A Beginner's Guide to Day Trading

Day trading is making short-term trades, lasting less than one day, in an attempt to extract a profit from the financial markets. Some day traders are very active, making many trades each day, while other traders may only make one or two trades per day. The most common day trading markets are stocks, forex and futures. Day trading can be a part-time or full-time career, depending on the trader's style.

It can be lucrative for some, but the long-term success rate is low.

There is a lot of hype around day trading. Some websites promote it as a way to get rich quick (it isn't), and others say it is impossible (also not true). There are lots of day traders around the world who find success and make a living off the markets, so the truth lies somewhere in between those two extremes. If you've thought about day trading, it's worth your time to read through and understand the concepts discussed below, so you'll be better prepared for what to expect if you decide to proceed.

We will cover how long it takes to start earning an income, day trading styles, capital requirements, best day trading markets, profit expectations, software and hardware requirements, hurdles traders face, and finally how to become a better day trader.

Time Investment to Day Trade Successfully

Day trading isn't a get rich quick career, nor is it something that takes years to gain consistency at. Expect to spend six months to a year honing your skills and practicing a strategy before you become comfortable with it in all conditions.

The hard part is that a day trading strategy may work great this month, but next month it doesn't. Day traders need to constantly adjust, as no two day in the market are exactly alike.

The problem most new traders make is that they don't practice a strategy in a demo account, for several months or more, before risking real capital. Therefore, they have no idea how a strategy works, and how they need to adjust it when market conditions change. The demo accounts serves as a testing ground, where new traders can test out ideas, see what works and hone trading psychological skills (such as patience, discipline and focus).

Commit to spending at least six months to a year, every day, practicing a specific method of day trading. Day trading does require a daily time commitment, even when just practicing. Practicing every day builds the habits that are required for day trading real capital.

As you begin practicing, you may notice you perform better at certain times of the day. Focus on these times. While practicing may take several hours per day during the first year, many experienced day traders only trade for one to three hours per day.

There is a commonly quoted statistic that only about 5 percent of day traders succeed. This is a good approximation. Most people who try day trading will not succeed, yet most of them do not practice everyday for six months to a year either. Time investment and quality practice increase a day traders chances of being in the 5 percent that are successful.

Day Trading Styles

There are a number of day trading styles, but really it comes down to personal preference. Some traders are very active, catching small price movements with large position sizes. 

These types of traders are called scalpers. They often makes dozens of trades a day (but this is not required).

Other day traders may only take several trades a day, but they try to capture bigger price movements. These trades typically last longer than a scalper's trades, yet may also be quite short-lived at times.

Most day traders trade off of price charts and/or use a Level II to help see where orders are being placed by market participants. These two tools help traders make trading decisions. Some traders may also focus on specific news events, or trade off statistic tendencies that they have researched.

Capital Requirements for Day Trading

Different markets require different amounts of capital to day trade. Stocks are popular, but also the most capital intensive. If you want to day trade stocks in the US, the absolute minimum you need is $25,000. And you'll actually need more because you need to keep your balance above $25,000. Starting with $30,000 or more is recommended. The stock market provides up to 4:1 leverage on day trades.

Therefore, a $30,000 deposit allows a day trader to utilize up to $120,000.

If you day trade forex you can start with as little as $500, though starting with more is recommended. In forex, leverage of up to 50:1 (or more in some countries) is available. While 50:1 leverage is likely overkill, utilizing 5:1 or 10:1 leverage allows traders to take positions up to five or ten times the amount of their capital. 

Day trading futures is possible with a $1,000 deposit (deposit minimums vary by broker), but more is recommend. If trading a popular day trading contract like the S&P 500 E-mini, start with at least $3500, and ideally $7000 or more.

While leverage can amplify returns, it can also create large losses and even result in a negative account balance (owing the broker money). Always use leverage with caution, and utilized a stop loss order on trades.

What Markets to Day Trade

Stocks, foreign exchange (forex) and futures are the most popular day trading markets. They are all good markets and offer similar profit potential.

Which one to choose comes down to personal choice.

Day trading stocks means buying and selling the shares of a company, or various companies, on a daily basis.

Foreign exchange is buying and selling currencies. The most popular day trading currency pair is the euro/ U.S. dollar (EUR/USD). Day trading this pair involves buying when the EUR is expected to rise relative to the USD, or selling when the EUR is expected to fall versus the USD.

Futures are a contract that match up a buyer and seller at a specific price, with the buyer agreeing to pay that price for the asset when the contract expires in the future. The seller is agreeing to deliver the asset, like oil for example, to the buyer when the contract expires. Day traders are never required to deliver or pay for the actual asset, because all positions are opened and closed within the day (no open obligations). Profits are losses are based on the prices the contract is opened and closed at.

Each market has its own nuances, and will take time to learn. Learn one, thoroughly, instead of trying to trade them all. Eventually, day traders may branch out and trade all markets, but beginners should focus on one. For a thorough breakdown of the pros and cons of each market, see Which Market to Day Trade? Stocks, Futures or Forex?

Expected Monthly Income From Day Trading

Discussing day trader income is almost irrelevant, because there is such a wide range of incomes. There are day traders who barely make a living (and lots that lose) and there are day traders who make hundreds of thousands of dollars a year.

The best way to get an indication of what your profit potential will be is to start practicing in a demo account. In the demo account use the same amount of money that you will be depositing when you open a live account. After 6 months to a year you will have an idea of whether day trading is viable for you.

In terms of expected profit, some general guidelines are discussed below.

It's recommended new traders only risk 1 percent of their account (or less) on a trade. That means a losing trade has a very small affect on the overall capital balance.

If risking 1 percent per trade day traders can expect to make between 10 percent and 30 percent a month. This is not what a trader will make, but rather a goal to work towards. Note that these figures are based on smaller account sizes, which is what new traders are starting out with.

The more capital a trader has, typically the lower the percentage return. It's easier to make high returns on smaller amounts of capital than it is to make the same return on large amounts of capital. For accounts over $100,000, percentage returns will typically start to drop.

For detailed scenarios on how much you can expect to make, see How Much Can I Make Day Trading Futures, Forex, and/or Stocks.

Keep in mind, these figures are based on having a solid method and having practiced it in all market conditions. It will likely take six months to a year, or even longer, before you can expect these returns on a monthly basis.

Day Trading Hardware and Software Requirements

Day in the modern age requires a computer or laptop; a reliable one! While trading off a laptop or one monitor is fine, some day traders prefer having two more monitors (or more) to keep tabs on multiple assets.

Internet access is also a must, with high speed cable or ADSL recommended. Having a back up internet connection is also recommend, such as having a data plan on a smart phone or tablet. That way, if the internet goes down, positions can still be managed using an alternate device on an alternate connection.

Having a phone (cell phone or land line) is also recommended. In case of emergency—like your internet connection going down—it is good to have an alternate means of contacting your broker (other than email, chat, or your trading platform, which won't be working).

To place demo or live trades, day traders require a trading platform. Brokers typically provide day traders with their own software, but third-party software can also be hooked up to many brokers. The platform is required for placing trades, as it tells the broker what you want to do and the broker instantaneously relays that to the market.

Most trading platforms have charts included. Having reliable and easy to use charting software is also a requirement for day trading.

Finally, day traders need a broker and they need market data. When opening an account (demo or live), the trader specifies what they want to trade and requests live prices for that market. This is called a data feed. The data feed shows traders the current price, allowing them to transact with the market place via the trading platform.

For more information on all these requirements, see Tools and Services Needed for Day Trading.

Hurdles to Day Trading Successfully, Consistently

Day trading poses a number of hurdles. Mainly, each trading day is slightly different. Traders need a method that works in nearly all market conditions. That doesn't mean a day trader will win every day. On the contrary, even with a great method, there still may be several losing days a month. Winning every trade or every day isn't important, it is winning over the course of each week and month that matters.

Find (research or develop) a method that adapts to market conditions. Typically, this means avoiding systems that are overly complex, contain lots of indicators or require constant research. For example, if you want to learn how to day trade forex consider using a simple price action strategy.

Day traders also face psychological hurdles. There is no guaranteed paycheck, which can weigh heavily when bills are due but your trading isn't going well. This can be a vicious cycle leading to more trading mistakes and worse performance.

Invest in Yourself, Not in Day Trading Gimmicks

Software and gimmicky products that promise riches overnight typically have a very short shelf life. They may work for a little while, but ultimately they will fail you unless you know how to make adjustments to the software yourself. Instead of getting suckered into trading product scams you're much better off spending your time and money on your own education.

Read books and articles on trading. Consider getting mentoring from someone you have followed and who's method you feel would work with your personality and needs. Invest in your own education, not trade signals you pay for each month or expensive subscriptions—these only serve to make you reliant on someone else. Invest in yourself from the start. That way, no matter what happens you have the skills to get the job done, on your own.

Final Word on Day Trading

Expect to put in at least six months to a year before you start to see any sort of profitability and consistency. It may come sooner, and that's a bonus, but don't assume that it will. Day trading stocks require at least $25,000, forex requires at least $500 and for futures you'll want at least $3,500 or more.

Day trading requires more money than just a deposit, though. Get setup with a good computer, one or two monitors, a trading platform and data feeds. With many brokers the data feeds for various markets cost money, so pick a market and stick with it. There is no reason to pay for data feeds you won't be using. Also, a consistent income isn't likely during the first six months to a year, so save up for living expenses if attempting to day trade as a primary income stream.

Focus on simple methods that you can work on and practice yourself. Don't become too reliant on others. In the long run, you are better off investing in yourself and an education that will last forever, not blowing money on signals or gimmicks that offer no long run benefit to your trading career.