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Day Trading

Day Trading

​Learn day trading from scratch. Perhaps you are hoping to find the holy grail of day trading here on this post. First of all, you should know that I am an everyday man who has probably shared similar experiences to yours. Unfortunately, I cannot promise infinite profits over night. Instead, I will give you a realistic picture of day trading.

Based on nearly 20 years of experience in the financial markets, I can give numerous tips to help you get started and make it easier to learn day trading. Trust me, losing thousands of dollars a day is not fun. If and when you learn to avoid the mistakes I have made, then this contribution will be invaluable.

Buying and selling financial products like stocks and futures during one single trading day is called day trading. For that reason, day trading is also called intraday-trading. The holding period of one position during a day trade lays somewhere between a few seconds and a few hours. Open positions are being closed, at the latest, by the end of a trading day.

The aim of day trading is to make profits using the pricing momentum of an underlying asset within a short period by utilizing an intraday leverage around 4:1 for stocks and the low intraday margin requirements the day trading broker provides (in the United States, international leverages and other financial products can be higher).

Many brokerage firms allow their clients to trade with an amount being four times higher than the capital available on the trading account. Some allow even higher levers.

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How to become a day trader, how to start day trading and is it possible to make a living by day trading?

​In this article series, I will provide you with extensive details about day trading. You will learn more about how to day trade stocks, penny stocks, currencies, options, and futures.

You will learn day trading from the very basics up to the advanced day trading strategies and tactics. On top of that, you will gain the same level of understanding as the best day trading brokers and you will become aware of the potentials of day trading and the involved risks.​

In short, you will learn day trading from scratch. For free, no strings attached. Okay, maybe two strings are attached.

  • ​I'm not a financial advisor. I'm a typical investor who goes his own way on the financial markets. I don't provide consulting services. I simply publish my point of view about the financial markets. All investments you make are at your own risk.
  • This guide thrives because of your questions. The guide will be updated on a regular basis as every new question comes in. So, if you have any questions, please do not hesitate to leave a comment below or use the contact form. All questions will be answered and I will add the respective answer to this ultimate guide for day trading beginners. Furthermore, I will dedicate separate posts for crucial topics that have been taken into special account.

What is day trading all about? Also, what is the difference between position trading and day trading?

Day trading is defined as a trading approach in which both the opening and closing of a position takes place during one trading session between market open and market close.

In day trading, no positions are held overnight. This means that a position will never remain open while the exchange is closed. The concept applies to any financial product, whether it’s stocks, forex, options or futures.

There are classifications into different sub-types of day trading.

  • ​The average private ​day trader will hold his positions for a few minutes or hours.
  • ​​​​​Some other speculators use scalping or scalp trading and hold their positions for a few seconds up to a few minutes.
  • ​In high-frequency trading, which many institutions use, there are sometimes only fractions of seconds between the opening and closing of a position.

​​​All of them belong to day trading.

The shorter the time frame becomes, the larger the positions are needed in order to achieve meaningful returns (quantity of stocks, options contracts, futures contracts, etc.).

Position trading, on the other hand, is a longer time frame trading approach. This involves building up a position within a brokerage account, maintaining the position and closing the position over a period of a few days, months or even years.

While day traders liquidate their full position within one trading day, position traders sometimes add to their positions or sell a part of an existing position.

Learn and practice day trading as a hobby – is that possible?

Day trading is a profession and a serious day job. Anyone who day trades as a hobby, spending only a few moments with it, will sooner or later be giving away money to others.

Any job can be challenging but day trading is extremely challenging. One wrong mouse click can cost you hundreds of dollars.

The wrong tools can cause serious damage to your trading account if you don’t understand the mechanism correctly.

The fact that you often trade positions on margin and leverage can lever your risk enormously, especially if you don’t know what you are doing.

How do I know day trading is right for me?

Day trading is an investment approach used to make fast money. Instead of compounding profits over 20 or 30 years with long-term investing, day trading aims for profits within weeks or months.

While long-term investors often target returns of 7-8% p.a. on average, day traders target gains of several hundred percent per year.

So how do you know if day trading is right for you?

In most cases, one’s own mindset is the problem. It is often overlooked that a higher profit potential is also associated with an increased potential risk.

Moreover, the increased risk ultimately results in a lower success rate because many day traders burn through their account 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.

While it is hard to say whether day trading is right for you, I can easily say that day trading is not right 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 day trading 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 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

The naked truth

That sounds harsh, I know. However, it is the truth.

If you want to belong to the 10% who are successful in day trading, then you have to be prepared.

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

Like doctors, pilots and racecar drivers, you have to learn how.

Day trading is a profession and a vocation at the same time.

The good news - learning day trading 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 in learning day trading is that you keep your money dry until you've learned the right skills and don’t gamble away all your money before beginning.

Yes, discipline is required for hours, days and weeks. In many cases, day trading means sitting in front of your PC for a long time and waiting for the right chance without making unnecessary trades.

  • ​Are you ready, and do you have the time, to sit in front of your PC for hours?
  • ​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 strong motivation to win and are you willing to do anything necessary to be successful?

​​​If not, then day trading is not for you.

Will I get rich by day trading?

​You may not be pleased with the answer: It depends.

Like all other investment styles, day trading involves both opportunities and risks. Day trading is shrouded with mystique.

Many people think a lot of money can be made within a short period of time. The possibilities are often mentioned in various advertisements.  If you fall for the blind left, you will lose all your money, guaranteed. Because there are also enormous risks.

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 to the first million it makes a huge difference whether your starting capital is $200, $10,000, $25,000 or $500,000. Most day traders are undercapitalized and have a disadvantage right from the get-go.

Undercapitalization often leads to attempts of bypassing the Pattern Day Trading 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.

So why not take a shortcut?

Trading on the intraday margin with high leverages during the day sounds good, right?

No!

This is a sure way to kick yourself out of the market. For example, if you trade with a leverage of 6:1, you will lose your money six times faster if there is a loss. If a position without leverage moves $100 against you, then $600 is lost at a 6-fold leverage.

Only those who have a plan and follow it make money by day trading. The mathematical chance of becoming a millionaire in day trading is higher than winning the Powerball.

Statistics say the chances of winning the Powerball is about 175 million to 1. But what about day trading?

If 10% of all day traders are successful and only 1% of those successful day traders have become millionaires, then the chances of getting rich with day trading are much better than winning the lottery.

That’s because 1,000 to 1 is better than 175 million to 1.

However, the chance of becoming a day trading millionaire becomes lower if your equity capital is low right from the start.

One question still remains. Will you feel rich once you have made the first million?

Can anybody learn day trading and is it possible to become a good day trader?

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

  1. What is your current job? 
  2. Are you good at your job?
  3. 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 a good day trader. Even an excellent one. If everything works out nicely you can also make a living by day trading.

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 day trading. 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 of day trading.  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, success, and popularity. The range is from 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.

Day trading, therefore, presents very extraordinary challenges. You not only have to invest in education, but you also put your personal money at risk every day.

No other day 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 is the best? And which time frame should I trade?

​A chart is a visual representation of the price development of a stock or commodity traded on the stock exchange.

There are two types of charts:

The time-dependent charts, which are displayed on the basis of a tick in minutes, hours, days, weeks, months or years. A time-dependent chart is a representation of 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.

The second display option is the time-independent chart. Here, the time of price formation is not taken into account, but rather the degree of change in price is compared to the previous price. The most widely-known, time-independent chart model is the point & figure chart. This includes the three-line breakthrough chart, the Renko chart, 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.

You need to know in advance what information you want to filter out of the chart in order 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.

I prefer the candlestick chart because a lot of information can be quickly captured at a glance.

Is fundamental analysis important for day trading?

Fundamental analysis plays a secondary role in day trading. This is due to the short time span the day trader has in mind for his holding period. The holding period is the difference between opening a position and closing a position.

However, a day trader should know all the critical dates in order to consider scenarios in advance and be able to trade immediately with the market reaction.

This includes, for example, important economic data or earnings announcements.

Is technical analysis important for day trading?

​Technical analysis in conjunction with order flow analysis is very popular among day traders. 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 easier 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.

Why does technical analysis work?

Because there are so many traders who use it. Breakouts and breakdowns create trends and the interpretation of patterns is pretty consistent.

That's why it's so easy to predict where the market will move in the first few ticks. But...

One must also bear in mind that trading systems are specifically designed to rip-off retail traders. It is and remains a game of cat and mouse.

Anyone who assumes the technical analysis to be prognostic, and adheres to it, is acting negligently. Appropriate risk management and 100% commitment to your trading are essential.

Those who always want to be right rarely get what they want. You have to accept that not every trade can be a profitable one.

Technical analysis helps us to make the right decisions at the right time through visualizations and fixed rules that are based on time and price.

Also, if a trade does not work out in your favor then it is even more important to be consistent, to accept the loss and move forward.

​All further articles about day trading

​Your questions

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