In its purest form, day trading is the act of buying or selling stocks with the intention of finishing the day in a cash position. In other words, day traders take positions on for a very short period of time, it can be for a split second, a couple minutes, or a few hours, but by the time closing bell hits they have cleared all positions and are sitting on cash. In this article we will explore exactly how to become a day trader.
Day traders need volatility to thrive, they are interested in price action and volume, and not overly concerned about long term fundamentals of the company they are trading. In fact, half the time they may know very little about the company and what it does.
Some of the top day traders can make five to six figures in a day. However, like any worthwhile profession it’s not easy. Most people who attempt day trading fail.
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. In order 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 back you. In other words, the firm gives you their capital and you are given a profit split arrangement. These firms typically team you up with a senior trader who you learn under.
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 are grouped 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 different exchange routes, better trading platforms and better execution than someone who is trading from home.
Now, if the idea of sharing your profits with someone else doesn’t sound appealing you can also open up 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 Involved In Becoming A Day Trader
The costs involved in becoming a professional day trader are not cheap. They include subscribing to news services, chat rooms, paying for data feeds from exchanges, a trading platform, and other forms of infrastructure. These expenses can exceed a couple thousand dollars a month.
On the other hand, the retail day trader may have lower fees. But they have a technological disadvantage. They maybe getting their news slower, or have a slower trading platform making execution more difficult.
One thing retail day traders do to try overcome these disadvantages is join a trader chat room. A good chat room will be linked up to some of the news services that the pros use. In addition it gives traders an opportunity to communicate and learn from more experienced traders.
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 faster the better, when stocks are moving fast you can’t afford to have any lag. You’ll also want to invest in a couple monitors as well, so you don’t miss anything.
Can You Be A Day Trader From Home?
The short answer is yes. And while its true, you just need an online broker, a laptop and internet connection, to be successful you’ll need to be understand that there is a cost of 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 what your trading style is you’ll probably need to subscribe to some services. Such services might include: investment newsletters, alert services, chat rooms, news and research, and a trading platform (not all trading platforms are free).
All these expenses are 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 greater profits.
The beauty behind becoming a day trader is that you’re essentially your own boss. You set your schedule and have the potential to earn without a cap. Its these benefits that have people interested in becoming a day trader. However, if you don’t have discipline and a solid strategy, then you are most likely to fail.