When you’re just getting started with day trading, it’s important to do research and assess risk levels before you start making trades with your own money. This guide will give you some important tips and tricks to help you start your day trading journey.
What Is Day Trading?
Day trading is the buying and selling of a security during the same trading day. Day trading is common with stocks and foreign exchange trading. Day traders are typically focused on short-term positions and pay attention to market-moving news that causes volatility to make their profit.
Day Trading Requirements
In 2001, the Financial Industry Regulatory Authority’s (FINRA) new day trading rules went into effect. This rule affects pattern day traders, or traders who execute trades four or more times and day trades count toward six percent of their total trading over the course of five days.
Pattern day traders must have a minimum equity of $25,000 or more, and this must be in your brokerage account before you day trade. This equity can be cash and eligible securities. While all pattern day traders must have $25,000 in equity in their account, your broker may have a higher minimum.
If you meet FINRA’s definition of a pattern day trader, your trading account will be flagged and must meet the requirements to start day trading again.
Why is $25,000 the minimum equity for day trading?
Prior to 2001, traders were required to have $2,000, which was established in 1974. Since that rule went into place, technology has boomed and made day trading accessible to more people. Also, day traders do not have any collateral that could be sold to meet margin requirements, since traders are not long or short. Not only is the day trader rule to protect brokers, but it’s also to help protect the trader.
Learn more about the pattern day trader rule with our guide.
What to Research Before Day Trading
Don’t go into day trading blind—make sure to do the proper research when trading the markets. Here are a few things you’ll want to research before you start your journey.
The Best Times to Day Trade
You can day trade at any time of the day, but there are a few times that day traders find the best time to complete trades.
Trading during the first few hours after the opening bell is the most common time to trade, especially because there are opening gaps and overnight volatility to take advantage of. Other traders like to trade the hour before closing bell. This isn’t to say that there aren’t trading opportunities during the day—you never know when volatility might strike!
Learn Day Trading Strategies
There are so many types of day trading strategies out there—and before you begin day trading, you need to find one that works for you. Many day traders find one strategy that works for them, and repeat that strategy to make their wins.
The most important thing is once you find a strategy you like, practice! Practice with paper trading or trading simulators to really perfect the strategy before trading with your own money.
Learn Risk Management
Before you begin day trading, you’ll want to learn all about risk management so you can protect yourself from massive losses.
There are two types of loss to consider: trade loss and daily loss. Trade loss is what you lose on a single trade. Daily loss is what you lose for your trading day.
Many day trading professionals recommend not risking more than 1% of your total capital on a single trade. When you place your trade, you can place a stop-loss that will exit you out of your trade when things start to take a turn.
Professional day traders tend to recommend not risking more than 3% of your total capital in a single day. If you’re risking 1% on your trades, and you lose out on three trades, that means you should stop trading for the day and start fresh the next day.
If you’ve been trading for a while and have been consistently profitable, another strategy is to set your loss limit to your average profitable day. This strategy relies on the idea that if you lose your average winning day, you could make it up in the future with your typical trading
Practice Paper Trading
Trading, especially day trading, is risky. If you want to day trade, but are worried about potential losses, a good place to start is by paper trading. Paper trading is an easy way to practice trading, without actually risking your money.
Once you feel more comfortable, you can move on to day trading with your own money. One note of caution, though, is sometimes paper trading can cause you to take on trades you may not have done with your own money. Check out Benzinga’s guide to find a paper trading account for you.
Resources Needed for Day Trading
Make sure you have all the information and proper resources necessary to set yourself up for success when you begin day trading.
Choose a Broker
To begin day trading, you’ll need to pick a broker to day trade with. Which broker you choose will depend on your strategy and goals. Check out Benzinga’s guide to the best stock brokers for beginners.
Once you choose your broker, you’ll need to make a deposit for your capital. Remember, the pattern day trader rule requires $25,000 in equity if you meet the pattern day trader criteria. If you’re starting out small, you’ll want to be mindful of your number of day trades if you don’t want to be flagged.
Another important resource is your setup. While not required, it’s good to have more than one monitor to have room for looking at multiple websites and tools.
You’ll also want to make sure your computer is up-to-date and works fast. Not only should your computer be fast, but you should have fast, reliable wifi. A slow computer or internet connection can hurt your trades.
The markets are volatile and can react to big news. It’s helpful to have a streaming software to help you keep track of market-moving news. A good news service will offer fast news, real-time alerts, and customization alerts.
One example of a stock market news service is Benzinga Pro. News is the core of Benzinga Pro (we even have our very own newsdesk) and comes with a variety of tools, including Screener, Squawk, Movers, Signals, and so much more. Benzinga Pro’s newsfeed offers quick market news and is fully customizable so you can tailor the feed to your trading strategy.
It’s important to make sure to do the proper research and practice before you begin day trading. Learning the requirements, strategy, and risk management can help you find success while day trading.
Disclaimer: Benzinga is a news organization and does not provide financial advice and does not issue stock recommendations or offers to buy stock or sell any security.
Benzinga Pro is for informational purposes and should not be viewed as recommendations. Benzinga Pro will never tell you whether to buy or sell a stock. It will only inform your trading decisions. You can find our full disclaimer located here.