Day Trading: Everything You Need to Know

Day trading has been around for a while. However, with the advent of electronic trading, what used to be limited to financial institutions is now available to the retail trader, someone who day trades as an individual and not for a company.

Like many other people, you have probably heard of how day trading has earned enough many for some people that they were able to quit their regular day jobs and become full-time day traders. Also, just like many other people, you have probably wanted to learn day trading, or simply wanted to know more about this unique occupation. If this is the case, then you are in luck.

In this post, we are going to cover everything there is to know about day trading. We will cover every aspect from how day trading works, day trading software, and how you can learn day trading. There is a lot of information to cover so let’s get started.

Characteristics of Professional Day Trading

Professional day trading is not simply a hobby. Day trading requires a continuous effort on the part of the trader to improve their day trading skills while generating a profit and minimizing losses. For those that attempt day trading without previous knowledge or experience, or at least taking the time to learn day trading, the markets, and how day trading works on a technical level, will find that making a living in the day trading industry will be very challenging. Professional day trading requires that the trader uses their own risk capital, which are funds that can be lost without causing overpowering financial hardship and must use day trading software to find the specific metrics that they are looking for in stocks, futures, or forex, whichever they decide to start day trading in. Most of all, professional day trading requires that the trader has and use proven strategies that they continue to refine until a benchmark of consistent profits has been achieved as a result of their day trading activities.

Unlike an investor that may purchase a security and maintain possession of it for years, a day trader, or someone that engages in day trading, only maintains their securities for a short period of time, typically one day, hence the name. People can conduct day trading activities in just about any market, but the stock market and foreign exchange markets are the most commonly used.

Most day trading is accomplished by people that are well funded, educated, and experienced in the ins and outs of the market. Day trading combines high leverage and short-term trading practices in order to capitalize on small movements in the price of currencies or stocks. Utilizing a short-term philosophy, day trading allows for people to eliminate some of the risks that are involved with securities. By possessing the securities for a short amount of time, day trading rarely requires the traders to have to worry about something happening that could cause substantial losses.

While it may sound like day trading is strictly about turning a profit as quickly as possible, it also serves two important functions in the markets. Day trading activities are responsible for a large portion of market liquidity, and they help to keep the markets running smoothly with multiple buying and selling activities.

How Day Trading Works

To get into all of the technical aspects of how exactly day trading works will take a lot more than what we can place in this short posts. So, in order to make the process clear without taking too much time, we will provide you with a brief example that will clearly demonstrate how the process typically goes.

Day Trading Example

Let’s say that our day trader, we will call him Fred, uses his day trading software to find the specific stock he is looking for and buys 1,000 shares at 9:00 a.m. By 9:15 a.m. the price of those stocks starts to rise, at which time Fred decides to sell his 1,000 shares. If the price went up by ½, or 50 cents, when Fred sold his shares, he would make $500. However, you have to remember that Fred has to pay commission for his transactions, we will say his commission fee that he has to pay is $27. That means, after fees, Fred has made $473.

If you think that the $473 that Fred made isn’t that big of a deal, keep in mind that this is the result of only one transaction and Fred will be making 20 or 30 more before the day is done. While this may only be an example, this is typically how a day trader operates on a daily basis.

Day Trading Software

Just as in almost every industry, you will need certain tools and software in order to make sure you have a shot at being successful, the same is true for day trading. The current day trading software that is available not only helps to make your job of analyzing securities and making an informed decision a whole lot easier, it is a necessity if you really want to be successful at day trading. Here is a list of the types of day trading software you will need if you are planning on day trading for a living.

Broker = This is the most essential software you will need. Why? Ever try changing a tire on your car without a jack and tire tool? Trying to do that is exactly what it is like when you try to trade stocks without a broker.

There are plenty of online brokerages to choose from that have exactly what you need for day trading, including day trading software. You will have to review the various companies to see which one best suits your needs. Compare software options as well as costs and associated fees for conducting trades.

Stock Screener = If you think finding companies that fit specific variables is a simple task without the aid of day trading software is easy, think again. With nearly 3,000 companies listed on the New York Stock Exchange alone, manually conducting a search for the company that fits within your strategy is nearly impossible. This is why you need a stock screener.

When you are wanting to search for stocks that have certain qualities that you are looking for, you are going to need a stock screener. Stock screeners are comprised of three components: a set of variables and search engine that can filter those variables, a thorough database of companies, and the ability to generate a list of companies that match the established variables.

Charting Software = While the charting programs that come available on most brokerage sites will suffice in the beginning, you will eventually grow past their capabilities. After you have been trading for a while, and have developed your day trading skills, you will want day trading software that will allow you to generate custom charts based on metrics that fall in line with your day trading strategy. This is when you are going to need a quality charting software. You will want to find a charting software that is fast, reliable and allows you to customize your search criteria so you can narrow down your possibilities.

News Provider = There are few elements that can make stocks move as much as a breaking news story. To understand why a stock is moving on your stock screener, you will want to check a reliable news provider, a day trading software that is a must, to see if there are any major events or catalysts causing the movement. While day trading, this could be a major clue for you as to what stocks you should start your day with.

Whatever day trading software you decided to go with, make sure it has the following features:

  • Portfolio Tracker
  • Real-time News
  • Level II (which provides you with a list of all the buy and sell orders currently on the market)
  • Built In Order Entry
  • Time and Sales

These features are the bare-minimum your day trading software should provide you with. Regardless of what you are planning on day trading, forex, stocks, or futures, you have to have the right tools for the job, especially if you are planning on day trading for a living.

Day Trading for a Living

When people start day trading for a living, they usually fall into one of two categories: the individual that is working alone, or the individual that is working for a large corporation or institution. You will find that most people doing day trading for a living work for larger institutions because of the assets that are provided are ones that most individual day traders can only dream about. Large amounts of leverage and capital, high-end day trading software, direct link to dealing desks, these are some assets that would be practically impossible for the individual day trader to achieve on their own. Additionally, day traders that work for institutions usually have access to resources that enable them to capitalize on trades long before the individual day trader has a chance to react.

As we stated earlier in this post, there have been many people that have experienced enough success at day trading to quit their normal jobs and pursue day trading for a living. If you are considering such a move yourself, it would be in your best interest to make sure you know what you are getting into. We are not in any way saying that you shouldn’t consider day trading for a living, we simply mean that day trading is not something you just jump into without being prepared. Here are some tips that will help you make the transition to full-time day trader a lot easier.

Experience = One thing that will be very helpful at being successful day trading is experience. While you can read every book that has been published on the subject, create a digital library filled with articles that cover successful strategies, and watch every how-to video you can find, you can still get hammered by the markets. One of the best ways to ensure that you will have more positive results is by having experience with the markets. It is highly recommended that you create an online trading account and start playing the markets. Even if things don’t work out for you, you will have the experience and knowledge of what you did wrong, why it was wrong, and how to do it correctly before you start day trading for a living.

Training = This kind of goes hand-in-hand with experience. Yes, there is a difference between learning about a topic and actually doing something, completing some training before you dive head-first in the world of a full-time day trader will at least give you something to fall back on while you are fine-tuning your strategies.

Be Consistent = One factor that you will have to possess if you plan on making day trading your new occupation is that you have to be consistent. Here are some examples featuring day trader Fred.

Example B1:

Fred has been day trading for 12 months. During the first two months, Fred did really well, averaging $5,000 each month. On the third month, Fred was ecstatic that he was able to make just over $12,000. However, during the remainder of the year, Fred only averaged around $1,200 per month for the remaining nine months.

Example B2:

Fred has been day trading for twelve months. During the year, he averaged $5,500 per month. While he has friends that are also day traders and have told him about periods in where they have earned $10,000 or more, Fred is content with his consistent performance.

From these two examples, which would you say is the best scenario? If you said example B2, then you are right. All of us would love to say we brought home $10,000 or more during the month, however, consistency, such as that demonstrated in example B2, should be the goal of anyone that is day trading for a living. This consistency means that you have learned the markets you are operating in and know how to read them.

You should also take a look at these steps before jumping headfirst in day trading for a living. Here are 10 steps for you to take that will help you to determine if this is the right move for you.

1. Conduct a thorough and honest self-evaluation.

There are certain traits you should possess if you want to be successful at day trading stocks, forex, or futures. It is not simply a commitment to a new career, it is also a commitment to a new lifestyle. While it may appear that day trading for a living is a life of ease, it actually requires a great deal of effort on your part.

  • Long hours.
  • Very little time off.
  • Solid risk-taking abilities.
  • Commitment to the daily activities required of a day trader.
  • Being able to motivate yourself on a daily basis.
  • Continually learning and improving your strategies.

2. Financial arrangements to ensure you are covered.

Another aspect about full-time day trading is your finances, both personal finances and your finances for trading. Once you fill it is time to leave your current job and start day trading for a living, you will no longer have that steady income. With that being said, you will need to make sure that you have enough money set aside to cover your expenses. How much you should save has been debated by many financial experts. The safe minimum, however, is at least six to twelve months worth of expenses.

Having such a savings serves two purposes. One of the obvious reasons is because, without your income from your old job, you will have to have something to fall back on until you have started generating an income from day trading for a living. The other purpose for having this savings is that you will be more apt to make smarter trading decisions when you don’t have to worry about whether or not you are going to have electricity in the morning.

One more point about finances before we move on. Keep the money you have saved for expenses and the money you have saved for trading separate. The reasoning behind this is pretty simple. You don’t want to short yourself when it comes to paying for your expenses because you used your money to buy securities. On the flip-side, you don’t want to find yourself unable to purchase the desired security because you didn’t have enough saved to pay your rent. Keeping these two accounts separated will help to prevent such a situation from arising and will enable you to make decisions that are not emotionally charged.

3. Knowledge of how the markets operate and how they react to catalysts.

To be successful at day trading for a living, you have to have some knowledge of how the markets work and how they are affected by economic, national, and international events. But it also requires less-complex knowledge, such as knowing what hours the markets are open and what holidays are they closed on.

4. You have to have a suitable day trading strategy that you have either created, selected, or modified.

Most individuals in the day trading industry make their biggest mistakes during their first 12 months. Why? Mainly due to unstable strategies. To start, you should have at least two proven day trading strategies. They serve as a backup for each other in the event one strategy should happen to not work as you planned, or that there were no trading opportunities made available on a specific trading day. After you have gained some experience with your day trading skills, you can add more strategies that are more complex, but potentially more rewarding.

5. Knowing the securities you are wanting to trade.

You have to keep in mind that stocks, futures, forex, mutual funds, and ETF’s are all traded differently. You have to know the characteristics of the securities and their trading requirements if you want to achieve success at day trading for a living. Without understanding these different requirements and characteristics, you could be leading down a path of excessive losses.

6. Practice good money management.

Using good money management practices will help you to address the challenges that come with day trading for a living with stocks, futures, or forex. It will also help your chances of being profitable even if only a portion of your daily trades present you with gains.

7. Test historical data.

After you have developed your day trading strategies or found the strategies you think work best for you, use a test account to see how effective they are without having to risk real money. Most online brokerages offer such services for day trading purposes. You can also back test historical data with your planned strategy. Just make sure you account for costs and fees associated with day trading in order to have a realistic assessment. This leads us straight into our next step…

8. Do not forget to account for fees and charges related to your trading activities.

Day trading typically involves a great deal of activity throughout a normal trading day when you are day trading for a living. This will quickly build up to substantial brokerage costs. Make sure you conduct research on all of the brokerages and compare what fees they charge for conducting trades. Each brokerage offers something unique for their users, so look around and chose wisely.

9. Integrate your trading strategy into a larger trader plan.

While having proven strategies is a component of successful day trading, they cannot do it as a solo component. Here is some consideration that is needed to complement your strategies in order to develop a trading plan for your day trading activities.

  • How much money will be used per trade
  • What assets will be traded
  • What is the entry and exit strategy
  • How much capital will be used
  • What will the frequency be for placing trades

As you can see, your day trading plan is basically just an outline on how you will conduct business when you are day trading for a living. It incorporates your strategies, what you will trade, what is your risk limit per trade, etc., and places it all together into your trading plan for your day trading activities. If you are planning on making a real effort in day trading for a living, you will have to develop a solid day trading plan.

10. Don’t start off too large.

Regardless of how much money you have sat aside for your day trading efforts, start off small, especially when initiating your new strategies. Using smaller amounts will help to avoid large losses if your strategies don’t work out as well as you thought they would. There will be plenty of time for going large once you have found the strategies that work best for you.

Day Trading Salary

When day trading, you can work for companies, have your own clients, or simply work for yourself. Whichever professional path in day trading you choose, it can have a direct impact on your salary. Since professional day trading typically relies on market fluctuations for the trade of stocks, forex, and futures, the average day trading salary can vary. It is not unusual for the beginner day trader to make less than $50,000 during their first year in the industry. However, the current average is above $100,000 per year, about $103,000.

The state from which the day trading takes place will also have an impact on the average day trading salary. In New York, the average day trading salary is in the neighborhood of $120,000 and in Connecticut, the average is $112,000. However, when you look at Texas with an average day trading salary of $98,000 and Florida at $99,000, you can see just how much of an impact your area will have on the average day trading salary. Also, when day trading outside of large cities, you are less likely to have a large clientele, which also affects your day trading salary potential. While the internet makes it possible for isolated day trading and to reach beyond the boundaries of where you are currently residing, location still plays a role in the average day trading salary.

Another key factor and probably the largest, in the average day trading salary is the experience level. Those that have day trading experience in working with stocks, futures and forex are more likely to have a better idea of when it is time to buy or sell and will have a higher earning potential, thereby increasing their day trading salary. Additionally, day traders that have been working with clients for a longer period of time also have a larger client base than those just starting in the industry.

How to Learn Day Trading

While having experience in day trading helps, you can still learn day trading and do day trading for a living. Whether you are wanting to learn day trading to start a new career, looking for a way to make extra money, or simply interested in the industry, you have to approach it as you would with any other subject you want to learn. It will take a commitment of time, research, and work with different strategies until you find the one that works best for you if your goal is to learn day trading.

If you are completely new the world of stocks, forex, and futures, here is some recommended topics you should research if you want to learn day trading:

  • What are stocks?
  • How do stocks work?
  • What is a ticker symbol?
  • What does it mean to “sell short”?
  • What is the New York Stock Exchange and how does it differ from NASDAQ?
  • What are commissions and margins?
  • What is Forex?
  • How does trading currencies work?

There are plenty of other topics involving day trading and doing day trading for a living that you can research in order to help you learn day trading. Keep researching, reading, and learning so that way you have an understanding of the aspects of trading.

While it is true that many day traders have experience in the markets and college degrees, that does not mean you have to have these in order to learn day trading. In fact, there is currently no educational or experience requirements needed to be an individual day trader. The only thing you need besides operating capital, time, and an understanding of how stocks, futures, and forex markets work, is effective strategies.

Conducting a search in your favorite search engine for day trading strategies will yield some overwhelming results. By simply checking the information on authoritative sites will help point you in the right direction. Here are a few factors to look for when trying to pick your initial strategies.

Entry and Exit Strategies = When it comes to day trading, certain securities are better than others. There are two factors to look for in day trading when trying to find the ideal stock and that is its volatility and its liquidity. The liquidity of a stock lets you enter a stock at a good price. The volatility of a stock is a measure of the expected price range for that stock, for that day. This is the area in which a day trader operates.

Scalping Strategies= The scalping strategy involves immediately selling a security as soon as it becomes profitable and is one of the most popular strategies used in day trading. By using day trading software, a day trader will sell the security as soon as the price of the security increases to a point it returns a profit. This strategy requires the use of good day trading software to ensure this moment is not missed.

Fading Strategies = This strategy involves selling stocks after a rapid upward movement. This strategy is very risky, but can also be massively rewarding. Fading is completed on the assumption that they are overbought, early buyers are ready for taking profits, and that any existing buyers are scared out. Again, having and using a good day trading software is essential for using this strategy.

Momentum Strategies = This strategy is based on news releases and/or strong trending moves that are supported by high volume.

Daily Pivots Strategies = Daily Pivots involves profiting from the daily volatility of a stock. A using their day trading software, a day trader will attempt to buy the stock at the lowest dip of the day and then sell it at its peak.

Day Trading: Industry Lingo & Terms

Every industry has its own unique lingo that may seem like a foreign language if you are not familiar with it and day trading is no exception. Here are some examples of lingo that is commonly used in the day trading industry that could leave you scratching your head. Along with learning day trading, if you want to do day trading for a living, you will also have to get accustomed to this unique lingo and its meaning.

Pattern Day Trader = A pattern day trader is someone that possess an account of at least $25,000 and conducts four or more trades within five days and is greater than six percent of their total trades.

Fibonacci Series = It sounds fancy but the Fibonacci series is nothing more than a list of numbers with each number being the sum of the two previous numbers.

Relative Strength Index = This is the average number of upward price movements for a specified period that is divided by the average number of the opposite, downward price movements. Higher RSI indicates that there are more people interested in buying rather than selling the specified security.

Commodity Channel Index = The Commodity Channel Index is used to identify the turns in seasonal agricultural commodities and other securities that experience a change in the levels of supply and demand during the year.

Bollinger Bands = This is a trading limit established below and above the moving range of a security within a 20-day period. Day traders buy when the price falls to the bottom and sell when the price is near the top band.

Modified Dietz = Modified Dietz is a method used to gauge your performance. While it is not the most accurate, it is one of the most simple methods

Day Trading for Dummies

When we say “day trading for dummies”, it’s not meant to be derogatory in any way. However, since people receive and comprehend information differently than others, day trading for dummies merely refers to explaining a topic in layman’s terms. This is especially true when learning something as complex as how to learn day trading, day trading as a whole, and day trading software functionality. With determination and discipline, just about anyone can learn day trading so long as they have the desire to do so. Here is a simplified day trading for dummies list of what you will need in order to get started with day trading for a living.

Computer = A computer is probably the main component to setting up your area for day trading. Today’s computers provide plenty of power for day trading activities and day trading software, but you will want to ensure it has a good monitor. And while you’re at it, get an additional monitor so that way you will have plenty of viewing area. Day trading is going to require you to spend a lot of time reviewing charts and data that your day trading software will generate so you do not want to have to keep closing or minimizing windows when jumping around your screen. Just keep in mind that, depending on the day trading software you decide to use, you may need a computer with very fast updating capabilities. Refer to the section “Day Trading Software” for a better explanation.

Backup Computer = It is difficult to trade online or use your day trading software when your computer goes down. For this reason, it is advised that you have a backup computer with your day trading software installed so that you can continue your day trading efforts. Computers can develop glitches in software, operating systems, and components that will make them useless. Not the best of scenarios when you make your living at day trading. Your backup does not have to be some high-end model. It just needs to be powerful enough to handle your day trading software that you need for your day trading activity.

Internet Access = Do not be cheap and subscribe for the slower internet package. Taking forever to update your charts and websites can lead to missing out on the best time to buy or sell a security and will not let you utilize the full benefits of your day trading software. Pay the extra monthly service fee for the fastest internet connection your provider has to offer if you are serious about being successful at day trading.

Brokerage Account = There are many online brokerage services available online for conducting day trading activities and many have their own day trading software you can use with your subscription. If you are having a tough time deciding which one is best for you, conduct a search for brokerage reviews. There are plenty of sites dedicated to providing unbiased reviews of brokerage sites, day trading sites, and day trading software. Another great way to see which site would be a good candidate is by checking reviews from previous or current customers.

Spreadsheet Software = Along with your day trading software, having a spreadsheet software is essential for tracking the performance of securities and analyzing returns to gauge how your day trading efforts are paying off. While most online brokerages offer such services with your subscription, it’s not a bad idea to have your own independent spreadsheet software to compliment your day trading software.

Day Trading Facts

Before we close out this post, here are some facts about day trading that many people might not be aware of.

  • Financial Requirements= If you are planning on stocks as your vehicle when you begin day trading for a living, keep in mind that there is a financial minimum you must maintain. According to U.S. law that was established in 2001, your day trading account has to have a minimum of $25,000 if you are a U.S. resident and trade more than eight stocks in a week. This means you purchase eight stocks and sell those same eight stocks. However, forex has no minimum limit.If forex is where you are planning on pursuing your day trading activities, you can do so with very little money. In fact, many people in the day trading industry prefer to trade in currencies due to their simplistic nature. There are only a few currencies that can be used for day trading and this makes it a lot easier than day trading in stocks.
  • Day Trading in Forex= The term “day trading” in relation to forex is kind of deceiving. Unlike stocks where markets are open for set hours and then are closed until the next trading day, currencies on the forex markets can be traded 24-hours-a-day. Since there is no such thing as overnight trading in forex, and you can have open positions longer than a day, “day trading” is a misrepresentation.
  • Losses Must be Limited= In day trading, there are fewer rules that are more important than limiting losses. One of the main reasons people lose money when day trading for a living is because they do not take the necessary steps to limit their losses that they can incur from day trading. When day trading, many beginner day trader’s will keep possession of their stocks when they continue to drop, thinking that they stock will increase in price the next day. However, as frequently happens, news is released overnight that causes a negative impact on all stocks, even the one that started dropping the day before. If you are doing to be day trading for a living, you will have to know how to limit your losses while day trading. That declining stock could have been sold when it first started declining and limited how much of a loss was actually taken.
  • Use Only Part of Your Money= When day trading, do not use all of your trading capital, rather only some of it. Until you have gained experience in day trading for a living, you are not going to know how successful you will be.
  • Everyone is Different= As we stated in our section on day trading for dummies, everyone learns at a different pace. So what if your friend has only been day trading for eight months and is consistently earning $6,000 per month day trading. Perhaps they had more experience in the markets than you and had a better initial understanding of how day trading and day trading software works. Perhaps they are simply riding an extended wave of good luck. The point is this, all of us learn differently and process information differently and this is especially true in the complex world of day trading. Keep working on your strategies by analyzing the information available to you through your day trading software and as you learn day trading skills, you will soon be bragging to your friends about your consistent success at day trading.
  • You Need A Direct Access Broker= If you are really serious about day trading for a living you need a direct access broker. Online brokerages have their benefits and will suffice in the beginning as your start day trading, but they are not as fast as having a direct access broker. Direct access brokers typically have a specific day trading software they like to work with so make sure you find one that works with the day trading software you want to use.
  • Don’t Establish Daily Money Goals = When you are day trading for a living, you will have days you win, and you will have days where you don’t do so hot. It happens to everyone, even those that have been day trading for years and that is something that will never change. Regardless of the day trading software, you use, or the level of experience you have, how much you win or lose, will depend on your discipline in limiting your losses and learning from the event. Your only daily goal should be to get from the market whatever you can. This will become evident as you learn day trading
  • Every Day Trading= This might sound odd, but if you do not want to trade every day, then don’t. If for whatever reason you do not feel like day trading, your best option is to simply avoid day trading activities for the day. Making yourself trade when you don’t feel up to day trading will usually only end up in you taking losses because you are simply not into it.

A Summary on Day Trading

The chances are pretty good that you have heard people refer to day trading as a way to “get rich quick”, or that it is a scam. However, we have done our best to make this the most comprehensive post that you can find on the topic of day trading and have shown how day trading is not a scam and is, in fact, a great career choice. Whether you decide to conduct day trading in stocks, forex, or futures, day trading as a profession will require a great deal of work. Given the information that we have provided, you should have no difficulties in deciding if day trading for a living is the right move for you.

Now that this article has shown you how important it is to learn day trading and its strategies, you can get started on the right track. Once you start learning, the key is not to stop until you are an expert.

Good luck, and happy trading.