In the past, most people simply didn’t have the ability to actively trade stocks. All transactions were handled by brokers, and the time needed to buy or sell stocks meant most small traders didn’t always earn the profits they expected.
That all changed with the rise in use of the internet and online trading houses. Now, virtually anyone can enter the fray and, potentially, earn much greater returns on trades. As a result, a new class of investors was created—day traders.
While the real start of day trading was way back in 1867 when the invention of the telegraph and the first ticker tape allowed remote investors to learn what was happening in the nation’s exchange floors. However, day trading as it’s known today started in the late 1990s when electronic trading platforms were introduced.
What Is Day Trading?
A basic definition of day trading is quite simple. In essence, day trading is the buying and selling of stocks or other financial instruments within the same trading day. The idea is to capture small gains many times without holding an instrument long enough to encounter any major risks.
That doesn’t mean day trading won’t result in losses, because it certainly can. There is always a risk involved, which is why traders need to limit their exposure on any single investment to ensure any losses experienced are kept to a minimum.
The most common day trading options include stocks, options, and currencies, although there are a few more obscure instruments experienced day traders may choose to invest in. Most investors choose one option to specialize in, but that does not suggest diversifying is discouraged. How and when investment options are selected will depend on the needs and preferences of individual investors.
Know the Risks
Far too many people have been lured into day trading without any real grasp of the risks involved. Yes, it’s quite possible to earn substantial amounts of money day trading, but it’s also possible to lose the investment if you’re not careful.
Before risking any money, it’s vitally important to understand how the market works. That’s not something you can learn in a day or two. It takes time to develop a grasp of the strategies needed to read the market and know when to invest and when to step back and wait for the next opportunity.
Most experts recommend using practice accounts to learn how the markets work. Once you’ve garnered an understanding of the markets and how they work, there is less chance of losing some, or all, of your investment.
How Much Money Does It Take To Get Started?
To become a day trader, you’ll need to establish and maintain a brokerage account with a significant balance. The current requirement for day trading stocks is to have a minimum balance of $25,000 in a brokerage account.
Currently, there is no minimum amount required to start investing in currency markets, but it’s hard to justify the risks and fees involved if you’re investing less than a couple of thousand dollars. Futures investors generally start with several thousand dollars. As a rule, keep at least $5,000 available if you’re planning on investing in futures.
Don’t forget the costs of hardware and software. As a rule, it pays to have a quality computer that fast and efficient. In addition, companies like TradeZero recommend using software that’s designed to help day traders choose investments and execute trades easily and quickly. There are numerous software packages available, so take the time to review the options and choose the one that best meets your investment objectives.
Day Trading Isn’t A Part-Time Job
Another issue that’s impacting the success day traders is the time commitment required. Simply put, day trading is not a part-time job. Far too many would-be investors assume they can make money day trading by simply checking in during their lunch hour or the hours they’re not working another job. That’s a recipe for failure.
Day traders who want to succeed must be willing to invest a great deal of time in their new-found career. Virtually no one makes money without spending time learning the best times to invest and how to read the indicators that determine where the market will go. Since different types of investments peak at different hours, learn when each type of trading occurs.
Avoid Becoming Emotionally Involved
That’s not easy to do when it’s your money on the line, but investment experts always note that it’s important to remain as detached as possible when making buying and selling decisions. Keeping a losing stock simply because it might go up later often leads to even more losses. As a famous country song suggests, know when to hold ‘em and know when to fold ‘em.
Identify the Times When Money Can Be Made
When the markets are stable and there is little going on, it’s hard to make money as a day trader. Profits are generated when there is a significant churn in the market. In other words, you’re more likely to make significant profits when there is a lot of political or economic turmoil.
Is Day Trading Right For You?
Once you’ve explored the pros and cons, it’s time to decide if day trading is right for you. Not everyone is cut out to be a day trader, so it’s important to look carefully at your goals and determine if you’re willing to invest the time, capital, and energy necessary to be successful.
It’s important to understand that a significant percentage of people who try day trading fail. It’s a tough business and requires a solid commitment if you’re going to generate a profit. However, those who decide to move forward and learn what’s necessary to succeed can earn a substantial income.
If you’re still unsure how to proceed, don’t make the decision yet. Take the time to explore all your options, learn the strategies necessary to do well, and choose a brokerage firm that’s known to support day traders in their quest to succeed.