So you want to be a day trader? Or maybe you’re looking for ways to supplement your income. Regardless of your reason, there is no doubt that day trading is certainly having its day in the golden sun. 

Partially sparked by record low-interest rates and people being stuck indoors looking for new ways to entertain themselves and earn profits. TD Ameritrade reports that activity has quadrupled since January 2020 with Robinhood also seeing a huge spike in activity

But while newcomers may be enticed by the promise of large wins, they’re just as likely to suffer insane losses if they’re not prepared. So what exactly do you need to know to begin day trading? We take you through the important day trading basics in this article so you can increase your chances of ending up green.

What is Day Trading?

As the term ‘day trading’ has been accepted into regular vernacular, it has come to carry two different meanings. 

In the technical sense, day trading is simply the buying and selling of financial instruments (stocks, options, futures, currencies crypto, etc.) within the same calendar day or even multiple times over the course of a day. In terms of options trading, this means the buying and selling of calls on the same day. For shorts, it is the selling and buying of puts, on the same calendar day. 

In the more run-of-the-mill sense, day trading has taken on the meaning of holding onto a stock market position for a short period of time. This could be within a day or maybe even a couple of days and would encompass scalpers, momentum traders, and short term swing traders. 

How much do day traders make?

With day trading, there is no limit to what you could potentially earn. You often hear success stories of new traders hitting the jackpot overnight. However, day trading does involve significant risks and it is not for everyone. Conservative financial advisors like to point to the often-quoted statistic that active trading strategies tend to underperform more passive index strategies over long periods of time. However, for those willing to put the time and effort into developing a consistent strategy, day trading gains can compound quickly. Think about it, if a day trader makes 0.5-3% per day on their capital, this equates to roughly a 10-60% increase per month. 

While day trading may just be your side hustle or part-time hobby, to see long-term success and consistent growth, traders need the focus and diligence to treat day trading as a career. If you have a low-risk tolerance or simply don’t have the time or focus to properly manage your trades, maybe long-term hold type of investments will be better suited to your risk profile.  

How Does Day Trading Work?

Day traders use short-term trading strategies to capitalize on small price movements that occur in the marketplace. Capitalizing on these small minute price movements can be incredibly lucrative. 

The more volatility in the marketplace, the greater the opportunity to make and lose money. Without volatility, there is no opportunity. This can be in any marketplace but day traders tend to thrive in the stock markets, forex, and cryptocurrency marketplaces. 

Due to the volatile nature of these markets and the large price swings that are expected to take place, risk management is a crucial skill to prioritize. Traders need to learn to keep their losses small while letting their winners run and keeping their emotions in check. 

What You Need To Know Before You Start Day Trading

To consistently make profits day in day out, traders need to be equipped with the day trading basics and have the essential set up. 

Day Trading Setup 

With modern-day day trading, all you need is a reasonably powerful computer, fast internet, charting software, and an online broker. That’s it! 

While some traders like to splash out on complex systems with multiple monitors, we suggest keeping it simple to start with. Remember, you can always expand and add to your setup as you progress and feel like you need more. 

And just in case your internet source cuts out, keep a smartphone handy so you can jump in and out of trades as a backup.

Knowledge is Power

Do your homework. Learn the stock trading lingo, understand how to read an options alert, brush up on your technical analysis, and stay informed about the companies and stocks you want to trade. You’re going up against the big guys. Professional traders that know the markets in and out and love to trap retail traders. Stay alert and be informed. 

Learning these things won’t happen overnight. It takes time to study the markets, develop a winning strategy and methodology. But the best thing a beginner trader can do is observe the market, study how the stocks move, keep a trading journal, and continue to revise and review. 

INFOGRAPHIC - DAY TRADING GLOSSARY
DAY TRADING GLOSSARY

Capital & Risk 

You need to transfer funds into your trading account to start day trading. Trading is a risky endeavor and you should only trade with money that you are prepared to lose. 

Don’t over-leverage your accounts! As a rule, we only like to risk 1-2% of our accounts per trade. The use of stop losses also limits our max loss per trade. 

Playing defensively means that you don’t need to win all your trades. A win rate of over 50% (meaning that half of all your trades are profitable) is generally considered to be pretty good for most beginners. Even so, while you may have a win rate of over 50%, if you don’t keep your losses in check you still won’t be profiting if your losses are larger than your wins. 

This is where the risk to reward ratio comes to play. One of the most important trading metrics, the risk to reward ratio measures your potential reward for every dollar you risk. For example – If you have a risk-reward ratio of 1:2, this means that you are risking $1 to make $2. 

We like to keep our trades at 1:2 risk to reward ratio, at the very least. Coupled with tight stop losses, 1:2 risk to reward ratio gives a trader more leeway on their win rate. If you keep your losses minimal and let your winners run, you can still be profitable even if only a small percentage of your trades turn profitable.

Pick a Market to Day Trade

Stocks, options, futures, forex, or crypto? While these financial instruments are similar in many ways, their markets are very very different. 

Our advice – focus on one type of instrument when starting out. Once you understand the market, develop a strategy that works for you, and are consistently profitable – move on to the other. 

Our next piece of advice – stay away from penny stocks. Why? They’re illiquid. Beginners with low capital may be tempted to trade penny stocks because of their low cost and high fluctuations. But trading penny stocks is almost always a terrible idea. You’ll likely end up holding onto positions that you’re having trouble exiting and the companies can even become delisted. Don’t take the risk. Either save up more funds or turn to options trading on quality stocks.

INFOGRAPHIC - DAY TRADING OPTIONS AND FUTURES
DAY TRADING OPTIONS VS. FUTURES

Day Trading Discipline

As stated above, treat day trading as a job instead of a hobby. While this doesn’t mean you have to sit and stare at the computer all day – it does mean that you have to dedicate the time to properly manage trades. Markets move quickly and day trading takes time. Time to learn, time to observe, time to manage, and time to review. 

A typical trading day tends to go something like this: 

  • The stock market opens at 9:30 am ET (futures are a little different and are basically 24/7). 
  • The first 15-20 minutes after opening are typically highly volatile – while money can no doubt be made during this time, for beginners it may be better to observe. 
  • The hours just before and after lunch typically die down before activity picks up again in the hours before the closing bell at 4 pm.

Start Small 

Instead of rushing into the market head first and opening 10+ positions – take your time and start small. Don’t open too many trades in one session. Try to stick to 1-2 trades at any one time. Any more and the positions become difficult to manage and monitor. Stock prices can fluctuate wildly and profits can disappear in the blink of an eye. Even professional traders have difficulty managing more than a handful of trades at once.

At the end of the day, it’s more about the quality of your trades than the quantity. Take the time to focus more on the setup and wait for the trade to come to you. Start small and have a plan.

Day Trader Mentality 

Trading is not an activity for the faint of heart. Novice traders will experience a steep learning curve when starting out. For some, the story goes a lot like this – instant success followed by the painstaking attempts to recreate the initial wins. You can’t sustain a day trading career purely on good luck. Luck eventually runs dry. What follows? A lengthy losing period or in the worst-case scenario, blowing up an account. 

Bottom line – you will lose. Everyone loses at some point. You need to be emotionally prepared for it. 

There is an emotional, psychological, and financial toll to trading. Price swings in the wrong direction can be financially devastating. Your nerves will be tested and greed can and will rear its ugly head. 

The best way to stay level headed? Plan your trades and trade your plan. Keep the greed at bay and try to stay psychologically and emotionally uncompromised.

Day Trading Mentor and Community

Even for experienced traders, day trading can be isolating and emotionally taxing. While you are staring at a computer screen, watching charts day in day out, it is important to remember that you are not alone. 

There is a huge community of traders ready and willing to share their experiences, impart their knowledge, success, and failures. Learn from each other. Gain a mentor who can show you the ropes and have fun trading. 

How To Start Day Trading

Step One: Open a Brokerage and Transfer Money 

You need a broker, a company that will facilitate your trades. Not all online trading platforms are made equal so don’t be afraid to shop around. The type of brokerage firm you obtain will depend on the markets you’re trading and the services you require. For day traders, you will typically look for fast, reliable online brokerages with low fees and low commissions. 

Day Trading with Cash vs. Margin

After you’ve opened a brokerage account, you need to decide whether you trade using a cash or margin account. We take you through the important considerations below. 

Day trading typically involves using large amounts of leverage i.e. trading on margin. Margin accounts essentially allow traders to borrow funds to buy securities – similar to short-term loans. While cash accounts are more akin to regular bank accounts in that no lending is allowed. 

Cash Account

  • You won’t be able to trade with unsettled funds – Cash accounts can take a couple of days to settle funds after trading. If you use unsettled funds to open new positions this will likely result in a 90-day lock on your account. 
  • You won’t be able to short stocks with a cash account – Shorting stocks carries immense risk. Regulation T instituted by the Federal Reserve Board requires that traders who short a position, have 150% of the value of that position held in a margin account. 

Margin Account

  • You use leverage to buy and short stocks – While using the extra leverage could dramatically increase the potential profits, it also magnifies losses. Traders could potentially lose more funds than they have deposited in their account. And if the difference can’t immediately be repaid, the brokerage can liquidate the securities in the account. 
  • The Pattern Day Trader Rule applies (see below for further discussion) which places limits to the number of day trades for accounts below $25,000.

PDT Day Trading Rules for Margin Accounts

INFOGRAPHIC - PATTERN DAY TRADING PDT RULES
PATTERN DAY TRADING RULES

The Pattern Day Trader Rule is an industry-standard that applies to securities such as stocks, options, bonds, and ETFs. The PDT Rule does not apply to the Futures and Forex markets.

A Pattern Day Trader is a trader who: 

  1. Executes four or more ‘day trades’ within five consecutive business days using the same margin account; and 
  2. The number of day trades makes up more than 6% of the trader’s total trades for that time frame.

If a trader meets or goes over these ‘day trade’ limits they will be flagged as a Pattern Day Trader by their brokerage and will need to comply with the PDT rule.  

The Pattern Day Trader Rule places a minimum requirement that the pattern day trader maintains a balance of $25,000 in their margin accounts at all times. 

If the margin account falls below the 25K equity requirement, the trader will be prevented from day trading until the account is restored back to the minimum level. 

Check out The Pattern Day Trading Rules – Don’t Get Caught Out By to learn more. 

Step Two – Day Trading Morning Watchlist 

Day trading takes research and planning. Don’t just roll out of bed right before the opening bell. Stay up to date with the latest news, analyze your stock charts, and stay informed. 

Every Sunday we release our Echelon 1 Weekend Report, packed with insight and analysis of the overall market and specific stocks of interest that week. Read it and get a jump start on your trade preparation for the following week. 

While some traders like to use scanners, for beginners scanners can be a little overwhelming. Instead, we suggest shortlisting some stocks that you’re interested in and observing their movements pre and during market hours. Learn how they move. Write down your conditions under which you’ll enter a position. Practice your technical analysis and wait for your trade set up. Never, ever go into a trade blind. 

Step Three – Have a Plan and Trade Your Plan

Risk management is essential. You can spend hours studying charts trying to predict the next big market move, but all this is pointless if you don’t stick to your own trading plan. 

Having a systematic, methodical way of taking profits is imperative to being a profitable trader. 

INFOGRAPHIC - DAY TRADING PROFIT TAKING STRATEGY
DAY TRADING PROFIT TAKING STRATEGY

Find your support and resistance levels. These areas serve as valuable markers that are fundamental in identifying entry, exit, stop loss, profit taking levels, and risk to reward ratios. Setting predetermined entry and exits helps remove most of the emotional aspect of trading. When a trade is planned out well, all that’s left is the execution according to your own parameters. A stop-loss will manage the downside and setting profit taking levels will manage the upside. 

Things to look for in a good trade: 

  • Liquidity – high liquidity allows you to enter and exit a stock at a good price. 
  • Volatility – measures the expected daily price range.  More volatility means greater profit or loss. Try to stay away from options higher than 40-50% implied volatility. 
  • Volume – high volume indicates a lot of interest in a stock. An increase in a stock’s volume is often an indicator of a price jump up or down.

Step Four – Keep a Day Trading Journal 

Review, review, review. Keep a trade journal of all your trades and include details of your entries, exits, results, and the reasons why you did what you did. To improve your strategy you need to be able to go back and analyze your trades for the week.

What went right? What went wrong? Should you have done something differently? How were you feeling? Were you distracted?

A trade journal can highlight your strengths and weaknesses as a trader and pinpoints the areas you need to improve. Stay accountable and diligently record every trade. 

Get Started. 

Becoming a successful day trader comes down to developing your own trading style, setting rules for yourself, and sticking to them. 

The thing that nobody tells you is that there’s no ‘magic sauce’, no one thing that is going to make you profitable 100% of the time. There is no fast track to success and why should there be? Being a day trader is one of the rare professions where you have every freedom you’ve ever desired. Not even the sky’s the limit to what you could earn. But this takes effort,  patience, focus, and diligence. Take your time to study the market, and work on developing your own personalized day trading strategy that fits you — that’s all the difference.

How Echelon 1 can help. 

If you’re new to trading and want to learn how to navigate the stock, options, futures, and crypto markets with confidence, come join the Echelon 1 community. Be part of a thriving network of traders, analysts, and investors. Learn the fundamentals, receive mentorship from seasoned professionals, and have access to real-time analysis and member-only plays, so you can capitalize on the biggest moves in the market.

Welcome to the Echelon 1 community and take the guesswork out of your trading. 

The Day Trading Guide