In its purest form, day trading is the act of buying and selling stocks for a short-term profit. At the end of each trading day, closes out all their positions and is left with just a cash balance. Day traders put on positions that last seconds, minutes, or a few hours. It all depends on their trading strategy and profit goals.
However, day traders need volatility to thrive. They are interested in price action and volume, and not overly concerned about long-term fundamentals. Many day traders ignore the fundamentals all together and only care about price action.
Some of the top day traders can make five to six figures in a day. However, like any worthwhile profession, it’s not easy. A good mentor can help improve your odds of success.
How To Become A Day Trader
There are mainly two routes you can take to become a day trader. The first, submitting your application to a proprietary trading firm and getting accepted.
Some prop firms make traders put money up and then leverage their capital. For example, you might put up $10K up, and they’ll give you $100k in buying power to trade. These type of prop firms are also known as broker/dealers. To trade for them, you must pass a securities license, usually the series 7.
The second type of prop firm operates more like a hedge fund. You don’t have to put money up, and they fully fund you while taking all the risk. In other words, the firm pays a salary, and you also get a percentage of the profits you make the firm.
Why would anyone do this?
Well, if you don’t have a lot of capital, joining a prop firm can give you access to funds that you wouldn’t be able to get elsewhere. You team up with like-minded individuals in an environment that allows for faster growth. Depending on which firm you join, you may or may not get a salary, so your pay is directly linked to performance.
Typically, professional day traders have access to all the different exchange routes, and stock locates for shorting, faster trading platforms and better execution services.
Some professional traders pay several thousand dollars a month to cover their infrastructure.
However, if the idea of sharing your profits with someone else doesn’t sound appealing, you can also open a retail trading account and do it on your own.
No license is required to become a day trader in this case. However, you must follow the Pattern Day Trader Rule. The rule states that your account must be above $25k if you execute four or more day trades in five business days.
Costs of Being A Day Trader
The costs involved in becoming a professional day trader are high. They include subscriptions to news service providers, chat rooms, stock locate fees, data feeds, exchange routes, research, high-speed internet, and a trading platform. These expenses can exceed several thousand dollars a month.
On the other hand, the retail day trader rarely invests that much into infrastructure. However, they have a technological disadvantage. For example, CNBC and other news outlets must verify news stories first. A trader with a Bloomberg terminal is going react faster to news headlines.
Some chat rooms subscribe to news services and keep their members informed. Also, it gives people a chance to communicate and learn from more experienced traders.
For the most part, professional traders trade in groups. Team trading allows for more eyes to be on the market and the chance to find more opportunities.
If you decide to go retail, you’ll still need a good PC that has a fast processor, graphics card, and memory. Don’t be cheap with the internet either, the quicker, the better, when stocks are moving fast; you can’t afford to have any lag. You’ll also want to invest in a couple of monitors as well, so you don’t miss anything.
Can You Be A Day Trader From Home?
The short answer is yes. But you need more than an online broker, a laptop and internet connection to be successful.
Remember, there is a cost to doing business.
Certain things you shouldn’t skimp out on like: A computer or laptop that has a fast processor and graphics card, fast internet and a backup internet connection.
Now, depending on your trading style, you’ll probably need to subscribe to some services. Such services might include investment newsletters, trade alert services, stock scanners, chat rooms, news and research, and a trading platform (not all trading platforms are free).
All these expenses are the costs of doing business.
Do you need all of them?
It depends on what your trading style is. But the benefit of adding these features is that you’ll be able to spot opportunities faster, which potentially could lead to higher profits.
The beauty behind becoming a day trader is that you’re essentially your boss. You set your schedule and have the potential to earn with no ceiling in sight. It’s these benefits that have people interested in becoming a day trader.