How to Start Day Trading In 3 Steps

David Frost // Blog, How To Invest


February 17  

Day trading offers a fun, flexible, and exciting adventure for anyone. But not everyone knows exactly where to start. Let’s explore how to start day trading.

Ask your friends to imagine what a day trading looks like. Most will describe someone locked in front of multiple screens with charts flashing. CNBC plays in the background, while a ticker scrolls the wall.

Places like that do exist. However, people used to day trade long before charting software existed. Today you can start day trading with just a laptop. Knowing where to start can be a challenge. Fortunately, we’ve boiled it down into three key steps.

Open a Brokerage Account

Unless you’ve passed your Series 7, you cannot legally trade stocks. Buying and selling stocks requires a broker’s license. With the explosion of online connectivity, you can find brokers easily. Yes, people do still call in trades to their broker. This isn’t practical if you want to day trade.

When you look for a broker to day trade with you need to consider several things:

  • Fees: How much does the broker charge for trades? Most will offer a flat rate for unlimited shares, or some per share cost. You’ll find flat rates from $5.00 on the low end to $10.00 on the high end. Per-share rates typically range from $0.005 to $0.01 per share.
  • Platform: What type of platform does the broker offer? You need to find a platform that works with your trading style. It won’t do you much good to try to place complex orders on old technology.
  • Customer Service: Trade long enough, and you will encounter problems. Good customer service will get you back up and running quickly.
  • Type of Account: Some accounts restrict the type of transactions. Most employer 401Ks prohibit active trading. Individual investment accounts, rollover IRAs, and several other brokerage accounts all allow for active trading.
  • Account Funding: Continual day trading requires a minimum $25,000 balance. This allows you to trade continuously through the brokers’ margin. Anything less than $25,000 will limit you to three round trip trades every five days on your actual cash balance.
  • Geography: Living in the U.S. allows you to trade U.S. stocks actively. People outside the U.S. either trade local stocks or use products like spreads.
  • Margin (Leverage): Brokers allow active traders to trade with leverage on their balances. Most offer leverage of 4x. This means you can buy and sell up to $100,000 if you have a balance of $25,000. The leverage amount generally decreases for overnight holdings. If you hold positions overnight using margin, you will be charged an interest fee by the broker. Brokers require a minimum $2,000 for trading on margin. This includes stocks and options.

Some exceptions exist to the rules above. Brokers in the Bahamas and Caymans allow U.S. traders to leverage up to 6x their money with less than $25,000. They also permit continuous trading. However, these brokers don’t follow all the same rules as U.S. brokers. Brokers inside the U.S. have federal insurance up to $250,000 for each account. International brokers do not have this backstop. So, while attractive for new traders, they come with more risk.

Find a Mentor

Trading is exciting. But it doesn’t happen overnight. Your journey will be a lot easier with someone you like.

A trading coach or mentor is an invaluable asset to your trading career. Learning from a mentor’s experience allows you to cut the learning curve. Many people do learn and find success on their own. Yet, having someone to show you the ropes can help you along the way.

But how do you find a good mentor? That’s the challenge. There is no shortage of gurus on the internet. Enough bad apples gave the good ones a bad name. Over the years, the market for trading education grew into a multi-billion-dollar business. Courses exist everywhere, from Udemy to YouTube.

When you want to find the right person to learn from consider the following:

  • Actively trade themselves
  • Explain things in a way you understand
  • Their style matches your own (or what you want to learn)
  • Accessible to ask questions
  • Point out common mistakes and pitfalls
  • They offer products at reasonable prices

Learn One Trick, Then Build a Library

Most of us want to trade multiple times a day for big wins. You’d either be one of the luckiest people ever or living in 1999 to start off that way. Most of us must sit and learn the ropes. But it doesn’t have to be impossible.

Don’t try to learn everything at once. Start with one setup. Find one good trade setup and make it yours. Learn how to work that setup in different market conditions. Understand where it works and fails. Don’t worry if you only find one trade a month. Go back through old charts to study the setup.

Once you have one setup mastered, add a second. Most profitable traders build a library of setups. Over the years they learn a variety of possibilities. Once they master one, they add another. Eventually, you move from having one setup to dozens. You build a library to trade with.

Next, you expand your markets. If you only traded big names, start to learn smaller names. Dive into commodities. Discover currencies. They may not all work for your style. Some won’t work with your setups. However, you’ll eventually build up a library of trades and markets to where you trade multiple times every day.

Practice Humbly

You think you’ve found “it.” This setup works perfectly every time…except for two months later when “it” fails.

The hardest part of learning to trade; knowing when the trade just didn’t work out versus when you made the wrong decision.

Humans learn from reinforcement. Win a trade, and you’ll do the same thing again. But what if you were just lucky? How do you know the difference?

There is no simple answer. However, solid trading comes from solid analysis and planning. Here are a few tips to spot when you got lucky.

  1. You can’t explain why you took the trade
  2. Your mentor or friend with the same style of trading doesn’t agree with you
  3. You don’t know where your stop is before entering the trade
  4. You didn’t know where you planned to enter until you clicked the mouse
  5. You’ve never taken a trade like this before

Not all your trades will work when you first start day trading. Here are signs you did it right, even if you lose.

  1. Your analysis can easily explain the trade
  2. The entry, stop and target were all planned out before taking the trade
  3. You impress your mentor
  4. The trade looks like many others you’ve taken
  5. An unknown, outside event (news, etc.) knocked the trade-off course
  6. Other people took similar trades at the same time and lost
  7. The trade follows your trading plan

When you learn and practice a new setup, give yourself space to fail. Practice on a demo account, or backtest the strategy. Find some confidence in the strategy before you start to risk real capital and start day trading.

Prepare to be Amazed

Even after years of trading the markets, you will find something unusual. No matter what you think you know, more exists.

About the Author

Trading and investing in markets is second nature to some, but a mystery to others. The goal is to provide a forum where everyday people aspiring to be part time or full time traders will learn how view markets differently and profit beyond their wildest dreams.

David Frost