How to become a day trader

Day trading involves opening a position on a trade and closing it quickly to profit from the short-term movement in the price of the instrument traded on.

Whichever form of day trading you choose to do, whether its stock trading, foreign exchange, financial spread betting, you should realise there are significant risks attached to this form of trading.

First always practice with a virtual trading account without involving any real trading capital. Major online brokers that provide day trading covering any of the aforementioned instruments allow people to open virtual accounts to practice prior to opening a real account. You should practice until you get the feel of how everything works and become comfortable.

Different types of day trading

1) Day trading stocks

The most popular form of day trading is day trading stocks, which involves buying a stock and then selling it quickly for a profit. Day trading, as the name suggests, is trading stocks during the course of the day i.e. positions are opened and closed on the same day.

The idea of day trading is to identify opportunities using technical indictors such as intra day charts to profit from short-term fluctuations in the price of a stock.

• Day trading is not all about buying and selling stocks within the same day, some people take a slightly longer view of things and can hold positions open for 2-3 weeks. They look at the trend and take positions on a stock (also called position trading) over a longer period to identify direction of stocks.

• If you are just beginning to day trade, position trading will be more suitable because intra-day trading might be too fast paced. As you get to grips with position trading, you may want to move on to intra-day trading.

Significant capital required

The monetary value (trading capital) of any trade has to be substantial in order to cover commission charges for buying and selling the line of stock and to make a worthwhile gain. There is no point in trading a stock with $1,000 and making a gain of 5% because the commission charges would reduce the profit to a mere $30 or so. A $30 gain would not be worth the risk. Any trading capital should be money that you can afford to lose because of the risk associated with day trading.

Day trading stocks is getting increasingly popular due to the increasing availability of excellent software to analyse stocks for day trading purposes such as excellent quality of intra day charts and live streaming news reports that keep day traders updated on any developments that might affect the price of stocks they are analysing or trading.

Also, some online stockbrokers offer great incentives for day traders by reducing commission for very frequent traders. For very active traders, broker like Etrade offer great reductions.

Development of day trading clubs

There are increasing number of day trading clubs where people get together to day trade stocks. They do this for a living and require participating members to have substantial capital to begin with. To become a member of such clubs you are expected to have a trading capital of at least around $40,000 or so.

Other types of day trading

2) Futures trading

Futures trading is another option for day traders. Futures trading involves predicting the direction of the price of an instrument whether it be a stock, commodity, currencies.

This form of trading has become increasingly popular because of the ability to make big gains without requiring substantial trading capital and the ability to predetermine the maximum possible losses through the use of techniques such as employing a stop loss.

Futures trading involve betting on the direction in price of an instrument such as a stock, usually on future quarterly contracts. The ask and bid prices offered by the broker is based on real time prices derived from the respective exchange the instrument trades on.

• You can make money on the rise or fall of the instrument concerned, as long as you predict correctly.

• For serious traders, you can open margin accounts. These allow you to open large positions without for small initial outlay or without requiring you to cover maximum possible losses.

3) Forex

Foreign exchange (Forex) trading allows people to make money form speculating on the value of one currency against another. Currencies trade against each other freely and prices are driven entirely by the supply and demand of a given currency. Again, trader can open and close positions during the course of a day and try and profit from the changes in value of a currency against another.

• Forex trading has its advantages over day trading stocks such as the fact forex brokers offer far greater leveraged trading, which means people are able to assume very large positions by making a small outlay.

• Other advantages include no commission for either opening or closing a position.

• Forex trading can be a more risky form of day trading because of the greater number of factors that can have a bearing on the movement in price of a currency. Changes in the price of a currency can be vulnerable to national, international economic and geopolitical factors.

Technical analysis

Learning technical analysis is a must for any budding day trader. Almost all buy and sell decisions will be derived using technical analysis. Due to the short-term nature of day trading, fundamental analysis such as studying current and past financial data does not work very well, but can complement your technical analysis.

Day traders will look to become well versed in a number of technical indictors to confirm their buy or sell signals. There are some popular indicators like range trading, strength index (RSI), etc.