Day Trading for Beginners: Starter Guide 2021

The market volatility we see right now attracts more and more people to get into day trading. Of course, instinctively, they want to make money fast buying and short-selling stocks intraday. But is this type of speculative investing really worth it? Are there similarities to the dot-com bubble from the 1990s, or is it entirely safe to get into day trading as a beginner right now?

This day trading for beginners guide provides insights into the whole concept of day trading, reveals stunning statistics and day trading secrets. It explains the day trading basics and offers in-depth insights. So make a well-informed decision on whether it is worth getting into day trading now.

This is an entirely free day trading guide without a paywall. There are no advertisements and banners included in the article. Some topics cannot be explained with a few sentences, so I linked to relevant articles at daytrading.com. I hope you enjoy this guide.

Day Trading for Beginners | The ultimate Guide

What Is Day Trading?

Day trading is a speculative way of trading where financial products like stocks, options, crypto and futures are bought and sold during one single trading day. The term intraday-trading is also often used to describe the process of day trading.

The holding period during a day trade is somewhere between a few seconds and a couple of hours, and the position needs to be closed by the end of a day to be a day trade.

While long-term investors often target returns of 7-8% p.a. on average, day traders aim for higher returns by using the pricing momentum of an underlying asset. Thus, typically an increased number of shares are traded, and the profit per share is a few cents.

Below you see how day trading, swing trading and investing compare, but please note, there is no clear boundary for most of those characteristics.

Day Trading vs Swing Trading vs Investing
Characteristics Day Trading Swing Trading Investing
🏆 Primary objective Generate higher returns fast by trading high-volatile assets Focus on price swings independently of the profitability of a company Lont-term growth by investing in profitable businesses
🙋 Typical personality Impatient trader More conservative trader with investment ideology Patient investor
🕖 Holding time Intraday only Overnight to several weeks Several months or years
🚀 Leverage 1:4 leverage on intraday margin, sometimes higher 1:2 leverage on overnight margin Normally no leverage
📈 Trade frequency Frequent Some trades per week or month Low trade frequency
📉 Short selling Often Normally not Never
📊 Analysis method Technical analysis Technical and fundamental analysis Fundamental analysis
💻 Trading tools Stock screeners, Level II Stock analysis software Statistics, key financial figures
🕖 Time commitment 10-40 hours per week 2-10 hours per week 1-2 hours per week
💰 Primary risk Overtrading, emotional stress, slippage Overnight price gaps Stock market crash
💰 Account minimum >$25,000 for some securities in the U.S., in some countries less No minimum No minimum
💰 Fix and variable costs Tools >$300, management fee $0 Tools >$100, management fee $0 Tools <$100, management fee >0.5%

How Does Day Trading Work?

A day trade always consists of two transactions, an opening and closing transaction. If a trader goes long, he first buys and sells later. If a trader goes short as a short seller, he sells first and buys back later.

For example, Bill opens a news position of stocks at the market open at 9:30 AM EST on Nasdaq. He buys 1,000 shares of Apple for $125 per share. If he sells the 1,000 shares on the same trading day, this trade is considered a day trade. The same goes for short sellers. If Bill goes short at the market open and sells 1,000 shares of Apple for $125 and buys back those shares during the day, this short selling trade is also considered a day trade. However, if the shares are held overnight, then his trading activity is called swing trading.

Day traders have to be fast to benefit from market volatility and price spikes. Most often, a day trader knows where to exit the trade before even opening it.

Day traders need a well defined trading plan and trading strategy with clear rules. This reduces emotional stress and increases the probabilities of success.

How to Start Day Trading?

It is easy to get started with day trading by simply opening an account. But just doing it and begin wildly placing buy and sell orders for fun and thrill is most likely not the best way to get started. Like in any other profession, you need proper education first, and it can take a few months or even years to become profitable.

But how to learn day trading? A trading course is an excellent starting point to build your trading edge. Alternatively, you join a day trading discord server. But be aware, day trading is time-intensive, and it requires a lot of on-screen time to learn how the markets work.

How To Start Day Trading

How to Practice Day Trading?

There are free day trading guides, day trading tips, and day trading strategies out there. The gap and go strategy and opening range breakout are my favorite ones. And honestly, you will need a mix of everything to practice it. If you are a day trading beginner, then you need to understand the basic terms first.

As being said, trading courses are a good starting point for day traders. To learn to day trade, you need a paper trading platform to test your day trading strategy under real stock market conditions. The stock market is the most popular market for day traders.

Day trading penny stocks and day trading low float stocks are two popular techniques. Propper preparation on how to research penny stocks is fundamental to sustaining profitability. You can also trade the forex market, futures, or options strategies.

Strategies for stock trading and other assets can be tested with free paper trading accounts. Day trading books can be helpful if you prefer this type of learning. You should also learn what is buying on margin and how to use margin in a beneficial way to leverage your P&L.

Day Trading Success Rate

The day trading success rate is estimated to be around 30% or less. Unfortunately, U.S. brokers do not publish reliable day trader success rate statistics, but some brokerages in Europe are forced by law to at least publish the probabilities of success rates.

The truth might feel shocking first, but a minimum of 67% of speculative investors fail based on those statistics. A Forbes article went even that far and considered the success rate to be around only 10%. So the truth is most likely somewhere in between.

The point is, if you start with day trading, you want to make sure to belong to the successful day traders in those statistics more likely.

Good preparation and education are the fundament for success, followed by using the right tools and keeping the costs low.

Source Estimated Day Trader Success Rate
CFD broker disclosures in Europe 2021 33%
Forbes post from 2017 10%
Quora estimate 2020 4%
Brazilian day trader study June 2020 3%

The typical success rate only implies the probabilities of making money day trading and not how much money someone can make.

Why Do Day Traders Fail?

  • Inadequate education
  • Absence or abandonment of a sound strategy and plan
  • Undercapitalization
  • Overconfidence
  • Unrealistic expectations
  • Fear and greed
  • Hope mode
  • Faulty risk management
  • Gamification
  • Gambling addiction

Day Trading Search Terms

Here is another interesting statistic about the most frequently used search terms related to day trading:

❓ Search Term ⭐ Searches per Month
Day trading 176,000
What is day trading 34,300
Robinhood day trading 28,900
Day trading rules 25,700
Pattern day trader 25,200
Day trading stocks 21,800
Day trading strategies 12,500
Best day trading platform 12,300
Day trading for beginners 9,800
Reddit day trading 9,700

Most people are interested in definitions and rules related to day trading. They also want to day trade stocks and use the best trading platforms. The most prominent brokerage used for day trading is Robinhood, and Reddit is frequently used as a source for research.

Day Trading Requirements

The Securities and Exchange Commission (SEC) and Financial Industry Regulatory Authority (FINRA) want to ensure to protect undercapitalized investors and introduce a pattern day trader definition and requirements for a day trading account. U.S. based brokerages require an account minimum of $25,000 to day trade.

Most traders are undercapitalized and have a disadvantage right from the get-go. Undercapitalization often leads to attempts to bypassing the Pattern Day Trader Rule.

That approach undermines the protection mechanism that the SEC has created. Also, undercapitalization leads to irrational decisions. The road from a few hundred dollars to the first million is long and winding. Some traders tend to use a pattern day trader workaround instead.

Main characteristics of the pattern day trader rule

  • Relevant if more than 3 day trades are made within consecutive 5 business days.
  • Effects only margin accounts, but not cash accounts
  • Applies to any security, including options, but not assets futures and forex
  • Only relevant if the broker is located in the United States

The relevance of the pattern day trader rule restriction depends on the location where the broker is located.

Brokerage Registered In PDT Rule Relevant
United States Yes
Europe No
United Kingdom No
Cayman Islands No
Bahamas No
Trinidad and Tobago No
Sankt Lucia No
Seychelles No

How Much Can You Make Day Trading?

Day trading for a living. That’s what most day traders dream of. It is essential to understand that you already need a reasonable amount of money to start day trading. And yes, you can become rich. First and foremost, you have to self-define “being rich.” For most traders, “being rich” is synonymous with being a millionaire.

Who wouldn’t like to be a millionaire?

When you begin the journey by joining the group of day traders, it makes a huge difference whether your starting capital is $200, $10,000, $25,000, or $500,000 to make your first million.

That’s why goal setting and a realistic perspective, and the right mindset are crucial for success.

Example:

You open an margin account with $25,000, and the intraday-margin enables you to trade with a 1:4 leverage. So, you can actually trade intraday with $100,000.

With a budget of $100,000 you can buy 800 shares of Apple with $125 per share. As a day trader, you aim for a profit of $0.25 within 15 minutes. If you succeed with this trade, you made $0.25 * 800 shares = $200 profit.

Now do the math to see how many trades you need until you become a millionaire with this account size. It is a long way, even with a $25,000 account.

Day Trading Millionaires

There are many self-proclaimed trading millionaires out there. It is your responsibility to differentiate between marketing tactics and real results. Before you start a trading course, make sure to evaluate if the proclaimed profits have been really made.

The chances are that performance results are only marketing tactics and that they have a hypothetical results disclaimer. So make sure to take the right path by following successful day traders.

What Is The Best Day Trading Strategy?

Trading educators and trading tools will help you to understand the complexity. But they are not the guarantee for any long term profits. First, you have to find your day trading strategy for stock trading, ETF, options, or the forex market. Even if you are looking for options trading strategies, you need to evaluate the best one.

It depends on your personality, your time, your emotional control, and your personal preferences, what kind of strategies fit the best. Of course, you have to learn how to handle losses, but also how to learn profits.

Most of the time, the control over your emotions will be decisive if you become profitable in the long run or not.

Some strategies are designed for premarket trading, where traders participate in price movements outside the regular trading hours. Day traders often monitor the relative volume to identify stocks before they unfold their whole price movement potential. During the trading day, day traders often look at the most volatile stocks and scan for short squeeze stocks with high momentum.

VWAP trading usually starts once the regular trading hours begin. All day trading strategies require a good understanding of basic market mechanics like the bid vs ask principle.

Advanced Trading Platforms and Tools For Day Traders

Once you are profitable trading the financial markets on paper, you need a broker and a trading platform for live trading. Make sure to go with one of the market leaders and also make sure to keep the expenses small. You had to pay up to $20 per trade to your broker in commissions in the past.

These days, most online brokers a commission-free trading account. TD Ameritrade is excellent to start trading stocks. TastyWorks is a good broker for day trading options. A direct access broker like Interactive Brokers is suitable for high-frequency trading.

In the beginning, it is essential to focus on costs. Keep them as low as possible. Free tools exist to give you a better understanding of the stock market and the day trading strategies. You learn how to buy a stock and how to sell it. You know how to short stocks and how to secure your investment.

Stock screeners and stock scanners will probably become your best friend as a day trader. That’s because timing is everything, and being late is not an excellent characteristic of a successful day trader.

Successful traders execute multiple successful trades on the same day, keep calm, and pay attention to their risk tolerance level. A stock screener will help you to find the best entries fast, for example, based on trading volume filters, gap scans, or market news.

When Is the Best Time to Buy Stocks?

The timing aspect is fully covered in the article, the best time of day to buy stocks. There are some specific aspects you should be aware of choosing the right time of day, week, or even months when buying and selling shares. However, the most crucial element remains the best time of day to buy stocks.

Is Technical Analysis Important for Day Trading?

Day traders rely heavily on Technical Analysis in conjunction with order flow analysis and news catalysts. However, it should always be noted that technical analysis is only an interpretation tool. The future cannot be determined from a chart.

Predicting the weather from past data is more manageable than forecasting the price trend. Nevertheless, technical analysis helps to make the right decisions. With the help of visualizations, you always know where you stand in the market.

The article about the best indicators for day trading is an excellent starting point for learning more about technical analysis.

Is Fundamental Analysis Important for Day Trading?

Fundamental analysis plays a secondary role, and the same goes for high-frequency trading. This is due to the short holding period. The holding period is the difference between opening a position and closing a position.

Critical dates should be considered in advance and be able to trade immediately with the market reaction. This includes, for example, critical economic data or earnings announcements.

What Is the Best Day Trading Tool?

It is essential to choose one of the leaders in the market when you are searching for the best possible trading tools, trading educators, or online brokers. For me, Trade Ideas is the best trading tool for day traders. Their artificial intelligence-based algorithms ensure that only high-quality trading setups are alerted.

Read the Trade Ideas Review and see why Trade Ideas is the very Best Stock Screener and trading tool.

What Order Type Should I Use

An often overlooked aspect of increasing day trading profitability is using the right stock order types. It makes a big difference if the order gets filled without a limit or a market order for the best possible price. Therefore, it is essential to understand the difference between order types and to use the right one at the right time.

It is also essential to understand the order routing types. Direct access brokers allow you to route your order directly to stock exchanges and ECN’s. In contrast, most retail brokers use smart and intelligent routing options and receive payment for order flow from venues.

How Much Do You Need for Day Trading?

You need at least $25,000 in your account to day trade actively. Based on the SEC rules, you can make a maximum of 3 day trades within 5 business days if you have less than $25,000 in your account.

Can You Day Trade with 1000 Dollars?

In the United States, you can execute up to three day trades per week with less than $25,000 of capital in your brokerage account. You can day trade with 1,000 dollars, but you are limited in terms of the trade frequency. Also, if you do not have a pattern day trader account, you can only trade the cash available in your account without margin. Since the settlement data is typically +2 in the U.S., you may have to wait 2 business days once you have closed a position since you have to wait until the liquidity is available again.

Is Day Trading Illegal?

Day trading is 100% legit and not illegal. Various regulations exist to protect investors. In some countries, it is prohibited to trade specific asset classes. In the United States, all common assets like stocks, options, and futures are entirely legit. Traders risk losing money in a short period. That could end up in a margin call if buying and selling were made by using margin. Most day traders trade stocks for zero commissions, but other markets like foreign exchange are popular too.

What Type of Trading Is Best for Beginners?

Beginners should start slowly in any investment style. Typically they begin with securities like stocks and limit their losses by trading shares with small risk and execute low-risk strategies on the markets. Trades lead to positions and depending on your level of experience, your entry and exit result in profits and losses. It is essential to use the best day trading software moving forward to make the trading process more efficently.

How Do I Become A Successful Day Trader?

In most cases, one’s mindset is the biggest challenge. It is often overlooked that higher profit potential is also associated with an increased potential risk. Moreover, the increased risk ultimately results in a lower success rate because many active traders burn through their accounts within days.

Day trading is an extraordinary challenge and is justifiably called the “king class of trading.” Mistakes are not forgiven and cost money within minutes or even hours. This way of speculative investing is not suitable for you if you:

  • Aim for quick profits without awareness of the high risk
  • Have little equity capital
  • Are not willing to learn first
  • Think that this is a one-way street to your first million
  • Can’t lose
  • Are slow in trading platform handling
  • Are unwilling to change your broker to reduce fees, get better order fills and connect tools
  • Are you not willing to spend at least $100 to $300 per month on trading tools that enable you to be successful
  • Expect too much
  • Are not disciplined
  • Tend to be greedy
  • Don’t have the knowledge/experience to day trade
  • Don’t have the motivation to succeed

Discipline is required for hours, days, and weeks. That means sitting in front of your PC for a long time and waiting for the perfect chance without making unnecessary trades until then is necessary.

  • Are you ready, and do you have the time, to sit in front of your trading computer for hours? Maybe you have the motivation to learn how to build a day trading computer?
  • Are you ready to invest hour after hour in educating yourself without even making a trade with a real money account?
  • Do you have a solid motivation to win, and are you willing to do anything necessary to be successful?

If not, then this trading style is not for you.

Can Anyone Learn Day Trading?

You have to realize that day trading is equal to any other job.

  • What is your current job?
  • Are you good at your job?
  • Are you passionate and willing to work beyond what is expected of you?

I think you get the point. So yes, of course, you can become successful. If everything works out nicely, you can also make a living from it. Let’s assume you are a surgeon.

How much time and money have you invested in your education? A lot! Why should you need less training as a day trader?

Let’s take it a bit further. How far will you get as a surgeon without suitable instruments? Not far at all. The same goes for traders. Without the right tools, you won’t be able to succeed. Day trading is very much about precision. If you receive relevant information too late or if you hesitate a moment too long, then you are in a disadvantaged position.

In my opinion, anyone can learn the basics. And yes, it takes time and money. The question of success is much more complicated. Let us get back to the surgeon. There are differences in doctors’ reliability, prosperity, and popularity. The range is terrific, less competent, and not so good.

While it is not that important to be popular as a day trader, it is essential to know what you are doing.

There is one significant difference between a day trader and a regular employee. A day trader has to put his own money at risk every day to make more out of it. An employee in a company will mainly invest time, not his own money. The time spent will then be outweighed by money.

You not only have to invest in education, but you also put your money at risk every day. No other trader will be your true friend because you are competitors. There is no fixed monthly salary, and day trading doesn’t come with any guarantees either.

Which Chart Type and Time Frame Is the Best?

A chart is a visual representation of the price development of a stock or commodity traded on the stock exchange used by day traders and other types of investors.

There are two types of charts:

  1. Time-based charts: They are displayed based on a tick in minutes, hours, days, weeks, months, or years. A time-dependent chart represents the price trend in which each price is plotted on a price/time scale. The chart will develop depending on the time at which it was created and the price. Among the best-known, time-dependent chart models are the line chart, the bar chart, and the candlestick chart.
  2. Time-independent chart. Some chart types do not consider time for plotting. The most widely-known time-independent charts are the point & figure chart, Renko-, and the Kagi chart.

Consequently, it becomes clear: there is no “best” chart. Every form of presentation, like every indicator, has its strengths and limitations. In advance, you need to know what information you want to filter out of the chart to make investment decisions. The chart should give you as much information as possible but should not overload you with information, which would impair clarity.

What Market Data Should I Use

Other than swing traders, day traders need lightning-fast market data throughout the market session. Whether you are trading with a cash account or margin account, you have a legitimate interest in increasing the probabilities of success by using a high-bandwidth internet connection. Sometimes it is a millisecond that decides if your order gets filled or not. Make sure to use a brokerage firm that offers fast data, and in the best case, that data is for free and comes directly from the exchanges.

Day Trading for Beginners Conclusion

If you want to belong to successful day traders, you have to be well prepared and start with the day trading basics. Like doctors, pilots, and racecar drivers, you have to learn how.

Driving on the Daytona International Speedway, not knowing what you are doing, is not a good idea. The same is valid for day trading.

Day trading is a profession and a vocation at the same time. The good news is that learning costs time, but not necessarily money. At least for those who have patience. Patience is a virtue and is rewarded in many ways. The biggest reward is that you keep your money dry until you’ve learned the right skills and don’t gamble away all your money before beginning.

Day trading beginners need to learn the basics, begin with market research, review their past performance, evaluate how much capital is available and start with stock trades on paper. If you become successful in your paper trading account or trading simulator then a real brokerage account is a good idea to execute your trades and strategies.

One should always be careful with trading on borrowed money like margin trading. It may increase the net profit to trade on margin, but it can also be more dangerous. Market makers know where the stop loss orders of retail traders are, so you may undergo some stop running issues once you trade live. A level II data feed can help to visualize the stock price and price volatility better, but it costs extra.

There are many tips and strategies out there for day traders. However, it needs a lot of on-screen experience, and I hope that this little day trading guide helps aspiring day traders. Day trading is one of the most profitable investment strategies out there.

A day trader can trade with his own capital or join a funded trader program to trade other people’s money.

In some cases, swing trading might be the better choice since a swing trader does not compete that heavily with large financial institutions, and the price movements cannot wipe out a portfolio that fast.

Updated: May 23, 2021

About the author: Alexander is the founder of daytradingz.com and has 20 years of experience in the financial markets. He aims to make trading and investing easy to understand for everybody, and has been quoted on Benzinga, Business Insider and GOBankingRates.