You may have heard of day trading, but you’re not exactly sure what it entails or how to go about investing in it. You’re definitely not alone; day trading can seem like an intimidating topic at first, but once you break it down into bite-sized pieces, it’s not as scary as it seems! This guide will take you through the ins and outs of day trading so that you can start reaping the benefits of this lucrative investment strategy.
What makes someone good at day trading?
To succeed at day trading, you must have a good grasp of how markets work and how stocks, bonds, options and futures fluctuate. You also need an ability to make quick decisions based on limited information. This can take years to master. For example, some people might naturally understand how interest rates affect bond prices or which banks have the most liquidity available for repurchase agreements. Others might not get it right away and find themselves losing money before they figure out what’s going on. Understand your strengths and weaknesses as well as your goals before starting a career in day trading. Don’t let anyone tell you that day trading is easy; that’s just not true.
How much time do you need to start investing?
If you’re starting a day trading account with relatively little capital, don’t get too aggressive. Being unduly aggressive can easily sabotage your first few attempts at day trading and can be frustrating as well. Instead, start with just one or two trades per day and gradually build up from there. Once you’ve got a handle on when you’ll be putting out orders and why, take advantage of any morning news announcements that drive stocks up or down to see if you can cash in on them over time. The best way to invest in day trading is usually through short-term strategies, but every investor has his own plan for how he wants to approach investing. Just make sure it’s not hindering your progress!
Are you ready to spend your days and nights studying the markets?
Before you start day trading, understand that most people never make a profit. That’s because they don’t treat it like a business. To be successful as a day trader, you need a lot of resources at your disposal–in other words, money. Make sure you have enough cash on hand before diving into stock market speculation. Also understand that unlike buying and selling stocks when companies go public (IPOs), day trading is totally different than value investing or investment banking strategies. As such, there are no set answers to your questions about how to invest in day trading or what methods work best. The one rule of thumb is not to need much sleep at night!
Do you have enough cash flow coming in?
Before you get started investing in day trading, you need to know that you have enough cash flow coming in so that you can cover your living expenses and still be able to pay for any unexpected financial obligations. If there are problems with cash flow—say, if your income is irregular or fluctuates wildly—you’ll have a hard time maintaining your investment account. There is always a chance you will come out ahead on trade, but only if there is money left over from paying your bills. So do yourself (and your portfolio) a favor and make sure that cash flow is on track before investing any money into day trading.
Next, make sure you don’t take on too much risk. Day trading is highly risky and it’s possible that you could lose money no matter how good your strategy. Remember that day trading requires a good deal of knowledge and skill, and as with any investment, there is a chance you will come out ahead—and there is also a chance you will lose money. To ensure your investments are safe, only put as much into day trading as you can afford to lose if things go wrong. If that number seems daunting or unaffordable right now, look for ways to cut back on spending until you can afford it; the key here is not trying to get rich overnight but rather taking reasonable steps towards financial independence.
Do you have enough savings to risk it all?
Investing and trading successfully is not as easy as some people make it out to be. While it can be fun and exciting, you should never invest more than you can afford to lose. The best way to invest in day trading is by having a healthy balance of both risk and reward; don’t forget, though, that risk always comes before reward. If you want to start making money day trading with minimum investment, it’s best if you have some savings or income outside of your job.
What’s your risk tolerance?
A lot of people start investing because they feel like they should. But nobody likes losing money, so don’t risk what you’re not prepared to lose. The best way to invest in day trading is by starting out small and slowly building up your wealth with time. There’s a common saying that day trading is for professional investors — that may be true, but I think everyone can get something out of investing. If you have an excess of cash and you’ve talked with your spouse about it, then I’d say yes, try your hand at day trading! Keep all of your eggs (your investment) in one basket, though; by day trading exclusively on MtGox, you leave yourself vulnerable if something bad happens there (which did recently).
Can you afford a loss?
It’s important to consider your risk tolerance before deciding how much of your assets you want invested in day trading. For instance, if you have a mortgage, children and a family dog, there’s no sense risking your assets on risky trades. It doesn’t matter how often you check stocks or how good of a trader you are—you don’t want that decision making clouded by things like retirement accounts or family obligations. So consider what you can afford to lose when determining whether or not day trading is right for you.
Once you’ve determined how much of your assets you want to invest in day trading, decide what structure makes sense for your investments. For example, if you want to invest $50,000 in day trading but can only afford a 10 percent loss ($5,000), investing $25,000 is a good idea. That way if things go south, you’ll still have $25,000 left over to cover the potential loss on your initial investment. You could also decide that it makes more sense for you to just not risk any of your assets on day trading until you can build up a bigger nest egg or meet other goals first. Whatever makes sense for your situation is fine as long as it doesn’t leave too much money on the table.
Is this something you can do forever? Or just till retirement?
Everyone has a different risk tolerance, a different skill set, and lives at a different stage of life. If you’re very young, it may be hard to retire; if you’re older than 60, your retirement savings probably aren’t growing much so why not trade? The best way to invest in day trading is on an exchange with daily liquidity (though fees will likely be higher), where there are multiple market-makers and fewer order types that can trick you.
If this doesn’t work out, will you be ok?
If you’re getting into day trading because you want to make a quick buck, or turn $500 into $5000 overnight, stop right now. And if you’ve already started on that path, it’s never too late to change your mind. If you think trading is your best way to invest in day trading and be ok, only do it with money that can’t possibly hurt you. That way if it doesn’t work out, there won’t be consequences like losing your rent money. A much better idea is avoiding risk altogether by learning from those who have been there and done that. In fact, one of these experienced individuals made himself available for a question-and-answer style interview about day trading for our very own True Wealth readers: Did he predict Bitcoin?
There are many ways of making money day trading, but we highly recommend focusing on a few key strategies. Becoming knowledgeable and experienced with a select few is essential for success. Don’t try too many new strategies at once; you will be overwhelmed if you do. Instead, take your time and learn about one strategy and master it before trying something else. Once you have mastered your first strategy, then experiment with a second and so on until you have several strategies down cold.