Author: Ethan

Day Trading For Beginners: 10 Steps To Start

Day trading for beginners is exciting but can seem overwhelming. There is a lot to learn, and it can be hard to know what is essential and what is not.

But don't worry, we got your back!

Here are ten steps to get you on the right learning track!


Is Day Trading Gambling?

5 Ways to Find Stocks to Trade

What is Day Trading?

Day trading is defined as purchasing and selling a security within the same market day.

While day trading is appealing due to the quick profit potential, it does come with a great amount of risk.

Many people are also drawn to day trading because it can allow you to work from home and be your own boss.

However, just as with any other career, it takes a lot of hard work and dedication to become consistently profitable.

Here are ten steps that will definitely help any beginner trader get on the right track.

1. Learn The Basics - Stock Market Terms and Rules

Introduction to the Stock Market

Bear Bull Market

A stock, also referred to as a share, shows some part of ownership in a company. When you purchase a stock, you are, in essence, buying a small percentage of a company.

The term "stock market" usually refers to one of the major indexes of the stock market.  The NASDAQ Composite, Dow Jones Industrial Average, and S&P 500 are the major indexes in the United States.

Stock indexes are just stocks that have been grouped together to make them easier to keep track of.

While most food markets invite all to come and buy, the stock market is a little different. You can only buy stocks through a licensed broker. A stockbroker basically buys a stock on your behalf, at your request.

They provide you with a platform and tools to make the trades. Usually, a broker makes their money by charging you a commission for every trade you place. Most brokers now, however, offer no commission trading.

This means you can trade most stocks for free without being charged. These brokers can make money in other ways, like lending money from some types of trades that still have commissions.

There are designated times that you can buy and sell in the American stock market, called the New York Stock Exchange (NYSE).

Basic Stock Market Terminology:

BUY/LONG- Buying a stock anticipating that it increases in value is called going long.

SELL/SHORT- Selling a stock anticipating that it decreases in value is called shorting.

DAY TRADING- Buying and selling the same stock on the same day. You have to buy and sell a stock for it to be considered a full trade.

SWING TRADING- Entering a trade by either buying or selling but not completing it. Swing traders hold on to stocks for days, weeks, or even longer.

OPEN- The price that a stock is at when the market opens.

ASK- The lowest price a seller is asking for a stock.

BID- The highest price a buyer is willing to pay for a stock.

STOP-LOSS-A target price at which you specify your trade to be closed to stop the loss of profit.

TAKE-PROFIT- A target profit price at which you specify your trade to be closed. The amount of money you want to make in a trade.

BEAR MARKET- A market that favors sellers and is mostly trending down.

BULL MARKET- A market that favors the buyers and is mostly trending up.

Other Stock Market Slang:

MOMO- Another way to say momentum, or to refer to the momentum day trading strategy.

FOMO - Fear of missing out. This refers to being afraid of missing a big trade or being upset that you did miss one.

BABYSITTING - This refers to holding onto a losing trade for an extended period of time while hoping it turns around.

One of the only books that I would recommend to all traders is The Art and Science of Technical Analysis: Market Structure, Price Action, and Trading Strategies by Adam Grimes. It is a great book to help beginners really understand what is happening on the charts.

2. Check out Different Trading Brokers

Many beginner day traders don't realize you can't just throw a hundred bucks into the stock market and trade with it as much as you want. Like we mentioned before, you have to go through brokers and follow specific rules.

The PDT rule, for example, discourages many new traders from continuing on the path as a day trader.

What is the PDT rule? One of the most important rules that affect traders is the PDT, or Pattern Day Trader Rule. This is a rule implemented by the Securities and Exchange Commission(SEC). This states that you can't make more than three trades a week in a margin account unless you have a balance of $25,000 or higher.

How do you avoid the PDT Rule? You can avoid the PDT rule by using a foreign stockbroker, trading with $25,000 or more in your account, or using a cash account. The problem is that you can find U.S. brokers with low or no commissions, while foreign ones will definitely have them. This means that when you use an international broker, you will have to pay each time you make a trade.

Things to Remember about Brokers:

  • It does not cost anything to sign up with most brokers
  • Different brokers have different fees
  • You can use foreign brokers or U.S. brokers to trade on the New York Stock Exchange (NYSE). Foreign brokers don't require you to follow the PDT rule but usually have higher fees.
  • You will need a valid ID and Social Security Number to sign up for a brokerage account. They need this information for identity verification and tax purposes.
  • Many brokers offer one or more free stocks to sign up with them. These will usually only be worth a few dollars but could be worth more.
  • At the end of the year, a broker will provide you with, or have available, the appropriate information for you to do your taxes.

The two basic account types that you can open with a broker are Margin and Cash.

Margin Account- You can trade with borrowed money. For example, if you only have $2000 in your account, you can buy $3000 worth of stock. It just borrows from your broker.

Cash Account- You can only trade with the amount of money you have in your account.

The PDT rule applies to both types of accounts until you have a minimum of $25,000 in the account. You can trade with a margin account with borrowed money, but you still only have three full trades per week. With a cash account, you have unlimited trades with your own cash, but you have to wait a day for that before you can use that amount to trade again.

3. Paper Trading

Paper trading allows you to practice trading the real stock market without using real money. However, to get the most out of paper trading, you have to treat it like it's real money. If you don't, it just becomes a game.

You want to make your paper trading experience the closest to the real deal as you can. One of the most commonly used platforms for Paper Trading is Think or Swim by TD Ameritrade.

5 Steps To Start Paper Trading With Think or Swim

  1. Go here -  TD Ameritrade. Then most people will select Individual brokerage → Open an individual account. 
  2. After signing up, download the THINK OR SWIM desktop trading platform under the Trade tab and then under Trading Platforms on your main account page. (There is also a mobile version)
  3. After downloading, you enter in username and password at this screen. You then select the Paper Money tab and click log in.
    TD Paper Trading
  4. Then you have to call TD Ameritrade and ask them to switch your paper trading account to real-time data. (By default, your account is set to "delayed," and you are not trading real-time data.)
  5. You know you are good to go when your screen says this in the top left corner- "Simulated Trading, Connected, Realtime Data."

Simulated Trading

Benefits of paper trading include:

  • Less stressful practice
  • The ability to test strategies and theories
  • Getting comfortable with the market
  • Build trading confidence
  • Doing all this without risking your own money

TIP: While many traders find paper trading useful, some swear it doesn't help them at all. If you start to feel this way, try trading with a few real shares. This way, you are only risking a few dollars but will get more of the real money feel. Over time, as you get better, you can increase your share size and risk.

4. Study Your Trades/ Test Strategies

Trading Plan

Studying your trades will help you learn from your mistakes and how to hopefully not repeat them.

Traders study their trades and charts for the same reason that sports teams watch game film. You want to learn what you are doing right and wrong so that you can continually get better.

Things to consider when studying your trades:

  • Why did I get into the trade?
  • Why did I get out of the trade?
  • What patterns am I seeing?
  • Did I stick to my plan?
  • What did I do wrong?
  • What did I do right?

Being honest with yourself and taking each trade seriously will help you learn from your mistakes and get better much faster.

Studying your trades can help you find the best trading strategies that work for you.

Basic Day Trading Strategies

Momentum Trading: Finding stocks to trade that are the big movers of the day or have the most movement in price. Traders use technical analysis and metrics, such as volume and price range, to analyze big movers to see if they will keep their momentum.

Reversal Trading: With reversal trading, you look for stocks that stretch to new highs or lows. The rubber band example is often used in trading. This example is that if a stock goes up and up, it must rest at some point and come back a little or a lot.  Traders using this strategy look to take advantage of reversal and enter the trade as the price goes the opposite way.

Pull Backs: A stock often has a few price pullbacks when it has or is gaining momentum. When trading pullbacks, you find a stock that is a big gainer for the day and a way to enter a trade on its first couple of pullbacks. It can get riskier as the stock has more pullbacks, as it's a sign that it may lose momentum and reverse.

5. Watch Others Day Trade

Getting into the action and actually trading is the best way to learn. However, the second-best way and without risking your own money is to watch others do it. You can gain stock trading experience without the nerves and worries. We all learn how to do things through experience and trial and error.

The internet and YouTube have loads of free content related to the stock market and people trading it live. The problem with day trading content is there is a lot of fluff, total nonsense, and people mainly just wanting to sell you something.

It is good to watch and learn how others do things and what they are thinking while trading. Learning how people think while trading stocks can help you better predict what will happen next. Checking YouTube before the market opens each day can be a great way to find stocks to trade as well.

Recommended Stock Trading YouTube Channels For Beginners:

  1. Warrior Trading - Ross Cameron trades daily and provides loads of free quality videos, webinars, and classes. Ross has a more aggressive style of trading but is always open and honest.
  2. Timothy Sykes - His YouTube videos are more motivational than technical in showing you how to trade. He interviews a lot of successful traders who share tips and advice.
  3. Ricky Gutierrez - Ricky is the creator of TechBud Solutions, a free online community for beginners to get together and learn. He has good videos for beginners.

With all the useful videos, free webinars, and other info, everyone will try to sell you something. Most of these courses are expensive and unnecessary for success. They will probably help, no doubt, but don't waste too much on these courses. Take in everything you can, and realize that no one person has the secret to successful trading.

“Everyone has the brainpower to make money in stocks. Not everyone has the stomach.”

-Peter Lynch

6. Develop a Trading Plan

Anyone can get lucky here and there, but you want consistency when learning to day trade stocks. To get consistent, you should consider making a trading plan.

Some things a Trading Plan may include:

  • Reasons for entering/ exiting a trade
  • How much you want to risk on each trade
  • Daily research planning - Daily News/ Chart study
  • Mental preparation - What to do to get your head in the game
  • Physical preparation - Time to trade/ Proper Rest, Eliminate Distractions

The market is pretty chaotic, as you may know, or will soon learn. Planning your trades is critical to seeing past the roller coaster of emotions you may experience daily. If you do not prepare and plan properly, day trading is just gambling. With no preparation, it is just like throwing your money into a slot machine. When this happens, you are not learning or improving but rather just hoping for success.

When planning a specific trade, you need to at least plan where you will have your stop-loss set. This is the price where you want to cut your losses and accept the trade as a losing one. You want to set one so that if the stock drops rapidly, you won't be in a panic trying to figure out what to do. Setting a take-profit will get your stock sold when it hits the target goal price.

The reason for setting stop-loss and take-profit is to reduce risk and help take the emotion out of it. Bad things can happen if you change plans mid-trade, due to emotion, and take too long making a decision. 

It is impossible to always predict what the stock market is going to do next. To be a consistent and profitable day trader, however, you must know how you are going to react to what it does next.

7. Study Risk Management

Day trading risk management is assessing trade risks so that you can figure out how to minimize or eliminate them.

Risk management is perhaps the most important thing to learn and to keep focused on as a trader. If you learn to manage your risk correctly, you can reduce the chance of losing money or blowing up your account.

Risk Reward Ratio Chart

“Risk comes from not knowing what you’re doing.” 

- Warren Buffett

A good general rule with money is never to invest more than you can afford to lose. When you feel you are ready to trade for real, keep track of how much you make or lose daily. Many successful traders have daily goals set for how much they can lose before they are done trading for the day. You have to accept this so that you don't get discouraged and quit or end up going all in.

Risk Management Ideas For Day Trading

    • The  1% Rule - This is the idea that you never risk more than 1% of your account total. For example, if you are trading with $5000, you would not risk over $50 per trade.
    • The  2% Rule - The idea that you never risk more than 2% of your account total. For example, if you are trading with $5000, you would not risk over $100 per trade.
    • Focus on Risk/ Reward Ratios - If you're risking $50 on a trade, a 1:2 risk/reward ratio would call for your profit goal to be $100. A more conservative risk/reward ratio would be 1:4, in which you're risking $50 in hopes of making $200. Risk/reward ratios can help if you are planning your trades well.

8. Set Goals / Make a Budget

Setting reasonable goals can help keep you excited and motivated for personal growth as a day trader. You can slowly increase your goals as you get better or take a step back and slow down after a rough stretch.

Some of the basic goals traders set include:

  • Daily Profit Goal
  • Weekly Profit Goal
  • Monthly Profit Goal

Other, more personal goals may include:

  • Ability to stick to a plan
  • Know when not to trade

For example, while most traders hope to be right on their trades 8 or 9 times out of 10. A more realistic goal is just to be profitable and be right 6 out of 10 times.

While goals are great, you cannot allow them to force you into extra risk. Forcing yourself to get an exact amount every day or week can do more harm than good. If you're way behind your goal, you don't want to risk everything just to meet your goal.  Learn to accept that you are going to have losing days and probably even losing weeks.

Trading Budget Tips:

    1. Start trading with a lower amount and work your way up
    2. Pick the max amount you can lose daily or weekly, and stop if you hit it
    3. If you start to feel extra financial stress, take a trading break, or just paper trade for a while.

9. Know Your Opponents, Know the Odds

The odds are that most traders are not successful long term. You should always know the odds, but don't let them discourage you. Knowing the odds will help you keep your expectations realistic.
Trading Odds

The reality is that most traders fail because they want it to be easy. Most failing traders make the same mistakes over and over.

Top Reasons Why Day Traders Fail

  • Have Too High of Expectations
  • Lack of Planning
  • Give Up When They Don't Get Rich Quick
  • They Can't Control Their Emotions

Your opponent may be other traders like yourself, and maybe some with a little more experience. Most of your toughest competition comes from professional traders or institutional traders who have been trading successfully for years. It is essential to learn how others may think and react to certain things in the market.

It may sound silly or cliche, but you will most often find that you will be your own biggest opponent. You will find yourself asking, "why did I do that?" probably more than once. Whether you are risking too much or just not selling as the price falls and falls, it will happen.

“The most important quality for an investor is temperament, not intellect.”

-Warren Buffet

10. Dive in, Stick With it

You can sign up with a broker and download a trading platform in minutes. If being a consistently profitable day trader is what you want, start immersing yourself in the market. It is easy to get started and can be an exciting and rewarding thing to be a part of.

Sticking with it doesn't mean you have to pour endless amounts of money into the market after losing time and time again. You have to be smart and find your pace. If it gets challenging, don't give up but instead, keep pushing and learning every day.

The stock market isn't going to be easy to trade every day. Some days it is better not to trade, and when you aren't feeling it, you should simply watch instead. Remember there will be another trade if you miss one and that every single trader has days that frustrate them.

If there is something related to day trading that you don't understand, or haven't heard of, start researching it.

Remember to hold yourself accountable and try not to get discouraged by unexpected events in the market you cannot control. 

“I love quotes… but in the end, knowledge has to be converted to action or it’s worthless.”

- Tony Robbins


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