Investing > How to Day Trade

How to Day Trade

Opportunity is here — knowing how to day trade will help you seize it.

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Reviewed by
Updated April 25, 2021

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When the economy isn’t working well enough for you to bring home the dough, you have to find other means – many Americans are trying to solve that problem by day trading. Just in the US, millions have joined the ranks of day traders this year and are working to power through the COVID-19 fallout.

Investing platforms are having a field day with all their new customers, but unfortunately, today’s unstable market hasn’t been kind to these new entries. Inexperienced traders, mostly millennials, are coming in droves and often losing money through very risky trades that legitimate investors would never even consider.

Today’s market isn’t easy prey – and that’s why you should know exactly what you’re getting into and have a suitable strategy prepared before jumping in. Fortunately, opportunities are aplenty if you take the right steps – and this article is here to help you with just that.

To be a successful day trader, you need the right broker, a suitable strategy, and most of all, to know exactly what to avoid. Here, we will take you through the entire process step by step and help you dodge all the troubles that cost the average day trader heaps of money. Let’s get right to it, shall we?

What you’ll learn
  • What is Day Trading?
  • Best Securities for Day Trading
  • How to Start Day Trading
  • Choosing the Right Broker
  • Cash vs. Margin Account
  • Day Trading Strategies
  • Tips for Day Traders
  • How COVID-19 Has Affected Day Trading

What is Day Trading? 🤔

Unlike passive investing where you buy a stock and wait for months, or even years, before it grows in value, day trading is a day job. Day traders aim to buy assets and sell them during one trading day, leaving nothing to sit on their portfolios overnight.

Unless you have a very large trading capital, individual daily trades won’t make you thousands. But as your cash pile grows, you can make more substantial profits as time goes on – this makes day trading a very lucrative career for those who want to tackle all its challenges.

The Best Securities for Day Trading 📊

Every day trader’s favorite target is stocks, especially those that are at least a little bit volatile. If you can buy a stock in the morning while it’s cheap and sell it in the afternoon when the price jumps, there’s real money-making potential there. 

Essentially, day traders don’t usually look for risky trades (nor very expensive stocks). Sure, cheap new companies with huge potential might sound enticing – but day trading is about risk management and consistency. Here’s what a stock that’s good for day trading should have:

  • Volume – If a company has many stocks, that means it has good liquidity – e.g. it’s easy to find buying and selling opportunities. Also, if stocks are numerous, it means that individual shares are cheap and that you can invest as much money as you want in them. For example, Warren Buffet’s company Berkshire Hathaway Inc. is an immensely valuable company with relatively few shares – a single stock costs around $327,000 which is completely unviable for day trading.
  • Volatility (in reasonable amounts) – When a stock is volatile, it means that its price jumps up and down a lot. If you want to buy low and sell high, you need a volatile stock. However, if an asset is too volatile, it is very unpredictable and thus risky – something like this might look alluring but prudent traders usually stay away from stocks they cannot predict.
  • Familiarity – To make a good trade, you need to analyze the company you’re buying. Ideally, you should stick to the industry you like and understand – this will give you a better chance of making good predictions. This is not all there is to researching stocks, though – knowing how to analyze stocks on a daily level requires a bit of technical know-how too.
  • Popularity or the “wow” factor – If a company is on the news and social media all the time, people are going to know about it and invest in it. This will give a company the attention it needs to grow on the stock market and there will always be willing buyers and sellers. For example, Tesla, Elon Musk’s electric car empire, is super-popular (much due to its prodigal founder’s interesting persona) – this has made it a fast-growing stock that’s quite popular among day traders.

Other Investment Types 💰

Stocks aren’t the only fish in the huge financial pond – they’re just very popular. Day traders also trade in futures, bonds, commodities, and options, most of which are often more complex than stocks. 

Another very popular route is currencies which you can trade using a forex brokerage – but trading forex is in many ways different to investing in the stock market. However, if you find currency trading enticing, it’s a good idea to check out the top forex brokers so you can trade safely and with the lowest commissions.

How to Start Day Trading 📈 

Staring a day trading career has never been easier but there are still some legal requirements you need to take care of first. To get started, you must have at least $25,000 on your trading account – at least in the US. Once that is taken care of, you can set up a trading platform quickly – here is how:

1. Choose a Broker ✅

First, you need a broker – a medium through which you can buy and sell on the stock market directly, but not just any broker. Day traders need the following: no commissions on trades, a user-friendly platform, good research, and a huge selection of investments.

These features are necessary if you want to make your trading as profitable as possible, which is why the best traders only use the top brokers for day trading.

2. Set Up a Brokerage Account ✅ 

Once you have found your perfect broker, it’s time to set up an account. In most cases, this process is fully-digital and shouldn’t take more than a day after which you can get to work. All that brokerages require is your personal info – if you’re a citizen or a green card holder, signing up shouldn’t be a problem.

Fees
Commissions

$0

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Account minimum

$500

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General
Best for

Beginners and mutual fund investors

DIY stock trading

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Low fees

Pioneer of commission-free stock trading

Promotion

Free stock

Rating
Fees
Commissions

$0

$0

Account minimum

$0

$0

Minimum initial deposit

$0

TS Select: $2,000

TS GO: $0

General
Best for

DIY stock trading

Active options and penny stock trading

Highlight

Pioneer of commission-free stock trading

Powerful tools for professionals

Promotion

Free stock

Rating
Fees

Commissions

$0

$0

$0

Account minimum

$500

$0

$0

Minimum initial deposit

$0

$0

TS Select: $2,000

TS GO: $0

General

Best for

Beginners and mutual fund investors

DIY stock trading

Active options and penny stock trading

Highlight

Low fees

Pioneer of commission-free stock trading

Powerful tools for professionals

Promotion

Free stock

3. Make a Deposit ✅

You need money to trade with and when it comes to day trading, this should be more than $25,000. This amount is the minimum legal requirement for day trading but you should aim to deposit $30,000 if possible just in case you have a rough period or make a few bad trades.

4. Pick What You Want to Invest in ✅

The type of investments you want to focus on will determine your trading career in many ways. Whether it’s stocks, options, futures, or something else, you need specific knowledge to be a good trader.

5. Learn the Craft ✅

If you’re just starting out, it’s probably a good idea to learn how to buy/sell stocks and research your investments. Jumping into the market prepared is a must – luckily, most brokers offer free educational resources for new investors. If you don’t have previous trading experience, it’s recommended you start with one of the top brokers for beginners (most of which are great for day trading, by the way).

6. Start Trading ✅

Completing all the aforementioned steps will lay the groundwork for your day trading – after that has been taken care of, it’s time to get started. Do your research, buy your first asset, hold it so it gains value, and sell. If you can do this, just repeat ad infinitum and you’ll be making serious money in no time. 

Or, if you’re a normal human, sometimes you’ll fail – if an occasional failure doesn’t stop you, nothing will. A lot of practice and experience is needed if you want to be a great day trader so don’t let up even if you’re having a bad trading week.

What’s the Best Broker for Day Trading? 🛠️

Since day traders make multiple daily trades they need a broker that doesn’t charge commissions – this means a brokerage that will let you trade without taking a piece of the pie for themselves. If you trade with a broker that charges fixed commissions on every single trade, day trading would be too expensive, and thus, unprofitable – this is why using zero-commission brokers is crucial.

If the price is right, then all you need is a good trading toolkit. This should include an easy-to-use platform with great research and an abundance of investment offerings. For example, more casual day traders who deal in stocks and options like Robinhood for its effortless mobile app, while research-savvy investors favor feature-rich services like Interactive Brokers that have all the research and investment options you can think of.

💡 Interested in options? Learn about day trading options.

Cash vs. Margin Account 💵

Using a cash account means just that – you use your cash to buy assets. This is very straightforward but has its limitations – if you don’t have a large capital, your profits will be limited.

That’s what margin accounts are for – with this account type you can borrow money from the broker and use it to trade. The amount you can borrow depends on your current account balance, as well as the brokerage you’re investing through. 

Logically, investing like this will give you larger profits if you’re successful but be very careful. Margin trading is risky because you have to pay back all the money you borrowed at the end of your trade. 

This means that a very bad leveraged trade can decimate your balance if you don’t play it safe. Nonetheless, margin investing is more rewarding if successful so here is how the two account types compare.

You can only invest the money available on your accountAccounts under $25,000 have 2X buying power
Placing trades with insufficient funds can incur fees and get your account suspendedAccounts over $25,000 have 4X buying power
Borrowing make small, safe trades much more viable
Making a very bad trade can destroy your balance - margin investing is not recommended for risky trades

Day Trading Strategies that Work ✔️

Day trading without a strategy is like shooting arrows with a blindfold on – you might hit the target, but it’s still not a good idea. That’s why you need a good trading tactic that has worked in the past and is still doing a good job – here are a few suggestions.

Range Trading 🎯

This is one of the safer strategies that’s easier to master and is applicable to an abundance of stocks. If the price of an asset is stable and isn’t trending upwards or downwards, you just have to determine the price range, buy low, and sell high – here’s how it works.

If you look at a price chart, you’ll see it’s moving up and down all the time. To define its range, you need to find all the “highs” and “lows” – these are the points where a price reaches its peak and bottom. 

Range trading chart
Support and resistance line on a price chart. Image by TradingView.

Draw a line through all the highs and you will get the so-called “resistance line” – when you do that with the lows, you’ll get the “support line”. The price range is between these two lines, and everything that goes above or below it is an anomaly and will fall back in line soon.

There are two ways to use this knowledge. The first is to buy the stock when the price is near the support line and sell it when it’s near the resistance line. The other way is to wait until a price goes below the support line and only buy then – this will give you the cheapest-possible price but is relatively rare.

Pros

  • Works for non-volatile assets
  • Good price are not trending (relative stagnation)
  • Safe, newbie-friendly tactic that doesn’t require many research tools

Cons

  • Very time-consuming
  • Not the most profitable strategy

Spread Trading 🍞

A spread is the difference between the bid price and the ask price – this means, the highest buying price and the lowest selling price. Spread traders want to catch the moment when the lowest selling price dips and buy as many stocks as they can so they can sell them later at the usual ask price or higher. 

This is a high-speed strategy that requires quick and opportunistic behavior – as soon as the price goes below the usual price, buy it. Spread trading won’t give you huge returns but is very safe if you follow the rules.

Also, since the dips in price you’re looking for are anomalies, they are not always easy to find – this is a strategy that’s only applicable in short, spread-out time windows.

Pros

  • Safe, beginner-friendly strategy
  • Leaves a large margin for error
  • Not very time consuming

Cons

  • Low returns
  • Trading opportunities are not the most common

Fading ✔️

This is another strategy where you have to be very quick and where trading opportunities are far in between. Fading depends on big and sudden jumps and drops in prices like the one you can see in the chart below – that’s why it’s a tactic with few opportunities but high rewards if you manage to buy at the right moment.

Example of a fade move in a chart
Example of a fade move in forex. Image by TradingView.

Essentially, if a price jumps very suddenly, that means it will go down very soon – this is a great shorting opportunity. On the other hand, if the price drops suddenly, traders are going to start buying – if you are among the first to buy, you can expect to sell at a higher price in hours or even minutes.

Pros

  • Potentially very high-reward strategy
  • Low risk

Cons

  • Very rare trading opportunities

Trend Trading 📉

Trend trading is similar to range trading but it works for assets that are trending upwards or downwards. To identify a trend, you need to look at a price chart, find all the low and high points, and mark them. 

Then you should draw a line through the highs and a line through the lows. However, this only works if the highs and lows are moving in the same direction, as shown on the chart below. 

Uptrend on a chart
An uptrend indicated by higher highs and higher lows. Image by TradingView.

If the price is consistently growing over a long period, this gives you a reason to believe it will grow today too – and that’s how you can benefit. If you’re looking at an upward trend, buy your stocks when they are below the previous high and sell when the price surpasses the previous high.

When it comes to downward trends, do the same thing, but short instead of buying and holding.

Pros

  • Accessible for new trades
  • Good risk-reward ratio
  • Endless trading opportunities

Cons

  • Slightly riskier than range trading
  • Requires thorough, time-consuming research


Trading the News 📰

Important events and announcements influence the markets like nothing else. As a rule of thumb, very positive news about a company will be followed by an increase in the price of its stocks and negative announcements will do the opposite.

A contemporary example of this is Tesla’s battery day in 2020. It wasn’t what everyone expected – the new ground-breaking battery innovation that will make electric cars much cheaper was announced for 2022. 

Because of this delay, many traders decided to sell their stocks and TSLA fell by 6% the following day. Some traders used the “buy the rumor, sell the news” strategy – they bought the stock when battery day was announced, and sold it as soon as Elon Musk broke the news. This allowed traders to profit from the expectations that raised the stock price before battery day.

News about global events can also impact entire industries. The COVID-19 lockdown announcement earlier this year told traders that oil production and tourism were going to take a hit – so the price went down. 

At around the same time, unprecedented floods and other natural disasters in China have devastated local food production, and the demand has never been higher because of an impending famine. Because of this news, rice exporters from the neighbouring countries have seen their profits and stock prices increase. 

Events like wars, big trade deals, and Brexit all imply that something will change in the near future – that’s why traders react on the news and buy stocks they think will grow while they’re still cheap or sell before it’s too late. Even though these reports imply something might happen in the future, traders react quickly and so you can benefit from good and bad tidings on a daily level.

Another form of news that traders find important is when household investors like Warren Buffet say something is going to happen. More often than not, when the big daddy of investing himself buys something, other traders follow suit, expecting to profit from Buffet’s wisdom.

All in all, news can tell you what’s happening with a company or to the economy at large. If analyzed properly, this information will tell you how other traders in the market will react, and you can use this to make a quick profit.

Pros

  • Applies to all sectors of the economy
  • Highest potential reward out of all strategies
  • A good additional tactic for every trader

Cons

  • Depends on major external events
  • Not suitable as a main trading strategy


Momentum Trading 🏃‍♀️

At first glance, this will seem more like a panicky reaction to the market than an intelligent strategy, but there is merit to using price momentums to your advantage. Essentially, when a price is rising, traders take short-term positions and sell their assets as soon as the price goes down even slightly. 

This strategy requires great timing above all else – pushing the “sell” button at the right moment is key. This might sound simple but you have to take steps to reduce risks for your trades to be as successful as possible. 

The most important element is trading assets that have more than 5 million shares and high liquidity – these can be sold off very quickly. Also, stay away from ETFs and similar complex financial instruments as they do not accurately track the price of the underlying assets.

Pros

  • Works for stable and trending prices
  • Good risk-reward ratio

Cons

  • Requires perfect timing
  • Trading opportunities aren’t as common as for other strategies
  • Can generate fake signals

6 Tips for Day Traders ⚠️

Everything you read above should be a good foundation for you to start trading successfully. However, cake is usually better with icing and cream on top, so here are a few tips that will help you invest your money more safely and fruitfully.

  1. Don’t quit your day job – If possible, don’t cut away from your main source of income before you’re 100% sure you can trade for a living. Day trading isn’t easy, and you need to test the waters before fully committing – only around 10% of day traders have profitable careers.
  2. Set money aside – Pro traders only use 1% to 2% of their portfolios for daily trades. This will mitigate losses but also leave you with the opportunity to increase your portfolio by 0.5% – 1.5% each day. Remember – $25,000 is required for day trading and you should have more than this prepared to get started.
  3. Start small – High risks can yield high rewards, but beginners should make small trades before daring to make big investments. Fractional shares are the best way to make small moves – avoid penny stocks and other unpredictable assets.
  4. Use limit orders – You can set your brokerage platform to sell an asset automatically when the price reaches a certain point. Use limit orders to mitigate your losses and to keep on top of fast-moving prices.
  5. Be realistic and level-headed – Most traders are only successful with 50% of their trades – but even if that’s your case, you should learn from your mistakes and move on. More importantly, always be rational – the market might turn on you from time to time, but panicking will only cost you money.
  6. Don’t wait too long – Day traders usually exit all their positions within the trading day. This means they never buy and only sell in the evening – keep this in mind and make sure you are not left holding any stocks late in the trading day.

How COVID-19 Has Affected Day Trading 🦠

As you might know already, the COVID-19 fallout has caused a rollercoaster in the financial world. What we mean by “rollercoaster” is a volatile market – a high-risk, high-reward environment. 

This, paired with record-high unemployment we saw earlier this year has driven millions of Americans to start day trading and the market has grown as a consequence. This is to be expected – when a million new traders enter the game, they bring a lot of capital with them.

However, most aspiring new investors aren’t very experienced yet and some experts believe their efforts seem more like gambling than careful risk management. This is because the pandemic is not a good time to be blindly confident, rather, you should be careful.

The markets right now might be full of opportunity but they are also very risky. That’s why it is often recommended to avoid margin investing (that’s when you use debt to trade) and, even more so, to keep away from penny stocks.

Penny stocks are super cheap and thus make for alluring investments – if you buy something very cheap, you’ll profit immensely once it grows in value. However, these stocks are cheap for a reason and carry many risks – this is due to market manipulations and the fact that it’s very hard to find buyers for penny stocks quickly.

Trading low-risk assets might not get your rich overnight but it pays a lot better than blowing all your money on a failing stock. That’s why it’s recommended for day traders to keep it on the safe side while the market gets back to its former glory in terms of predictability.

Day Trading FAQs

  • Why Do I Need $25,000 to Day Trade?

    This is to safeguard the market against inexperienced traders. It is illegal to make more than 3 trades per day without at least $25,000 on your balance – this is because lower capital limits would allow numerous reckless traders to enter the stock market and disrupt prices through risky trades.

  • How Much Do Day Traders Make?

    Pro traders aim to increase their portfolios by 0.5% each day but do so by only investing 1% of the entire portfolio. For example, if your portfolio is $60,000, you should only invest $600 with the goal of making a $300 profit. This way, you are only at a 1% loss if all of your daily trades fail completely and you can see over 15% in monthly returns in an ideal scenario.

  • Can You Day Trade on Robinhood Without $25,000?

    No – like all US brokers, Robinhood requires a $25,000 minimum account balance from day traders. If your balance is below this number, you won’t be permitted to make more than 3 trades per day.

  • What Percentage of Day Traders Make It?

    Roughly 10% – this is because most traders take on high risks and lack the knowledge and discipline to make a substantial profit through day trading. However, since the stock market has seen a huge influx of inexperienced traders, this number is estimated to be below 10%.

All reviews, research, news and assessments of any kind on The Tokenist are compiled using a strict editorial review process by our editorial team. Neither our writers nor our editors receive direct compensation of any kind to publish information on tokenist.com. Our company, Tokenist Media LLC, is community supported and may receive a small commission when you purchase products or services through links on our website. Click here for a full list of our partners and an in-depth explanation on how we get paid.

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