From those interested in the financial markets, one of the most commonly asked questions is “How do I become a day trader?” Prior to becoming a day trader in 2005, I faced this question myself. In this article, I’ll explain the personality traits that traders have or need to create, what background and education will help you along the way, the pros and cons of trading for yourself or a company, the best markets for day trading, how long it takes to make money and profit expectations, as well as how to prepare for a career as a day trader.
Traits and Resources Required for Day Trading
When I was in university, I assumed that to be a day trader I would need some sort of formal financial or business education. I thought that such a background would help me profit from the financial markets, or would at least speed up the process. While I do have a degree in business, and the Chartered Market Technician (CMT) designation, I can honestly say that neither of these directly contributed to successful day trading.
I assumed that if I knew everything about the financial markets, that would produce profits. Unfortunately, general knowledge doesn’t translate into profits. I later learned that is not the quantity of information that makes a successful trader, but rather the ability, discipline, and willingness to practice a couple strategies over and over again. Practicing a strategy over and over again, in all types of market conditions and over many days and months, gives that trader the ability to adapt and implement those strategies profitably no matter what the market does.
While a formal education or finance designation won’t hurt, it isn’t required. What is required is a dedication to researching a few strategies, then learning how to make those strategies work no matter what the market does…and having the discipline not to trade when the strategies aren’t providing high-quality trading opportunities.
This is where mental aspect comes in. And make no mistake, day trading is largely a mental exercise. We can have the best strategy in the world, but if we don’t control our emotions we can lose heaps of money in a short amount of time. The mental skills required include (but are not limited to):
- Patience: To do nothing when there are no trades. To wait for the price to reach our pre-determined exit points while in a trade, and not deviate from our plan. To let our account grow, likely very slowly at first, and not force it by taking on too much risk.
- Discipline: To only act when a strategy says to do so. To create strategies and a trading plan in the first place, testing them out thoroughly before using them with real capital. To stay alert during market hours for trading opportunities, and not be distracted. To take losses promptly when the market indicates we are wrong about the direction of the asset we are trading.
- Mental Endurance: To not be beaten down by losing trades. Day trading is not easy. Every trader has losing trades, and after a couple losses it is easy to start doubting ourselves or our strategies. It takes mental toughness to stay the course and realize that losses are just part of trading, and if we know we are using a good strategy it is better to stick with it than to abandon it or continually be trying something new.
- Adaptability: Imagine a tennis player practicing hitting balls against the wall. As they start smashing it against the wall, always getting the rebound, they start to think they are pretty good. This is the average person after they have read a trading book. A live market is never static though, like a wall is. The market is always changing. To become good at tennis, our player will need to start playing against real opponents. Each opponent moves in a different way and will force our player to hit different types of shots. So it is with trading. Just knowing a strategy isn’t enough. Just like having a good forehand isn’t enough to be a good tennis player. To be good at anything where other people are involved requires the ability to adapt our strategies to varying conditions. When you day trade, conditions are different every day, and may even change multiple times within the day. Day trading is like playing a sport where your opportunity is swapped out each time you are starting to get the upper hand. That should not discourage you. Rather, it just means you need to put in a lot of practice so that no matter what opponent (market conditions) you face, you are ready.
- Independence: Once you enter a trade, or if you have a moment of anxiety and skip a trade, there is nothing anyone else can do for you. Your destiny is entirely in your hands. The market provides infinite opportunities to trade, which means we have ultimate freedom to do as we please. In the wrong hands, such freedom is devastating. Being independent means taking full responsibility for our actions, and understanding that the only one responsible for our trading is ourselves. If we blame others, we will never be successful. Take full responsibility, understand why losses occurred instead of blaming others or the market.
Day Trading Alone Or For a Firm
Day traders have options. They can trade for themselves, funding their own account and learning how to trade on their own. Or, they can trade for a company, with the company giving them money (or additional money) to trade with and also often providing trading education.
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.
Trading firms are for-profit companies, and therefore how they are structured will vary from firm to firm. Some firms, like those in Canada and other parts of the world, may fully fund a trader, and provide training. Alternatively, some firms may only require a small deposit from a trader, such as a couple thousand dollars, but in exchange, the firm will provide the trader with a hundred thousand dollars or more to day trade with. Such firms typically provide very low commission rates, and the firm makes money by taking a portion of the trader’s profits. The firm’s take may be anywhere from 60% to 5% of the trader’s profit. Typically the longer the trader trades with the firm, and the more money they make, the less of a percentage the firm takes.
A more common model in the US is to partially fund a trader. For example, a trader deposits $20,000 of their own money and the firm provides much more capital so the trader is able to trade, and make money off of, a more substantial sum than they would have if they traded on their own. These types of firms tend to make money off of commissions. Each trade may cost the trader several dollars. In some cases, the fees are cheaper than what the trader could get trading from home with a traditional brokerage account, and other times they will be more expensive. Remember, though, that the firm has provided the trader with more capital to trade, so the commissions are compensation for that. Typically under this structure, the firm takes only a small portion of the trader’s profit, such 5% to 1%.
Under both models, training may, or may not, be provided. As indicated, each firm may be slightly different. Some firms charge for training, while others don’t. Most firms fall somewhere on the scale between these two models. Some take a higher percentage of profits but provide traders with very lows fees. Others charge higher fees but take little or no profit from the trader. Deciding which firm is best for you is a matter for first finding firms that cater to traders in your location. Some firms have offices, while others allow traders to trade remotely from home. To find firms, do a search for “proprietary trading firms in YOUR CITY”, whatever your city may be. Then consider if you need capital to trade and if you want training. This will help narrow down the number firms offering what you want.
The simpler option is to trade on your own, using your own resources. Doing so requires creating or researching your own trading strategies. You will also need to fund your own trading. Luckily, there are markets you can start day trading with as little as $500 ($1,000 or more is better). Other markets require at least $25,000. Capital requirements are discussed below. You can also choose which brokers and tools use.
Most brokers provide leverage to day traders, so your $25,000 means you can actually use $100,000 (or more, depending on the market) for taking positions. Leverage compounds gains and losses more quickly. So even traders working from home have access to more capital than what they deposit. Trading commissions may be slightly higher than working at some firms, but the flip side is that the independent trader gets to set their own hours and keep all their profits.
Day Trade Stocks, Forex or Futures?
Stocks aren’t the only day trading market; forex and futures are also excellent day trading markets. 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 in a week in the stock market you are considered a pattern day trader. This means you must maintain a $25,000 minimum balance in your trading account 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. You can open an account for about $3,500 and trade a number of futures contracts. To trade one S&P Emini futures contract requires at least $500 in the account at all times (varies by broker, some are more). For each tick–the smallest price move of a futures contract–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 point movements between the high and low of the day. So if you can grab even a point or more day you’re making a great return assuming you can keep your commissions low.
As your account grows, you can trade more contracts. Or, if you have more to deposit initially, you may be able to trade multiple contracts and increase the number of dollars made each day. You’ll want to start with more than $500, though, since you need to accommodate for losses and intra-day fluctuations on positions. $3,500 to $5,000 is enough to get started. Starting with $10,000 or more is recommended.
The forex market, trading currencies, requires the least amount of starting capital. Forex provides 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 $1,000 or more. Starting with this small of a deposit means dollar gains will also be small at the start. Maybe only $5 or $15 per day. That works out to about 1% per day. As the account grows though, that 1% becomes a larger dollar amount. New traders will struggle to make 1% a day; expect to make less than that and plan accordingly.
I have day traded all three markets extensively, and they are all great markets. One is not better than another and based on how I trade I have not found a significant difference in the profit potential between them. The main difference is the capital required to start. Start trading the one you are most interested in.
No matter what market you trade, have a strategy. If you don’t have a proven strategy you’ll likely blow through your account capital quickly. You can create a strategy yourself, or use someone else’s. 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.
If you want to practice stock, forex, or futures trading you can start with a free TradingView account (can pay to get rid of ads and paying for market data may be required for some markets) and practice on real-time data with fake money. Alternatively, for futures trading, NinjaTrader has some awesome practice tools. For forex, you can open a demo account with almost any forex broker. If you are outside the US, I recommend the forex broker I use: FXopen.
Planning to Day Trade
Funding your account isn’t the only cost of becoming a day trader. Even if you day trade for a firm, where they provide you with capital, you face costs. If you don’t have another job, have at least 6 to 12 months of savings to cover your bills until your trading starts to produce some income. Day trading is tough enough. If you are worried about money while trading it becomes even harder.
There are also costs once you start trading real capital. There are commissions on each trade. Some brokers may require that you pay for real-time price data for the markets you are trading (not with forex), and these fees can be anywhere from a few dollars to hundreds of dollars each month. Other brokers don’t charge for these data feeds, but may have slightly higher commission fees than the ones that do charge for data. Some trading platforms, like NinjaTrader for futures, need to be purchased or leased…although this is not required as there are many free trading platforms available.
Assume that trading won’t be profitable right away. It takes most people at least six months or more before they start seeing some monthly 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 more time before you start seeing results.
That is the amount of time it takes for the people who ultimately become successful. Most people who attempt day trading fail. This is not something to just test out or dabble in. Commit to it, for those that don’t are likely to end in the 95% that fail.
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, unless you learn how to reign it in you will likely lose everything. It will take work to overcome those impulses. You also need to be highly disciplined, at least when you trade. Losing your discipline, especially when trading a leveraged account, can wipe out an account quickly.
There is also the “idea” of day trading and the reality….and they are quite different. Day trading may seem exciting on the surface, but can actually 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 will bleed your account dry.
If trading at home, day trading can also be quite isolating. There are likely very few people in your social circle who will understand what you are doing, and working at home with little social interaction during the work day is not for everyone. That said, with the internet and online communities, may traders find a social outlet/other traders to talk to that way. If you like working from home or working by yourself, the isolation is a benefit.
Summary Of 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 need to do some internal work to be successful at day trading. You should also want to day trade because you like it. Don’t do it to get rich. You likely won’t Trade a market that you are interested in, and that you have the resources to trade. Stock, forex, and futures are all great day trading markets.
Check out my Forex Strategies Guide for Day and Swing Traders eBook.
Over 300 pages of Forex basics and 20+ Forex strategies for profiting in the 24-hours-a-day Forex market. This isn’t just an eBook, it’s a course to build your skill step by step.
By Cory Mitchell, CMT