This guide outlines everything you need to know about day trading for beginners, starting with the definition of what is a day trader. If you’ve got any experience with the world of finance, you’re probably familiar with the notion of day trading – and you probably know that it can be a very lucrative way to make some extra money. At the same time, as with many things in finance, there can be a lot of jargon involved. This can make getting into day trading seem intimidating.
But don’t let this put you off. In this guide, we’ll run through what is a day trader and explore how you can get into it — including a section on which of the different trading styles is right for you.
What is a Day Trader?
Investopedia defines a day trader as one ‘who executes a relatively large volume of short and long trades to capitalize on intraday market price action’. ‘Intraday’ is finance-speak for ‘within the day’. In simpler terms, then, the definition of what is a day trader is just what it sounds like: a trader who primarily buys and sells within a single day.
What is a day trader: Key features
- Makes short-term trades during regular trading hours
- Rarely holds a position for more than a day
- Takes advantage of short-term price fluctuations
What is a day trader aim?
Day traders aim to ‘buy low, sell high’ within a single day. For this reason, they tend to focus on more ‘liquid’ investments, which fluctuate more significantly over shorter periods of time. Remember: day trading is a ‘zero-sum’ game. This means that, for one trader to win, another has to lose.
What is a day trader strategy approach?
Day traders use a variety of strategies, including:
- Trend-following
- Contrarian investing
- Range trading
- Scalping
- News trading
Trend-following is perhaps the most simple form of day trading. You wait until you see an asset’s value start to tick up and buy it, expecting its value to continue to rise. You then sell it once its value starts to decrease, again betting on the movement to continue.
Contrarian investing is the other side of this coin. You observe movements as with trend-following, but do the opposite. Rather than selling as a stock’s value decreases, you hold onto it. The reasoning behind contrarian investing is that too much trend-following can lead to stocks being misvalued, creating opportunities for savvy traders.
Range trading is a slightly different approach, taking a longer view than trend-followers or contrarians. Range traders analyze a stock over time to identify typical daily highs and lows. Armed with this information, they then buy a stock around its typical daily low, and sell when it approaches its typical daily high.
Scalping might sound intense, but it’s a common strategy. Scalpers aim to capitalize on the smallest price changes. The goal is to profit off enough trades over a single day that small wins compound into big gains.
News trading, finally, involves trying to get ahead of the markets. Rather than respond to fluctuations, news traders keep a close eye on the news and try to predict how stock prices will change.
None of these strategies is foolproof and no-one can know for sure whether a stock will go up or down. Still, you can increase your chances of success by picking the right strategy and executing it well. A trading personality quiz can help identify what is a day trader strategy to adopt that will suit your style best.
Day trading for beginners
Whatever your preferred strategy, the most important thing in day trading for beginners is to stay calm. While it might be tempting to buy or sell based on greed or fear, you’ll be better off if you make your decisions based on a sober analysis of trends and risk. Make sure you’re the right type of person to handle this.
And remember, there is risk. Once you’re trading with real money, you can lose out. But it’s not all doom and gloom: day trading can be a fun and exciting way to earn some money. If you’re still interested, then read on to learn how you can get into day trading.
Do I need qualifications to day trade?
No, you do not need any special qualifications to become a day trader. Anyone can become a day trader. The New York Stock Exchange (NYSE) and Financial Industry Regulatory Authority (FINRA) both classify day traders based on activity. If you trade four or more times a day over a five-day span, and those trades make up more than 6% of your total trading activity during that period, then congratulations: you’re a day trader.
What equipment do I need?
While you don’t need specialist equipment to day trade, you should invest in a fast computer with reliable, high-speed internet. Day trading involves buying and selling lots of stocks over short periods of time, and you need to make sure you can respond to changes quickly. You should also get a cellphone with a good data plan, so you don’t find yourself unable to close your positions if your WiFi goes down. Once you have all your tech, you just need a broker and trading platform to get started.
How do I select a broker?
None of the many brokers out there is the ‘best’, but different ones will better suit what is a day trader’s range of different needs. To find the right broker, ask:
- What do I want to trade?
- What customer service does the broker provide?
- What fees do they take?
- What opportunities do they provide for education and practice?
How can I practice day trading?
Good brokers will provide opportunities to practice day trading, setting you up with simulation accounts so you can learn the ropes using virtual cash. This can be crucial, as it gives you the chance to learn the practicalities before you put any actual money at risk.
It can also help you settle on your preferred strategy. You might go in expecting to be a trend-follower, for instance, but find you’re naturally more of a contrarian. If that works for you in simulation, you can go into trading with a clearer idea of what to do.
How much money do I need for day trading?
Different markets require different amounts of capital to enter as a day trader. If you trade foreign exchange, or forex, you can start with as little as $500. You can trade futures with a $1,000 deposit, though some brokers offer minimums less than that.
The big outlier, though, is the stock market. To trade stocks in the United States as a ‘pattern day trader’, you need a minimum of $25,000. What’s more, you also need to ensure your balance stays above $25,000, so you’ll need to start with more than that – around $30,000 is usually recommended, though some do advise starting with more.
What is my day trading style?
Finally, you need to know what sort of trader you are. Different types of traders favour different strategies. If you prefer to catch small price movements across a lot of stocks, you’ll be well-suited to scalping; if you prefer to hold for larger gains, you’ll choose a different approach. You should also consider what sort of analysis you like:
- How do you view markets?
- What interests you about trading?
If you’re a news junkie, for instance, you could gain a lot from bringing that into your trading. While others might prefer more technical market analysis, you might want to buy and sell based on current events. A trading personality quiz can help you understand which option works best for you, and you can test out the various approaches in simulations. Remember, every trader is different. The key is to find a style that works for you.
Conclusion
There’s a lot to gain from becoming a day trader. It’s not a get rich quick scheme, and it’s certainly not risk-free. But if you put the time in, learn your trading style, commit to a strategy and, of course, practice, you can make some real money from it.
