traders use interchangeably, and in order to make a profit, it’s recommended that they’re familiar with all of them. These include:

1) Momentum

The idea behind this strategy is that if a stock is moving up with increasing volume, it will continue to do so in the near future. Purchasing at a low price, letting it increase, then selling as soon as it starts to drop can create a profit.

2) Scalping

This strategy is one of the most popular among day traders. They purchase stock and sell it within minutes or even seconds – as soon as it becomes profitable. Because earnings are low, scalping is usually done with large quantities of stock. It does, however, require a lot of insight into what will make a sale profitable, as profits require traders to cover commissions, interests, and overhead costs.

3) Fading

A contrarian trading strategy, fading assumes that the trend of stock movement will change. This means buying stock moving downwards, or short-selling that with rapid upward movement. It’s a risky strategy that can be costly, so it’s best done with a stop-loss order in place.

4) Daily Pivots

Taking advantage of small daily movements, day traders can secure stocks at a support (low) level and sell at a resistance (high) level. Alternatively, they can attempt to short-sell, which can also provide a profit.

5) News Playing

Day traders will keep a close eye on multiple news outlets and may choose to make decisions based on the latest stories about companies, economic changes, or political events.

When news playing, the trader is buying with the announcement of news that is to drive the price upwards or short-selling at stories that have the potential to move down. It’s important to say here that rumors and insider data tend to influence stock ahead of news announcements, so again, keeping an eye on shares is a good way to go about news playing.

6) Algorithmic Trading

Finally, it’s important to note that a large percent of daily trades are made based on automated trading systems developed by large brokerage houses and hedge funds. These increase competition and lower profits for smaller traders.

What You’ll Need to Get Started in Day Trading

When getting started with day trading, you are going to make a few investments into the equipment required to make the practice a living. Some of the tech you may already have, but others you will have to purchase.

a) Computer

The most basic of your tools, you’ll need a reliable, relatively new computer you will conduct your business from. It’s best to invest in something powerful that will be able to keep up with all the software you require.

Furthermore, you’ll need it to run a Windows operating system, and most day traders prefer to work with at least two displays. But, that isn’t to say you can’t make do with your trusted laptop. It’s also not a bad idea to have a backup device, as hardware crashes can be costly.

b) Internet connection

Get a fast and reliable internet connection, again, preferably with a backup option. This will be critical, especially if you plan on following strategies such as scalping.

c) Trading platform

This is the software that you’ll be conducting your business on. Early on, while just getting started, try out a few, and see which one works best for your needs. Most will be free with a brokerage account (exact terms will vary), while others will cost more.

Generally, you’ll need to pay close attention to what each platform offers and choose the one which will work best for you. This will also depend on the type of trading you plan on doing.

d) Broker

Finally, you’ll need a broker who will handle your trades. This is probably the most important constituent of your setup, so be picky. You will want someone reliable, quick, with excellent customer service. Also, pay attention to all the fees, and look out for hidden costs.

Furthermore, look into the security details, and protection offered, as, ultimately, you’ll want someone trustworthy.

Your Initial Investment Capital to Start Day Trading

If you want to get into day trading, you’ll need a substantial amount of money. In fact, you’ll need more than ten times what you’d be required to hold in a typical margin account.

The reason behind this is SEC rules, which require all pattern day traders – those who make four or more trades within a five-day period – to have a minimum of $25,000 in their margin account. Once the account falls below this minimum sum, the trader will not be permitted to day trade until they deposit cash or securities. Some may try to avoid this rule by only doing three trades per week, but on the whole, that won’t generate enough profits to make a living.

Even more, the $25,000 is only the minimum requirement. Because day trading focuses on volatility and small profits on large quantities, much larger sums are often required in order to actually make money this way. It is for this reason that most experts advise having an investment capital of at least $100,000. For most people, this will be a large sum.

Now some may decide to borrow, but the risks associated with this type of buying and selling are high, and a word of caution is to only use the capital you can afford to lose.

How Much Can You Make While Day Trading?

The immediate return on well-performed day trades is the thing that attracts people in the first place.

Let’s say, for example, that you decide to purchase 1000 shares of a stock at the price of $10 per share, and the commission you have to pay your broker is $0.01 per share. Your cost will amount to $10,010. Then, later on, you sell at $10.20 per share, adding up to $10,200, minus the $10 commission, totaling a profit of $190. This means that your ROI is 1.9%. You can perform multiple such trades within the course of a single day.

With 52 weeks in a year, and each week having five trading days, this gives you the potential to make the same ROI over the course of approximately 260 days. In theory, that allows you to grow your starting capital by almost 500%. The benefits can be even greater if your starting capital is, say, $100,000. With this type of money, you could walk away rich within just a couple of years of day trading.

But in reality, things don’t tend to work out that well.

According to this study, only 3% of day traders actually make money, with even less of them earning more than $54 per day. Add to this the fact that making a living in this way often requires longer than 60-hour weeks, and you’ll begin to see how the fast pace can influence your day-to-day life.

Firstly, the practice necessitates preparation before the trading day begins, which can lead to sacrificing sleep in order to get ahead. Even more, the job entails huge amounts of stress which, in the long term, can lead to serious health consequences. Considering that it also requires extreme self-discipline, it becomes obvious that day trading as a primary source of income is only fit for a very few people.

Risk Management for Day Traders

That isn’t to say there aren’t strategies for managing risks, or even success stories. But in order to make it, you’ll have to invest a lot of time, patience, and do a huge amount of learning. It also helps to set some ground rules, and not to let your emotions (or an adrenaline rush) interfere with clear thinking.

i) Do Your Research

While a wild guess might make you money every once in a while, day trading for a living should always follow a clear strategy.

You’ll have to know the type of stock you’re dealing in, as well as to be well-informed at all times, so as to avoid making mistakes.

ii) Set Stop-Loss and Take-Profit points

Choose a trading platform that allows you to set up S/L and T/P points. These are automatic roles that limit your losses before they get out of hand but also prevent you from getting carried away on a high and missing the opportunity to sell when needed.

iii) Follow the 1% rule

Experts agree that you should only be willing to risk 1% of your capital on a single trade.

iv) Don’t gamble

Finally, it’s crucial that you keep a cool head at all times. Given the addictive nature of day trading, it’s probably the hardest of all the risk management strategies. But, ultimately, if you can’t control yourself, this type of job is probably not for you in the first place.

It’s also not a bad idea to consider other types of trading – ones that come with more manageable risk or require smaller investment capitals. Options are a great solution because they offer clear entry and exit points. Forex trading, on the other hand, doesn’t require big starting capitals (you can make do with as little as $50), yet still offers high volatility so you can make money based on well-researched guesses.

Is Day Trading the Right Career Path for You?

There is no catch-all answer to this question. Whether day trading is the right job for you greatly depends on whether you’re cut out for it. If you’re self-disciplined, don’t have an addictive personality, can keep a clear head in stressful situations, and are ready to do a lot of learning, then yes, it could be a way to make a pretty penny. But also, don’t forget that you’ll need a starting capital of at least $25,000 in the US, or you’ll have to work the foreign markets which might mean unconventional hours and a prolonged learning curve.

If despite all the risks, you’re still interested in it, then you have potential. Getting started, make sure that you give yourself time to become familiar with the practice. This means doing a lot of reading on the subject, as well as using trading software stimulators to get to know how everything works. It’s also not a bad idea to keep in mind that most day traders don’t remain in this line of business for a long time. So, it would be best if you didn’t quit your day job, or set some rules about how long you’re willing to pursue this career.

Finally, whether you give day trading a go will depend on your self-knowledge, but do try to keep to the ground rule of only using the capital you’re willing to lose.

Written By
Although web design is Catherine's first passion, productivity, business management and career development in this digital age are topics she is quite interested in lately. Catherine has been researching and learning for some time now, and she is always happy to share her knowledge and inspire others by writing some quality content.

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