“How to become a day trader?” is one of the most common searches I see going through on this site. Prior to becoming a day trader in 2005, I faced this question myself. Day trading is in my blood, and maybe you’re feeling like it’s in yours too. Here are a few simple things you need to know about day trading. After that we’ll get into the finer details of these points.
- You don’t need to be a “finance/math person” to be a day trader. You don’t need any formal education at all. Day trading is mostly self-taught or you find yourself a mentor–someone willing to show you the ropes–and then you apply yourself to the day trading…just like an apprentice.
- You can day trade for someone else, who may provide a training program, so you don’t need to fund your own day trading account and thus you don’t need much capital to get started. For more on this option, see Working at a Proprietary Trading Firm.
- Most people think of day trading stocks, and while that’s one choice available, if you are going to trade on your own, the Forex or Futures markets are likely better alternatives since you can leverage your account more extensively than with stocks. This means it takes less capital, and you can therefore hopefully make a living off a smaller amount of capital. For more details see How Much Capital Do I Need to Day Trade Stocks, Forex or Futures?
- When you start day trading you still need to live. Money isn’t going to flow in immediately, or consistently. You need to plan ahead for how you’ll cover your bills until the point where you can make a living off your day trading. That could be six months to a year away.
- You’ll need to find or come up with a trading strategy, and then stick to it through good times and mediocre times (hopefully there aren’t too many BAD, BAD times). If you don’t think you have the mental fortitude to handle the roller coaster, do something else with your money.
- Day trading can be quite boring compared to what you might think. You have a strategy and you wait for opportunities to implement it. That means a lot of the time you are sitting around doing absolutely nothing except staring at your screen.
- A day trader opens and closes positions within the same session. No holding overnight–this is relevant if you trade stocks or futures.
Now let’s go into these points in a little more detail.
How to Become a Day Trader
- Education? Proprietary Trading Firms?
You don’t need an education, you don’t even need to be smart. If you have watched the documentary Floored: Into the Pit it discusses how trading provides opportunity for almost everyone, and doesn’t discriminate. No matter what your background you can be a day trader…although it will take a lot of work. You’ll need to teach yourself, or get a mentor to teach you how to become a day trader. Very few people who attempt day trading are successful.
If you join a proprietary trading firm, they’ll provide you with (hopefully) good training as well as capital to trade once you have completed the training. Generally you don’t get a salary with a proprietary trading firm. Instead, they train you and provide you with capital. After that it’s like you are trading for yourself. They’ll keep a cut of your profits, but you didn’t need to fund your own account. Proprietary firms are a good option if you don’t have the money to fund your account, or want hands-on guidance.
If you’re new trader, which this article is directed at, and you decide to join a ‘prop firm,’ make sure to ask them if they teach you a strategy. If they only teach a general trading course, you’ll need to come up with strategies on your own, which means it will likely take longer to become profitable than if they teach you a consistent trading method.
How to Become a Day Trader From Home – Stocks, Forex or Futures?
Stocks aren’t the only game in town; forex and futures are excellent trading alternatives, and in my opinion are superior. Stock and futures exchanges are regulated in each country, so the requirements for each will vary. Here we’ll look at the US.
If you make more than 4 day trades a week in the stock market you are considered a pattern day trader in the US. This means you must maintain a $25,000 minimum stock trading account at all times, otherwise you won’t be able to day trade . For more on US day trading requirements look at this Securities and Exchange Commission (SEC) pamphlet: Margin Rules for Day Trading.
If you trade futures you’re not held to the same rules. Therefore you can open an account for about $3500 to $5000. To trade one S&P Emini futures contract requires $500 in capital/margin. For each tick the market moves you will make or lose $12.50. There are 4 ticks to a point–or $50–and most days you are going to see at least 10+ points moments between the high and low of the day (normally more). So if you can grab a even a point or more day you’re making a great return (increase the account slowly and you can trade more contracts) assuming you can keep your commissions low . You’ll need more than $500 though since you need to accommodate for losses and intra-day fluctuations on positions. Therefore, $3500 to $5000 will get you started. Although starting with $10,000 to $15,000 is recommended.
This is assuming you have a proven winning strategy. If you don’t have a proven strategy you’ll likely blow through your account capital quickly. No strategy? Trade a demo account until you are consistently profitable. You should be profitable in the demo–over and above commissions and costs–for at least 3 months before trading real money.
Forex also provides great leverage, up to 50:1 (higher in some countries), therefore, similar to futures trading you can start with a smaller amount of capital than stocks. I would advise starting with $2000, or more.
If you want to practice stock trading (or futures, forex or options trading) you can download the ThinkorSwim trading platform and practice on real-time data with fake money. For futures trading I recommend using Ninja Trader.
- You Still Have to Live
Funding your account isn’t your only cost, and even if you day trade for a firm/another person (they provide capital for you to trade and pay you based on performance, but there’s no salary) you face costs. You won’t be profitable right away. Assume at least several months–6 or more–before you start making consistent income. Likely a year or more before you can live on that income. If you are a workaholic you may be able to reduce this time estimate. If you work another job, and are learning in your spare time, you may need to expand this time estimate. And remember, many want-to-be-traders never make it to the stage where they’re consistent or can live off there day trading.
- Are You Cut Out for It?
Anyone can become a day trader given enough time and dedication. Yet some people are not ideally suited for it. If you have a gambling mentality, then you will likely lose everything. I used to love gambling yet managed to curb it, so all is not lost if you are this type of person. It will just take work to overcome these impulses. You also need to be highly disciplined, at least when you trade. Losing your discipline, especially when trading a leveraged account, can be mean your account is wiped out rapidly (see Why Emotional Discipline is Key to Successful Trading).
Day trading is be very boring at times. There are slow times in the market during the day and sometimes there are months at a time where the market does very little. With few trading opportunities most of your time is spent just staring at your screen. Being patient is key during such times, as trying to make trades when there aren’t high probability opportunities can bleed your account dry.
Summary on How to Become a Day Trader
Ask yourself if you have enough money to fund your account and pay your bills until day trading pays off. If you have the money, you can go at it alone trading from home. If you want instruction or someone else to provide you with capital, search out proprietary trading firms in your area. Ideally you are a disciplined and patient person, otherwise you’ll likely need to do a lot of internal work to be successful at day trading. You should also want to day trade because you like it, not just to get rich. If you do it for money you’ll likely fail (see Trading Mindset – Your Purpose for Trading Affects Your Results).
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For additional reading, see: Quit Your Job to Day Trade? Steps and Expectations