Day trading, Some swear it’s gambling, while others say it’s an easy way to become a millionaire. The truth like always lies somewhere in the middle. So how to start day trading? Let’s first look at what is Day trading
What is Day Trading?
Day trading is a speculative strategy where traders buy and sell securities within a single trading day This trading form can involve stocks, forex, commodities, and cryptocurrencies.
The popularity of Day trading still rising in 2024, and the retail scene is getting more competitive with tools that were previously proprietary to advanced prop firms, now are available to everyone
Benefits of Day Trading:
- Potential for Quick Profits: Day traders can generate significant returns quickly, capitalizing on small price fluctuations.
- Leverage: Many brokers offer leverage, allowing traders to control large positions with relatively small capital, amplifying potential gains.
- No Overnight Risk: Since positions are closed by the end of the trading day, there’s no risk from overnight market fluctuations.
Challenges of Day Trading:
- High Risk and Volatility: Using leverage can also magnify losses, and the fast-paced nature of day trading involves a higher risk.
- Intensive Time Commitment: Successful day trading requires constant market monitoring and quick decision-making.
- Psychological Stress: The high stakes and rapid pace can be stressful, leading to emotional decision-making.
How do Traders make money?
Traders mainly make money by buying low and selling high or selling high and buying low. Traders exploit Inefficiencies in markets at pricing the particular instrument,
This goes directly against The Efficient Market Hypothesis which states that ” share prices reflect all available information and consistent ALPHA generation is impossible” which makes Day trading highly controversial.
Learn more about the Efficient Market Hypothesis here
Getting Started with Day Trading [2024]
Before you start day trading and make money, the first question you should ask yourself is, What are you gonna trade?
- Forex
Short for foreign exchange, is the world’s largest financial market, where currencies are traded against each other 24 hours a day, five days a week. Trading Forex involves speculating on the fluctuating values of currencies to make a profit
- Stocks
stocks involves buying and selling shares of publicly listed companies through stock exchanges, to profit from the fluctuations in share prices.
- Futures
futures involve engaging in contracts to buy or sell a specific commodity or financial instrument at a predetermined price at a future date. This market caters to those looking to hedge against price risks or speculate on the future prices of assets, ranging from agricultural products to financial indices
- Crypto
cryptocurrency involves buying and selling digital currencies, such as Bitcoin, Ethereum, and many others, through exchanges or over-the-counter platforms.
How to Pick Which Market to Start DayTrading
To understand how to pick which market, we need to understand what makes a market more attractive than the rest. To be profitable in any trading venture, we must have an Edge.
Edge: Systematic advantage or set of conditions that a trader believes gives them a higher probability of making a profit over others in the market.
To make money in the long term in trading, traders must have an edge. The edge could be several things. The way they read the tape, their chart patterns ( unlikely), or the way they interpret breaking news. anything that gives a trader an advantage and a positive expected value for their trade can be considered an edge
Markets have matured so much over the years that getting an edge has become nearly impossible. Algorithms are dominating the markets, as of April 2023 60-75% of the US stock market volume was generated by algorithms. which makes it even exponentially harder for humans to find any edge in their reaction time or mathematical skills
so why is that important?
The Bigger the market, the Higher the liquidity, the harder it is to find an edge within that market. An example of this would be Forex. Forex markets are so efficient that finding any edge within them for any significant amount of time is near impossible. The same can be said about the futures market (especially ES-mini). this concept is amazingly well explained by Former Trillium Trading top trader Lance Bresitstein in his video on X
The video was posted on Oct 28, 2023, and until today March 2, 2024, no one stepped up to prove Lance wrong
One of the main reasons new traders gravitate towards FX or Futures is due to the low entry barrier. With the rise of prop forms, anyone can trade multiple futures contracts for as low as 90$. Another reason would be the lack of PDT in FX and futures. You can learn more about Futures prop firms here
so why am I saying all this?
it is Crucial for any trader before they start day trading to understand which market gives them a slight chance at success. Go for the market that isn’t as competitive with a chance to have an edge. In my opinion that would be the Equities/ The stock market. I’m not saying it’s impossible to make money in the other markets, I’m just saying it’s much easier in stocks. In other articles, we will talk more about Futures and Forex trading
you can learn about Best Day Trading stocks here
So how does one Start Day Trading Stocks?
So now, you have decided you are going to start day trading stocks. What’s the first step?
first, you would need to get educated on different types of trading strategies for different types of stocks. after that, you will need to find “Stocks in Play”
Stocks in play is a term used by SMB Capital, which means stocks that have high relative volume and have a higher chance of offering an opportunity to trade with positive expectancy
Most of the market is pure noise, you can’t come every single day for an entire year and trade 1 stock the same way. That’s not just how the market works.
To find stocks in play, traders use scanners to scan the entire market and narrow it to a few stocks that have a catalyst. The catalyst could be breaking news, technical setup, or federal legislation that will benefit the company.
Click here to check out the Best Day Trading Scanners for 2024
Best Strategies to Start Day Trading
Here are some of the most popular trading strategies ( Not including options strategies)
1– EP ( Episodic Pivots): Made popular aftermath of 2020 by Qullamaggie. Even tho this strategy is more of a swing trading than day trading. The effectiveness and the insane returns Qullamaggie secured with it are hard to miss.
The strategy focuses on fundamentals and technicals. Fundemantly it focuses on Earning reports and the % surprise in revenue and profit of a company. while technical the chart has to be ripe for a breakout,
to learn more about Qullamaggie’s EP setup, click here
2- Reversals / Captiluations :
At peak volatility, markets become very emotionally charged which makes capitulation plays after huge extensions to the upside or downside a lucrative strategy with an amazing Risk Reward Ratio. Here is an example of a capitulation play by Lance Breitstein
https://twitter.com/TheOneLanceB/status/1744765979307987382/video/1
3- Penny stocks (Long/short): Longing or shorting stocks have become extremely popular in the past few years. especially on the shorting side.
Dilutive small market cap companies gap their stocks up to offer more stocks which gives shorting small-caps a “built-in edge”. However this strategy became very tricky as more short sellers pile in a stock, the higher it can squeeze up.
When many small caps start to squeeze higher, this gives an edge to the long traders as well. You can read more about small caps in our article ” Is shorting small caps overcrowded” here
Broker & Platform:
There are many platforms that you can sign up but here is my recommendation
1- Thinkorswim /TD ameritrade
2- Interactive Brokers
3- Trade Station
however, if you are focusing on shorting penny stocks, you need a broker that will be able to provide HTB ( Hard to borrow stocks). Here are a few recommendations
1- Tradezero
2- Cobra trading
3- Centerpoint
Depending on where you are, you might have to deal with PDT ( Pattern Day Trader) which requires anyone in the US to have a minimum of 25,000 USD to trade freely
if you can’t make PDT, we recommend using Trade The Pool. Trade the Pool is an online prop firm that funds you with up to 260,000 USD to day trade and even swing trade stocks. you have to pass their evaluation and get funded straight away
Click here To try them out and get 14 day’s trial
You got The Market, The Broker, The Strategy, now what?
So now you have the strategy down and you are executing it, what else?
it’s extremely important to start Journaling.
Every trader should have a journal, where they track their trading performance and the effectiveness of their strategy. it’s without a doubt the most crucial stage in any trader’s journey is when they start taking their journal seriously,
Track your entries, exit, time of day, MAE, MFE, and everything you possibly can. to do this software like Tradersync does a great job of tracking all this with one click
Click here to get a 7-day free Trial
to create a better understanding of your edge. in future articles, we will go through how to more in-depth on how to journal in future articles
Trial and Error:
Day trading takes years to see results in, however with the proper guidance you can cut that learning curve significantly. traders must stay in the market for as long as possible without blowing their account to survive the brutal learning curve. Thanks to modern technology and the flow of information, everything you need to be profitable is available online.
Common Day Trading Mistakes to Avoid
- Overleveraging: Using excessive leverage increases the risk of significant losses. Manage risk by adopting conservative leverage ratios.
- Emotional Trading: Letting emotions guide trading decisions can lead to impulsive and unprofitable trades. Stick to your trading plan.
- Ignoring Risk Management: Not setting stop-loss orders or risking too much on a single trade can lead to substantial losses. Always prioritize risk management.
- Lack of a Trading Plan: Trading without a clear plan is akin to gambling. Develop and adhere to a well-structured trading plan.
- Failing to Learn from Mistakes: Reflect on and learn from each trading session to improve strategies and decision-making processes.
Conclusion
The path to becoming a successful day trader is fraught with challenges and requires patience, persistence, and a willingness to learn from mistakes. While the allure of quick profits can be enticing, a strategic approach focused on long-term learning and adaptation will stand you in good stead. As the trading landscape continues to evolve, staying informed and adaptable will be key to navigating the markets effectively and finding opportunities for success in the exciting world of day trading.
