4 Tips for Becoming a Day Trader
Being able to make money from small daily market movements sounds good to a lot of people, and if you have the skills and are willing to learn the trade, this could become your reality. You should know, however, that it's not as easy as checking the news and reading charts. You'll have to truly immerse yourself in stock trading since day trading is actually one of the toughest forms of speculation there is. Let's take a look at a few tips that will help you get started as a day trader.
Know the Rules
The first thing you should know is that you can't just go out there and start making micro-trades. There are rules regarding day trading, and you will have to abide by them. According to the FINRA rules, you will have to have at least $25,000 in your trading account if you perform more than four of what they qualify as day trades. These trades have to amount to at least 6% of all the trades you made in the margin account during that period. This is only one of the rules you have to know about, however, so you should check out FINRA’s website to see what will be required of you.
There are also various tax rules that you have to be aware about. When you hold stocks for a certain period and sell them, they are subject to capital gains tax. But when you make short term trades, it will be counted as regular income which will be taxed at a higher progressive rate and will have to be reported differently, so this is something you’ll need to look into as well.
Leave Your Emotions at the Door
A day trader should never be emotional when they do trades. You should always act on clear patterns and based on your acquired knowledge of trading. You should also stick to your strategy to the letter. Fear, hope, and greed should be your worst enemies. Instead, rely on trading history, charts, financials, and proven indicators, among other things.
Time Your Trades Right
Day trading is all about timing. There are times of the day when there's more trading activity than others, and you could take advantage of wild market movements. There are also days where there's more action, like on the days before and after holiday weekends. If you keep up-to-date on US stock holidays, you could find ways to benefit from volatility, but you have to be careful.
Volatility is something day traders usually like because trends tend to be more marked in those times. But it can be a bit tricky for newcomers. So, in the beginning, it could be a good idea to practice during times of volatility and make real trades when markets are less active, like in the middle of the day, for instance. If you do well with volatility, however, you should aim for the start of the day and the end of the day to make trades as there will be more action.
Don’t be Too Harsh on Yourself
Some people have unrealistic expectations about day trading and think that they have to get most of their trades right to be successful. In reality, the average successful day trader only makes money on about 50% to 60% of their trades. So, if you only make 30% of them at the beginning, that's okay. Just use things like limit orders to cut your losses and learn from your mistakes by keeping a journal and identifying patterns.
These tips should help you get started as a day trader on the right foot. Learn as much as you can about trading and the stock market in general, and consider starting with a demo account to know if you truly have what it takes.