Do you long for freedom from the 9-5 grind as a day trader? Perhaps the ability to set your own hours or spend more time with your family. As a day trader, that life is possible for you; however, it’s not without risks. As a result, you’ll want to make sure you have the best foundation possible before going out on your own. And that’s definitely possible with a little hard work. Put away the video games like Roblox, and get ready to put those gaming skills to use in a very different way.
What Is a Day Trader?
A day trader is someone who places long or short trades in the same day to take advantage of price action. You end a trading day with no active trades. Any active trades heading into the close would classify you as a swing trader. If you’re going to be a day trader, make sure you have the best day trading tools out there.
Day Trading Summed Up in 30 Seconds
- Day trading is the buying and selling of securities like stocks within the same day.
- Practice makes perfect. Get yourself in a simulator ASAP before you put real money on the line.
- Many day traders make money from trading economic news and fading the gap.
- Patience equals profits.
- Commissions will burn a hole in your pocket. Find a low-cost broker and don’t over-trade.
- Rule No. 1: Never lose money. Rule No. 2: Don’t forget rule No. 1
- Investing is not day trading – Warren Buffet.
- If you haven’t started investing yet, start NOW.
Is Day Trading Investing?
Let’s make it clear upfront: Day traders are not investors. People ask me all the time, should I invest in stock ABC or better yet, what do I think Apple is going to do?
To be honest, I have no clue; I leave the investing to the experts. For starters, investors are in it for the long game; they look to slowly increase their profits by holding onto certain assets for months, years, or even decades.
Alternatively, intraday traders take advantage of brief fluctuations in the market to make money in minutes or hours.
How Day Traders Make Money
There are a million and one ways to day trade and strategies that follow. Whether you trade the opening range, economic news, the gap and crap, the world truly is your oyster when it comes to making money.
Let’s explore two ways in which you can use the means mentioned above to make some money.
Trading Economic News
Did you know that news can be good for business? If you’ve been trading for some time now, you’ve most certainly seen the impact that news can have on the stock market.
Whether it’s housing reports or unemployment data, economic news can cause temporary reactions within individual stocks.
Can You Start Day Trading With $500?
If you want to become a day trader, chances are, you’re not starting with $25,000. Or even $1,000. So can you start with $500? The answer is yes. However, there’s a caveat. You have to be extremely careful. Especially if you want to make this your job.
Earnings News for a Day Trader
Let’s take earnings news, for example. If a company has exceeded its earnings forecast for a specific quarter, this is usually an indication that the associated stock price will rise.
Traders will be on the look-out for both scheduled financial reports and unexpected news that may move the markets one way or another.
Alternatively, if a company has failed to meet a specific forecast or has suffered a detrimental financial downturn, it could cause the stock to decrease in value.
The main point here is that day traders take advantage of corporate financial reports to either buy or sell stock during the day. Generally speaking, if they time their entries right, they can make significant sums of money during the day.
Have You Considered “Fading the Gap”?
Many day traders profit handsomely by paying close attention to the previous day’s closing price and the new day’s opening price. Also known as “fading the gap,” this is a common way day traders profit.
In some cases, overnight news will move the market one way or the other. “Fading the gap” is when a trader buys or sells in the opposite direction of a gap – meaning, the trader would buy shares in a company if a stock gapped down, or would short shares if a stock gapped up.
Let’s take Microsoft (MSFT), for example. On Wednesday afternoon, MSFT closed at $25.45, and Q3 earnings are set to be released after the bell. Fortunately for MSFT, earnings are fantastic, and on Thursday morning, the price “gaps up” to $27.10.
A savvy day trader has been doing his homework and believes the earnings report is over-inflated, the market overreacted, and the price is going to wash back down.
So what does he do? He “fades the gap” and shorts 1,000 shares of Microsoft at $27.05. Sure enough, the gap was short-lived, price swiftly falls back down to $25, and he makes a tidy profit.
But before you get too excited and start live trading, I must caution you: You will lose money unless you practice with fake money first. Yes, “fake” money.
Practice Does in Fact Make Perfect for a Day Trader
Making a profit through day trading requires practice as much as it does knowledge. You won’t find a professional basketball player in the world who hasn’t attempted thousands of shots in a gym.
Surgeons perform multiple procedures on cadavers before operating on any living, breathing person. And the best traders all practice with paper money before putting any real capital at risk.
A demo account or day trading simulator might not mimic all of the pressures and risks that come with having real money on the line, but they can still be valuable for learning and honing your trading strategies.
In fact, this is how they learn to develop their trading skills. If they make mistakes in the same area during the simulations, they’ll know to give themselves some extra work here. The goal, of course, is to learn from experience.
To a large extent, every successful day trader never stops honing their craft. If they find themselves in a losing stream for whatever reason, many will go back to the simulator.
There is no one stock market simulator that I would point to and declare as “THE best”, for all users in all situations. However, I really love Thinkorswim’s simulator. Personally, I’m a bit biased as it’s the one I learned on, but it’s top-notch and state of the art.
Missing Out on the 8th Wonder of the World: Compound Interest
Day trading can certainly make men and women quite a bit of money, but it also comes with several risks. In most cases, we expect profits from long-term stock investments to rise over the years and even decades.
Day traders do not see these long-term benefits and instead are looking to turn more profits more immediately.
To avoid missing out on the long-term profits, I recommend keeping your investments separate from the stocks you are day or swing trading. Simply make regular investments in index funds and leave the money there until you need it.
How Do I Get Into Day Trading?
- Have the funds to do so.
- Find a good broker.
- Open a practice account.
- Take courses.
- Study, study, study!
- Practice what you’ve learned.
- When going live as a day trader, start small.
- Take small positions and work your way up.
- Be realistic about profits.
- Plan your trade and trade your plan. Consider a cool trading technique like heikin ashi.
The Risk Is Real for a Day Trader
Look no farther than the tragic story of Alex Kearn’s. The 20-year new trader was assigned $1 million dollars worth of leverage from his new broker.
Without fully understanding options trading, he “thought” he lost $730,165. When in reality, it was just the other side of the options trade, the side not settled yet.
By no means was this actual “debt”. Alex killed himself for the simple mistake of not fully educating himself on the in’s and out’s of trading and the importance of risk management. Track your trades in something like AntSignal for example.
Let’s Brighten Things Up a Bit
One of the key advantages of day trading is being able to avoid being caught with your pants down if the market takes a turn overnight. For proof, look no further than the Facebook privacy scandal.
Facebook’s reputation tanked along with its stock price when news broke. The social media giant allowed third-party developers to access the data of more than 50 million people without their permission.
And the fall from grace was swift, the company’s stock price dropped overnight 40% from its peak. Fortunately, if you were a day trader, this wouldn’t affect you. Unfortunately, if you were a swing trade, it was a different story.
In a similar scenario, if a company reports less than stellar earnings while the markets are closed, the stocks are likely to open lower than they closed the previous day.
However, because day traders are only trading when the markets are already open, they’ll avoid these potentially damaging news releases. Though they’ll perform many more trades each day than a typical long-term investor, they can quickly jump out of a market that looks like it’s headed for several days of decline.
A Wise (And Profitable) Trader Has a Team Behind Them
You can and should hire a professional(s) to help you with the ins and outs of trading. Professionals will be able to walk you through some of the trouble spots and show you what you need to watch out for. I
f you’re already investing, making the transition to day trading doesn’t have to be hard.
Experts like the team at Bullish Bears can show you many tips and tricks like how to buy the dip and short the bounces, especially near the opening and closing of the business day.
Some stocks present their own formal challenges, and professionals who have a background in trading will be useful in showing you the ropes.
The goal is to keep both eyes on the market and be ready to pounce.
I’ll Close With This
A day trader can ultimately make significant sums of money when they play their cards right. However, significant risk comes from not knowing what you’re doing.
For these reasons, the importance of careful simulated practice and a supportive team behind you makes all the difference in the world. With dedication, patience and hard work, the profits will come.
Picking the right team will make or break you as a new trader. Take the time to make sure you’re just not another number. Ensure that your community wants to and can support you when you need it. All while avoiding fomo trading and sticking to the charts.
Trust me—Bullish Bears delivers the goods, and they have fun doing it. Happy trading!