This is my no-bullshit guide to day trading. Chances are incredibly small that you will make money day trading. Read on to find out why. And in case you want to learn more about day trading, read the full guide, which might take you approximately 30 minutes to complete. Get ready to join the 3% of successful day traders if you have the will to do so.
1. The Reality of Day Trading as a Career
The Appeal vs. The Reality
Day trading has been a steadily growing trend since the early 2000s when electronic trading became increasingly popular among private investors and traders.
To put it in perspective, in the United States alone, about 50,000 people search for the term “day trading” alone. Worldwide it’s at least twice as much. So in one year, about 1 million people search for “day trading” every year, which is massive and clearly indicates its popularity.
The Appeal: Day traders aim for quick wins in the stock market, futures and options market, or even in crypto and forex. The idea is to make money in fast time frames like the 1 minute chart to generate a higher return than a normal investment strategy.
The Reality: Most day traders lose money. Various studies indicate, that between one third and even 90% of day traders lose money in the long run.
What Professional Day Trading Actually Entails
Day traders fail that frequently because of the misunderstanding about what day trading actually entails.
Day trading is not just turning on a computer and making millions in one week on auto-pilot. It’s a real job, much harder than a 9-5 job because your own (and often hard-earned) money is at risk, every day, with any trade, at any time. This risk makes something with you and lets you act differently than you might think.
As a day trader, you have to be disciplined. As a day trader, you have to trade by defined rules. As a day trader, you’ll face psychological challenges you would never expereince elsewhere.
Day trading is about right preparation.
2. Building Your Foundation: Essential Requirements
Required Capital: How Much You Really Need to Day Trade?
If you live in the United States and have your trading account with a broker in the United States, the absolute minimum to day trade is $25,000. If your account balance falls below $25,000 you can only make 4 day trades within 5 business days in order to avoid getting disqualified as a pattern day trader.
Realistically, you better start with $27,000 or even $30,000 because you’ll likely start by losing money, and planning with too tight margin could end your day trading career quicker than you might think.
Educational Requirements and Resources
You don’t have to study anything, you don’t have to be a super economist, and you don’t have to be a mathematician, but… …it helps if you are good with numbers in general.
Even without education and with a relatively small budget, you can do much better than the best-educated person in the world who has millions on his account.
It’s simply about how good you are at taking small winners out of the market frequently by keeping your emotions under control at any time.
You can compare it to a poker player. Professional poker players use the odds in their favor. They know, that there is a small edge in gaming that they have, and if they play long enough by the rules, they make an okay return any day, which cumulates over weeks and months.
The same goes for day traders. Day traders have to trade by the rules, have emotions under control, and use risk management accordingly.
There will be days when day traders lose money, but the aim is to make money in the long run, so losses are part of the story.
Setting Up Your Trading Office
Day trading is the ultimate home office job. All you need is a laptop, internet, and a brokerage account. That’s it. The expenses can be small because it can be an old laptop with an i3 processor, 8 gigabytes of RAM, and a small hard drive. Sure, you can also buy an expensive setup, but it’s not needed to get started.
If you feel better with it, buy you a desktop or laptop where you can attach two monitors. This makes things more efficient. But again, it’s not needed if you want to find out if day trading is for you.
Essential Tools and Technology
The most essential tool is your brokerage account and platform. Nearly all brokers, be it TD Ameritrade, Charles Schwab, or trading apps like Robinhood, your trading platform is the main platform you’ll use.
If you have too much money and want to buy additional software to day trade, feel free to do so, but remember that you have to make the money back that you spend when subscribing or buying software.
3. Developing a Winning Trading Strategy
Finding Your Trading Style
What is your trading style? As a day trader, you’ll close your positions by latest at the end of the regular trading hours of a day in the market you trade. Yet, day trading has various nuances, so you can do scalping, hold positions for a minute or two, or trade on a 15-minute time frame to hold positions longer. There is no limitation to the trading style you plan.
Well, actually, there is a bit, because if you want to become a high-frequency trader with a 10-year-old laptop, that won’t work. But you know that.
Market Selection: Which Markets to Focus On
As a prop trader who wants to get into day trading, your favorite market will likely be the futures market. You’ll trade futures contracts on futures exchanges like the CME.
However, some people like Forex and Crypto more, so they decide for this market, but keep in mind, while CME is regulated and there is a clear and transparent pricing to futures contracts, the Forex and Crypto market is not at all as transparent and regulated.
Technical Analysis & Fundamentals
Day traders don’t care about company fundamentals, or at least they seldom do. If there is an earnings announcement, then the company releases company fundamentals, which then cause prices to move on high trading volume, volatility, and at a fast pace. However, a day trader does not care that much about the actual earnings number, more about the movements that the announcement caused.
Creating and Testing Your Trading Plan
Let’s say, you created your trading plan and you like the idea of trading based on a 5-minute time frame, using candlestick charts, trading the opening breakout only to the long side, and holding any positions for exactly 15 minutes before closing it.
What now?
Now it’s time to test the efficiency of your plan. Do you make money under real market conditions?
Let’s test it. Either use a backtesting program, or even better, test your strategies in real time with a paper trading account. The idea of this is to find out if you really make money with your strategy, or not. And if yes, how much money do you make with the risk you take?
4. Risk Management: The Key to Longevity
Position Sizing and Risk-Reward Ratios
There are so many position sizing techniques, so let’s focus on the most frequently used ones. Some day traders go all in with any trade and invest the entire account balance in any trade by having a maximum of one position at a time.
Some day traders split the maximum buying power into 2 or 3 equal parts to hold multiple positions at the same time.
But you can also determine your position by defining fixed risk parameters. For example, you can define a certain amount as your variable R. R is your maximum risk, like $100 per trade. Together with the delta between your entry and stop price, you calculate how many shares or contracts you can buy or sell.
And when it comes to your risk reward rations, well, common sense is that you should aim to make more money in a trade than what you are willing to lose. Let’s say you aim for $200 to make with any trade and risk $100 with any trade. Now your RRR is 2:1.
But as a day trader, you’ll have to decide about trade entries and exits in seconds, doing all that math is not that easy. That’s why you either have to use technology to help you quickly calculate your position size and risk-reward ratio, or you use and simplified approach.
Setting and Managing Stop Losses
Should you set a stop loss? And if you set a stop loss, should that stop loss be in the form of a live order, or just in your mind? The opinion about it is different. Some day traders always have their stops on the market, others assume that trading systems try to catch stop loss orders of retail traders just to reverse in price once the retail trader got stopped out.
In fact, algorithmic trading is a big issue these days and institutional algo traders go after client orders. That’s how they make money.
But the problem is, that if you want to avoid getting stopped out by the algos and don’t set a stop, this might could hurt you even more in case of a market melt-down (e.g. after market-shaking events and news).
The 1% Rule and Capital Preservation
You likely heard about the 1% rule that many investors use. Forget about the rule as a day trader. Think about it, can you always calcualte 1% of your current account balance, then consider the stop distance for your trade and calculate how many futures contracts or stocks, lots etc. you can trade with one trade if you have to execute an order in seconds? No! You can’t. Or at least, you can’t manually. So if you trade by hand, foreget about the 1% rule but keep capital preservation in mind. You have to find your way to use an equal risk per trade. You simply can’t risk 100% of your capital in one trade, or 10% of your capital, while with other day trades risk 0.5% or 0.1%.
Dealing with Drawdowns
Here you are. The good old drawdown. Man, if you are an investor since the early 2000s, you know what a drawdown is. No one wants them, but everyone experiences them.
A drawdown is a bad a**.
But we all have to deal with it.
One bad day does not ruin your life. But if things get out of control because of a drawdown, things can really become difficult.
I think that dealing with drawdowns the wrong way is the main reason why day traders fail.
If you are too emotional if you always want to make your money back, if you often feel the fear of missing out, you already lost. You can end your career, better earlier than later.
Dealing with drawdowns is a learning path. And luckily, using prop firm challenges helps you to avoid complete bankruptcy by just freaking out.
So, start your challenge, find out what a drawdown is, and if you have the skill and mindset to handle it well. If not, do not start a new challenge.
Unfortunately, that’s not really something you can learn. You either have this in you or not.
5. The Psychology of Successful Day Trading
Developing Discipline and Patience
Developing discipline and patience in day trading is so incredibly important to becoming a successful day trader, but as I said about dealing with drawdowns, simply not anyone has what it takes to do that successfully. It sounds so incredibly easy, but it is so damn hard.
I know you won’t believe me if you are just starting out, but you will soon.
As a prop trader, you have a benefit that you don’t have if you have your private bank account because as a prop trader you can fail many times before losing your shirt, while with a regular bank account, you can lose a fortune with one big fail. So, yeah, we can all be thankful that prop firms exist.
Managing Emotions and Trading Biases
Managing emotions is close to developing discipline and patience. If you don’t have your emotions under control, you’ll fail. Simple as this. In day trading, there is no room for emotions and uncontrolled reactions.
If you sleep a night and on the previous day only long trades worked out well, and you start the new day by simply having the trading bias that the market only can go to the upside, you guess it, it will become a major problem. You always have to be ready to make unbiased trading decisions. One way to control it is by deciding to either be an only-long-trader or an only-short-trader. This way, you always know what to look for, and if the conditions for the only market direction you trade are there, trade, if not, sit on your hands until the market shifts, even if that means that you don’t trade for hours or even days.
Handling Losses and Maintaining Confidence
If you have ever lost a trading account, you now how it feels and it sucks. No one wants to make loses. And the fact that anyone tells you that losses are part of making money, annoys you. That’s normal. But unfortunately, there will be losses and you have to handle it by maintaining confidence about your trading strategy and rules.
Building a Resilient Trading Mindset
That’s so easily said, but it goes in the same direction as the sections before. You need such a strong mindset with full control over your emotions be be successful. And there is no other way than trying it out do discover if you have what it takes.
6. Daily Routines of Professional Day Traders
Pre-Market Preparation
Pre market preparation means that you prepare your trading for the day by reading the pre market activity. You’ll read the news, check other international markets, and make a plan for the day. If you trade futures, you’ll decide which contracts to trade, you’ll read relevant news, you’ll check if there are specific announcements throughout the day and then you will start trading at the market open (or, if you like the thrill, you can also trade during pre-market, but keep in minds, it is more risky because of the lack of trading volume).
Trading Hours Structure
Trading hours are structured in three parts. The pre market hours, the regular trading hours, and the after market hours. The most volume is there during the regular trading hours.
Record-Keeping and Performance Analysis
As a day trader, you want to make sure to take notes for any trade. Otherwise, you’ll never find out which strategy, which trading times, which special events and news, which trailstop method, etc. works the best. If you make the same mistake over and over again, your records will show you. So, make sure to make notes. This can be in a trading journal, or by just writing things down.
Continuous Learning and Improvement
Like everywhere in live, continuous learning and improvement are what you need to be and stay successful. If you hold onto old habits and knowledge, you’ll fall back at some point.
7. From Part-Time to Full-Time: Making the Transition
Milestones to Achieve Before Going Full-Time
Never. Never start your day trading career by going all in full-time. Just don’t do that. Your chances of becoming a successful day trader are small. Really small. Starting day trading full-time does not reduce the pressure but instead increases it. If you are successful over the course of 12 months with continuous profits, you can carefully consider going full-time, but this decision is a really important one because of the immense emotional pressure that comes with it.
Creating a Financial Safety Net
Before going full-time, it is a good idea to create a financial safety net. Don’t store your cash reserves in a day trading account. Increase your capital and savings on other accounts to have your safety net in a safe envisonment. Once you make profits, wire money to your savings account. And never risk all your capital day trading.
Scaling Up Your Trading Activity
An old saying is that if you can’t make money day trading in a paper trading account, you’ll never do it in a real money account. And if you can’t make money in a small account, you can’t in a big account.
But that’s only true to some extent because your gained experience makes a difference, and also the emotional impact of trading on paper vs. with real money is different.
So, once you are successful, scaling up your trading activity is okay.
Don’t double risk at once, scale up slowly. Also, you have to find out if the market you trade is as liquid as you need to make similar returns. Some markets only work with small order sizes, while others let you trade big positions if there is enough trading volume to do so.
Setting Realistic Timeline Expectations
For day traders, a realistic timeline expectation is that you’ll likely fail in your first funding challenges or funded accounts when day trading before experience and knowledge take over at some point after a couple of weeks or months and turn things in the right direction.
If you don’t make it to a funded account after 10 attempts, you’ll may never will, or fail once you are in the funded account. But that’s okay. Let’s say you invest $75 per account and lose $750 in this 10-try scenario. That’s much better than opening a day trading brokerage account to day trade stocks with an account minimum of $25,000, just to lose everything with trading on margin in penny stocks.
8. Business Aspects of Professional Day Trading
Legal Structures for Traders
Here, you have to get active yourself because the legal structures are different from country to country. Some countries do not even allow day trading, some have high capital requirements, and in other countries it is limited what type of assets you can day trade. So the best is if you use your search engine to find out or, even better, ask your financial advisor.
Tax Considerations and Deductions
Again, the personal situation can differ so much, that I could only refer to general aspects. Contact your tax specialist to find out how to structure your day trading business, what deductions you can make, and if there is even a way to optimize your tax payments with day trading specific asset classes.
Compliance and Regulatory Requirements
For compliance and regulatory requirements, you can use the website of the SEC, if you are in the US. In other countries, search for day trading compliance or day trading regulatory requirements using your search engine.
Record-Keeping for Tax Purposes
One thing is for sure in any country, if you have to pay taxes on your trading income, you better ensure correct record-keeping. Otherwise, you’ll get in trouble. That’s why it is so important to have good reports from the companies you work with. They should be tax office compliant and have the information you need.
Imagine this. The country you live in wants you to pay taxes on any profits you make but does not allow you to deduct trading losses equally if your reporting does not include specific information. That would be the worst case because, in the end, your overall profit might be $0, but this rule could force you to pay taxes on the profits while not being allowed to deduct the losses.
9. Common Pitfalls and How to Avoid Them
Overtrading and Revenge Trading
Back to the psychological aspects of trading, especially day trading. Previously I talked about the fear of missing out. That means, that if you feel FOMO, you might feel the need to get active now, and over and over again because of the fear that you miss out on this one single jackpot, homerun, or however you want to call it.
Overtrading is equal to losing control of your emotions. If you lost 10 times in one sequence, why do you think that the 11th time will work this day? In many cases, it’s better to stop once you recognize that the day is a bad one. You better start with a good mindset the next day.
And if you ever have the feeling that it’s time to show the market who the boss is, stop it! Stop any trading activity now because revenge trading never works. Sometimes, for sure, you’ll get lucky, but you can’t go into boss mode when trading. The market is right at any time and your task is to go with the waves in the market and not to beat the market.
Strategy Hopping and Shiny Object Syndrome
Strategy hopping is another mistake especially day trading beginners make. If a strategy does not work with 2 trades, you hop onto the next strategy in the hope that this one works. But guess what, that first strategy would have worked this time, while the strategy you know used also failed. You might know that from driving on the highway – no matter in what line you drive, it’s always the wrong one.
If you have a strategy (and you should have), trade that particular strategy once all entry signals are triggered. Only change it if there is a good reason to do so and if it is confirmed with testing that your new strategy is the way to go.
Neglecting Physical and Mental Health
Neglecting physical and mental health is a real issue. Maybe it is a slow process that trading burns you out. If you went to the gym twice a week before you started with day trading, but now you never go to the gym anymore, that’s a problem. If you were used to meditating before your day trading career started, and now you never meditate, that’s a problem too.
Making notes about it will help you find out quickly if you neglect your physical and mental health. For example, if a gym is an essential part of your life, make notes of it, and track how often you go to the gym. Measure your weight, make notes about how you feel, and make notes about what positive and negative experiences dominated your day. If you find out that day trading has only negative effects, stop day trading.
Isolation and Burnout
If you hung out with your friends every Friday night, but now you don’t meet them anymore because of the losses you made, the feelings you have, and the pressure you feel, then that’s a problem too. If you isolate yourself and sit in front of your computer 10, 12, or 16 hours per day, you’ll feel negative side effects soon. Make sure to meet friends, go out with your family, take care of your kids, and don’t overtake. Avoid isolation and burnout at any time. If day trading does not any good to you, stop it.
10. Conclusion: Your Path Forward
Creating Your Personal Roadmap
It is likely that you have heard about day trading more positively from others, but what you’ve read in this article is closer to the truth than you might think.
If you already gave up or never got down to this content section (which is okay after over 4,000 words and the time you invested), let’s start your day trader career and find out now if you can make a living of it.
Create your personal roadmap by writing down what you want to archive and how. If you want to day trade within a prop firm, that’s one of the best things you can do because of the low risk. Start with a small challenge to gain experience without risking your shirt.
Learn by practicing it. Avoid overly marketing-oriented day trading material.
Get yourself ready, decide what asset you want to trade (e.g. futures), have a trading strategy ready (e.g. buying the opening range breakout with 1 contract), enter the trade, set the stop loss, and keep going.
And before you start, make sure to understand your prop firm’s rules in detail. Otherwise, the challenge is over before you even have a chance to succeed.
Don’t be frustrated if your first challenge fails. Make notes of as many things as you can. Adopt, improve, trade. Try a couple of times, but once you get the feeling that things don’t work, stop it.
Some prop firms even let you do paper trade. While I’m not a fan of long-term paper trading, I like it for the aspect of getting used to the trading platform. Learn how to submit a buy and sell order, how to place a stop, how to use the charts, how to use trade automation, learn how to scale in and out of a trade, because this type of risk-free trading practice is really beneficial.
Measuring Progress Beyond Profits
The profits are what you have black on white in your trading platform. But you should go beyond that. Let’s say you started a prop firm challenge for $75, you made it to the funded account, and you have withdrawn your first $500 in profits. Now you look at your notes and realize that you have traded a total of 100 hours to achieve this. Was it still worth it, or not? How do others see your progress? Do you feel confident that you can scale up the business? Do you have to feel that you still have enough time to do other things? Be honest with yourself and answer the question if it was worth it and why.
Long-Term Career Development in Trading
A long-term career in trading is possible for anyone. You don’t have to go to Harvard and then start at Goldman Sachs as a trader to make money. You can also achieve it as a proprietary trader by day trading futures contracts, and other asset classes. But before a long-term career, there is the success needed in the short-run and then you have to improve and improve to become better and better. And once you have achieved real results with real money, it will be at least equal in worth compared to a great University degree. Maybe you feel even more free than any employed trader if you can trade from anywhere in the world. It’s time to find out.
May a positive mental attitude be with you at any time.
Published By Prop Firm App Team