Have you seen the e-books floating around the Internet where people claim to have made millions while sipping coffee in their underwear at home day trading the stock market? It seems like a dream come true. But what is the reality behind day trading? Can people make a living at it? What skills and training is necessary to be successful? Is it for you?
What is Day Trading?
Technically speaking, if you buy and sell a stock the same day you can be considered a day trader. But day trading is a very broad term and can incorporate many of the following traders:
- Equity traders at a firm who make up to hundreds of trades per day for tiny profits. They typically hold for a few seconds per trade. Shaving is one practice where they trade between the bid and the ask for fractions of a penny.
- Scalping is a very short term trading technique where the day trader could be in a position for seconds up to minutes round trip. Not as aggressive as shaving, this practice still can take advantage of the bid and ask spread.
- Rebate trading involves the practice of earning money from exchanges by selling at the ask and buying at the bid. By adding liquidity to the market, many exchanges will give credits. It is possible to earn money by simply buying and selling at the same price with credit trading.
- Technical Setups. Much day trading is done by analyzing a certain trade setup. Perhaps the trader is using pivot points, resistance breakouts, or momentum to enter a position. Often these traders work from home and will only engage in the strongest setups. They are usually quite careful and trade far less than scalpers or shavers due to higher transaction costs than working at a big firm.
There is a wide variety of day traders. The one that is increasing in popularity is the at home day trader. The reason for the growth of this category of traders is that fast and reliable Internet is becoming increasingly common around the world. Discount brokers are catering more to the active broker who makes dozens if not hundreds of trades per quarter.
So if you are desirous of working from home while day trading the stock market, read on to find out what it takes.
What Do I Need to Start Trading?
Before you sign up with your local banks trading platform and start living like a day trader, review the prerequisites.
You will need:
- A broker
- A trading platform
- A good and reliable high speed Internet connection
- Starting capital
- A proven system or strategy
- Margin requirements
Tips: A good discount broker should have a very low rate for high volume trades. Shop around for the best possible rate. Another option available to many is proprietary trading from home. This is where an investment company will put up a large portion of margin for you to trade so you need only provide 5 to 10 percent of the total cost of the trade. The leverage is usually provided for a small percentage of the profits instead of an upright fee. In Australia the advent of Contract’s For Difference has given the same effect.
Keep in mind that certain countries will require day traders to have high margin requirements. Some necessitate 25,000 dollars if they are termed a pattern day trader which means they make a certain amount of intra-day trades in a week. If you trade less than this, or have looser rules in your country, so be it. Just make sure you analyze the requirements before you quit your job to start being a day trader.
Next you will need a reliable trading platform. There are many different trading software types available so pick wisely. MetaTrader and Tradestation are two well known choices. But many other platforms are good as well. Be sure to check on what platform your broker provides. Many brokerages give an online or downloadable software package with adequate technical analysis and charting features.
How Much Money Do I Need? How Much Can I Earn?
Without compound interest, if you were able to earn 1 percent per day for 200 trading days you would be able to turn 1,000 dollars into 3,000 dollars. Unfortunately, even one percent daily can be quite difficult. And 1,000 dollars into 3,000 dollars hardly seems worth a year’s trading. As stated earlier, you will need to satisfy the requirements for being day trader. If you only causally trade a few transactions per week, you may not need a highly funded account as required by your broker for day trading.
Remember though that with the use of leverage using options, CFD’s, or a proprietary firm we can gain 10 to 20 times the leverage. A one percent gain is now 10 or 20 percent profits. But leverage works both ways so we need to be careful.
Example of Trading CFD’s
Imagine you made a leveraged 10 percent per day trading CFD’s on up days and you lost 5 percent on down days. Further imagine that exactly 50 percent of your days were winners and 50 percent of your days were losers. Each day you only trade with 1,000 dollars (which gives leverage up to 20,000 dollars).
How would 200 trading days, or just under a year turn out?
| Wins: | 10,000 dollars |
| Losses: | 5,000 dollars |
| Net profits: | 5,000 dollars |
As you can see, you shouldn’t quit your day job yet if your system yields such results and you only start with 1,000 dollars. If you lose 50 percent, you now need to make 100 percent to be back where you started.
So how much money do you need? Here is my advice. Keep your day job and use a highly leveraged method to maximize your dollar value. Start by trading slower moving stocks so volatility doesn’t crash you right away. Next, use 1,000 dollars until you get comfortable steadily earning a profit.
Once you have a reliable system that works for you, feel free to increase the amount risked. First prove it to yourself, and then start using more money. If you can make a profit with 1,000 dollars, you definitely won’t be making large sums with 10,000 dollars… you will just lose it quicker.
What Is It Like Being a Day Trader?
Of course the experience will be different for everyone. But here is one perspective:
- You wake up early and check the futures market on the index to give you an indication as to how the market will open.
- You start screening for certain stock setups such as potential breakouts or earning announcements. You have a basket of stocks on your watch list. You get your coffee ready for the opening bell.
- No doubt you have a multi-monitor setup where you have numerous charts laid out. You might have the index futures chart with ticks or one minute bars, and intra-day charts on the specific stocks you are watching. You may have a live audio feed to a trading room floor. As well, you might be chatting with colleagues through text or voice over the Internet.
- The morning is usually the most furious time period of volatile trading. The closing is wild as well. If you are new at trading you may choose to sit these periods out. After the first hour of active market movement you might start to see trends or setups forming.
- You see a trade setup. After confirming it on a few different charts (perhaps tick chart, one minute bars, five minute bars, daily chart, etc.) you enter a position. At this point your blood pressure is through the roof. You watch the stock like a hawk forgetting to go to the washroom.
- The trade can be stopped out at a loss, traded for a profit, or closed due to no action at all. At this point you will be swearing and trying to figure out what went wrong orshaking your fist in the air like a monkey feeling that you are a stock market genius or feeling let down after all the hype.
- Then you screen for another setup and do it again. You are careful of the lunchtime hours where trading volume drops off and market manipulation increases. A choppy market can quickly erode profits.
Is It Easy Being a Day Trader?
The short answer is No! Being a day trader means managing the following:
- Your pride and confidence when trades go against you
- Boredom when no decent setups exist
- Keeping undistracted when at home and trading online
- Rigidly following a system no matter what emotions wash over
- Staying highly motivated in isolation
- Combating loneliness
- Getting exercise and maintaining good health
- Not constantly obsessing about the market after hours while spending time with family and friends
For those that love the market and want to learn, profitably being a day trader can be done. If you want to become a day trader you should find a mentor either in person or online, get a good broker, a system, and a lot of time. Most day traders do not turn a profit during their first 6 months… if at all. So do not expect too much out of yourself at first. Chalk it up to a learning experience and with dedication and time you will be on your way to being a successful day trader.