One of the most enticing benefits of day trading is that it could be your main source of income. Being your own boss, working from anywhere around the world has a nice ring to it. So why aren’t more people day traders? Well, it’s easier said than done. That’s why we’ve put together our list of 5 things you need to know before quitting your day job and becoming a full-fledged day trader.
5-step guide to becoming a day trader
Step 1: Self evaluation
When it comes to making a lifestyle switch, one of the first things on the list is a self-evaluation. This helps narrow down if this decision realistically is the right choice for you. In this case, a self evaluation would consist of identifying your personality type and schedule.
Do you consider yourself the entrepreneurial type? Someone who likes to put time and money into their own hands? Well, this is certainly an avenue to start living that lifestyle, but there are more qualities to a day trader than simply having the go-getter mindset.
Day trading requires self-starting, stability for losses and the mentality to stay committed. If you’re willing to put in the time to learn technical analysis and establish the understanding of market announcements, this style of trading may be for you.
Day trading is an investment style that requires quite a bit of commitment. You’re looking to actively buy and sell trades multiple times a day. Because they close trades everyday, having a full-time day job could be a barrier. If you’re working nights, retired or have the flexibility in your daytime schedule, it makes for a much simpler acclimation to the markets.
Step 2: Get set up
Once you’ve completed your self-evaluation, now it’s time to get your feet wet. Set up your broker account, establish your investment size and set clear goals and restraints. If you’re already live trading, you can skip this step or re-evaluate your investment sizes and constraints.
Whether you’ve been trading on a demo account or live, starting a new strategy requires a new evaluation of funds. Each market has a recommended or required amount of money to start investing.
Trading the Forex has no legal limit required to get started. However, it’s beneficial to have at least $5,000-$10,000 to have legroom for more trades. The more trades placed as a day trader, the more opportunity there is to turn a profit.
Goals and constraints
Like any entrepreneur, it’s on you to establish your personal goals. This includes being realistic with your goals and constraints. Some of the golden standards include the following:
Don’t quit your day job
This is one that should go without saying, but it can definitely be tempting. As you start to see success, it’s easy to want to call it quits at your full-time gig. To maintain stability, you should stick with it until you’re in a place where you can financially support yourself through trading alone. This means completely replacing or doubling your income with profits from your trades.
Set a realistic timeline
Turning a profit doesn’t just happen overnight so it’s important to set a timeline that works with your schedule and investment sizes.
Step 3: Practice your strategy
Practice makes perfect, or closer to it. Just like learning any new skill, you’ll want to practice for repeating success. This can be done by trading a demo account without risking real money. Continue to practice your strategies until you feel comfortable to move into live trading.
Establish market understanding
Get a feel for the market, and pay close attention to the way it moves and how investors react to the change. Taking up lessons, analyzing the market and reading up on key strategies are great ways to start learning how to day trade.
Find the right strategy and practice
Once you’ve tested out a few different strategies, you’ll get a feel for the right one. This strategy should work with the timeframes you have to trade as well as they amount you’re able to invest. Repetition is key, just like training to build strength for a sport.
Step 4: Management
By this stage, you’ve got your strategy and investment sized locked down. The next move is learning how to manage everything. To successfully day trade, you’ll need to self manage much like a you’re running your own business. This includes money management, broker charges and growth plans.
This isn’t just your average investment or return-on-investment strategy. To successfully manage your money as a day trader, dig deeper. This includes managing how and where to allocate your capital as well as calculating the margin requirements. Start calculating how many wins versus losses you can take at a your investment size. Your capital allocation plan and risk-to-reward strategy keep you in the green if done correctly.
As a day trader, you’ll be placing several trades in a day. Frequent transactions can lead to a hefty broker cost. Do some research on which brokers would provide the best stability for traders that place a high volume of trades.
There are different plans available at brokerage firms, such as fixed plans for unlimited trades at a set rate. If you aren’t sure if you could make use of an unlimited plan, there are also staggered plans that work off of volume. The higher the volume, the lower the rates.
Step 5: Establish a long term plan
Owning your own business, or in this case being a full-time trader, it’s crucial to establish a long-term growth plan. While you may start seeing results in the first couple of months, elevating those investments starts with a plan. To scale your wins and learn from your losses, reflect on your historical data and build your plan from there.
Backtest historical data
Once you’ve locked in and practiced your strategy, backtest it against historical data. This assessment will tell you the probability of your strategies success. You can simulate this test with a test account with your broker.
Set realistic starting goals, then advance
In the beginning, it’s easy to start too big for your britches. Start out with small goals while you’re learning. Any new strategy should be tested with smaller funds to minimize the amount of risk. Once your strategy is showing results and you feel comfortable advancing, start scaling larger trades and lot sizes.