Day Trading Guide to Getting Started
Day trading is growing in popularity as more and more people seek financial freedom and the ability to live on their own terms. I'm writing this article as if you were a close friend who asked me to give you an in-depth explanation of day trading for beginners.
The first thing I'll tell you is that it's much easier now than it was when I first started day trading stocks. When I started day trading full-time after the Great Recession, high-speed internet wasn't available in rural Vermont, where I lived. The platforms, apps, and tools used for trading were terrible.
Day trading for beginners is much better today, but that doesn't mean making a profit is easy. In this article, I'll draw from my personal experience in making over $10 million as a day trader. While my results aren't typical, you probably don't want to learn from an average trader or someone who gets paid to write articles but doesn't know how to trade themselves.
My goal is to help you ease your day trading journey and avoid all the mistakes I made when I first started.
Let's go!
What is day trading?
Day trading is a short-term investment strategy that involves actively buying and selling securities within the same day, seeking to profit from short-term price fluctuations.
Popular markets for day trading include stocks, futures, forex, and cryptocurrencies. In low-volatility securities, such as futures and forex, traders often use margin and leverage to increase their buying power. While using leverage offered by your broker can increase profits, it has been the cause of many traders' failures. In high-volatility securities, such as penny stocks and stocks with a market value of less than $20, leverage is still possible, but it is not mandatory.
A quick example: If you open a new position at 10 a.m. and close it at 12 p.m. the same day, you are completing a day trade. However, if you close the same position the next morning, it is not considered a day trade.
Day traders, or active traders, use technical analysis in conjunction with one of the common trading strategies, such as momentum trading or counter-trading.
A successful day trader doesn't just choose a security and attempt to trade it; their strategy dictates all their decisions. A good strategy includes a detailed set of rules that define the type of securities to trade, the trading time, the chart patterns used for entry and exit, and when to exit each day.
How does day trading work?
Day trading is a strategy designed to capitalize on market fluctuations on a daily basis.
Day traders seek out market fluctuations. Without short-term price movement (volatility), there is no opportunity. Therefore, traders would not be interested in trading a stock like SirusXM. As shown in Figure 1, $SIRI stock experiences no volatility. It typically trades sideways. The only way to profit from this is to use leverage to open a large position and sell it for two cents per share. In short, the risk outweighs the reward, and no profitable trader would be interested in this type of stock.
For example, Figure 2 is a screenshot from my live stream for Warrior Trading members. This chart shows a low-priced pharmaceutical company's stock price rising more than 500% following news of a positive outcome from a meeting with the U.S. Food and Drug Administration (FDA), allowing the company to enter Phase 3 studies for its drug development. While it's unrealistic for anyone to achieve the full 500% gain, achieving 10% of that gain is much easier than trying to achieve 10% of a declining stock like SirusXM. On this particular day, I closed my trade with a profit of $22,654.98 in about 90 minutes of trading.
How much do day traders earn?
The national average income for a self-employed day trader is $94,266 per year, according to ZipRecruiter, while the average income for a day trader working for an investment firm is $133,818, according to Glassdoor. Zippia reports that the average day trader salary is $116,895 per year.
With approximately 250 trading days per year, a day trader who averages $400 per day will earn an annual profit of $100,000 before taxes. However, to earn $400 per day as a day trader, you must have a minimum account size. I believe your account size should be ten times your daily target at a minimum. This means your daily target is to grow your account by 10% in a single day. This is an ambitious goal, but it's not one you're likely to achieve every day, but I believe this is the minimum account size. Although the profits that day traders can make are substantial, only successful traders achieve such profits. But there's a bigger question we need to ask ourselves.
What is the success rate of day traders?
Numerous studies have attempted to answer the question: What is the success rate of day trading stocks? A 2014 research paper published by professors from the University of California, titled "Do Day Traders Rationally Learn Their Abilities?" examined over 3.7 billion trades and concluded that only 3% of day traders made a profit. However, one potential challenge in applying this to today's US market is that the study was based on trades from the Taiwan Stock Exchange between 1992 and 2006.
A similar study analyzed traders in the Brazilian futures market between 2013 and 2015 and found that 97% of them lost money, and only 1.1% earned more than the minimum wage in Brazil.
Brokers are the only ones who truly know the success rate of day traders. However, since brokers do not publish their clients' trading data, we are left to assume that most day traders will lose money. The commonly accepted statistic is that less than 10% of traders make a consistent profit.
Later in this article, I'll discuss the importance of practicing with a virtual trading simulator before risking real money. This step alone can prevent significant losses. However, the truth is that unless you've proven your ability to make money in a trading simulator, there's no point in investing real money in the market. Save your hard-earned money until you have a proven track record to support investing real money in your strategy.
Advantages of Day Trading
For those who are profitable, it's hard to imagine making more money through almost anything else.
Suitable for nomadic lifestyles, as you can do it from anywhere with internet access.
Work for yourself. Enjoy independence.
Successful traders typically work only two to three hours a day.
No night trading required.
Mentally stimulating and enjoyable.
Very low operating costs.
The barrier to entry is much lower than entering real estate or starting a business.
Disadvantages of Day Trading
It requires initial capital to open a trading account.
The chances of success are very slim.
It requires a long and difficult learning process.
It requires a competitive spirit and courage.
It is a high-pressure, volatile job.
Stock Chart Basics for Beginners
Japanese Candlestick Charts
When momentum traders look for entry points, we use Japanese candlestick charts. This stock chart style is very popular among day traders. The reason is that each Japanese candlestick conveys four important pieces of information. For the duration of the candle, the Japanese candlestick tells us the high price, the low price, the open price, and the close price.
Candlestick Chart Patterns
The shape of a candle reflects the market's direction. A large green candle typically indicates a strong uptrend, while a large red candle indicates a weak downtrend. However, the appearance of a small red candle after seven consecutive green candles may indicate a weakening trend and possibly a reversal. The simplest form of technical analysis is understanding how to read candlestick patterns. Understanding the message conveyed by individual candlestick patterns is essential for a novice day trader. The next step is memorizing multiple candlestick formations and their meanings.
The Best Chart Timeframes for Day Trading
Most day traders, including myself, rely on 1-minute and 5-minute charts. Some traders who hold positions for several hours may also use 15-minute or even hourly timeframes. Charts work by choosing a timeframe, and each candle reflects a specific period of time. For example, a 5-minute chart contains only 5-minute candles. For fast-moving markets, some traders use what are known as volatility charts or 10-second charts. As shown in Figure 5, when you open a stock chart, you have the option to choose the timeframe for that chart. Many traders, including myself, keep multiple timeframes open for the same stock at the same time, including the daily chart, the 1-minute chart, and the 5-minute chart.
Technical Indicators
In addition to using Japanese candlestick charts, day traders use technical indicators to help better understand the current price context and potential future direction. There are hundreds of different technical indicators you can choose from. Here's my personal take on the subject. Simply put, I use technical indicators in my trading, but I don't change them.
I've noticed that some traders are always looking for the next "perfect" technical indicator with 100% accuracy. In reality, this is just an illusion. No indicator or strategy is 100% successful. Losses are inevitable. Instead of focusing on avoiding losses, focus on limiting losses and looking for the next winning trade. Here are the most common technical indicators used by day traders.
My Favorite Technical Indicators
- Volume Bars: Volume bars show the number of shares traded over a specific period of time. If the chart is set to a 5-minute timeframe, the bar represents the number of shares traded over those five minutes.
- 9-period Exponential Moving Average: Gray line: The 9-period exponential moving average (EMA) is the first support level for a stock when it bounces. A stock that is well extended from the 9-period EMA is riskier to buy.
- 20-period Exponential Moving Average: Blue line: The 20-period EMA is the next support level for long-term reversal patterns.
- Volume-Weighted Average Price (VWAP): Orange line: The volume-weighted average price (VWAP) is one of the most popular day trading indicators, replacing the average stock price.
- 200-period Exponential Moving Average: Purple line: The 200-period EMA is a long-term support and resistance level.
- Moving Average Convergence Divergence (MACD): An oscillating indicator that clearly shows trend changes.
- Relative Strength Index (RSI): Shows relative strength when a stock is overbought and therefore poised to decline.
Common Day Trading Strategies
Momentum Trading Strategies
My primary strategy is momentum trading. This involves buying a security that is experiencing a significant price increase. Instead of trying to predict the next significant price increase, momentum traders use stock scanners to search the market for emerging volatility. Once a security starts moving outside its normal range, the momentum trader begins looking for entry points. This isn't Warren Buffett's value investing strategy; it's a bold "buy high, sell higher" day trading strategy.
However, it does have some clear advantages. Stock scanners make it easier to find securities with the largest daily price gains. Active traders then research the stock to determine why it's rising. Typically, this is because of some kind of breaking news. This was the case in the example above in Figure 2. Once we determine why the stock is rising, we begin using technical analysis to analyze the stock chart and look for a sell point. The ideal entry provides a 2:1 profit-to-loss ratio. This means I would risk $100 to make $200. As you can see in Figure 7, as long as I'm right 33% of the time, I'll make a profit that percentage.
As a momentum trader, I regularly trade about a dozen different chart patterns. These are patterns I've memorized, and when I see them form, I immediately recognize the message they send about what the stock is likely to do next. In Figure 8, you'll see a standard bullish flag pattern. This pattern appears after a stock has made a significant rise and then begins to pull back slightly.
Momentum Chart Patterns
If we analyze this pattern closely, what exactly is happening here? The stock rose strongly, likely due to breaking news. Then a period of profit-taking occurred. Investors who were at the beginning of the move when the news came out are taking profits. Short sellers may be establishing investment positions to profit from the decline. We are seeing a decline in the stock, and I am using my technical indicators to monitor support levels. The stock should not decline more than 50% of its initial move. Ideally, it will return to support at the 9-period exponential moving average.
To briefly summarize how I trade this pattern, I buy immediately after a green candle breaks the high of a previous red candle. This is when the trend turns from bearish to bullish. My maximum loss is the low of the previous red candle, and my profit target is for the stock to reach a new high during the day. Sometimes, the characteristics of this pattern don't provide a suitable profit-to-loss ratio (2:1). In these cases, I won't be able to complete the trade.
Other considerations that affect the outcome of the trade include the trading time, the stock price, the stock's daily chart, the quality of the news, and whether or not the stock is the best fit for trading.
Some momentum traders adopt a fast-moving trading strategy. This strategy relies on executing many small trades while the stock is rising. Traders of this strategy require very high precision, as incurring a large loss will cancel out many small trades that had achieved the highest price.
Reversal Trading Strategies
A reversal trading strategy is also called a reversal trading strategy. It can be traded either on the long side, such as buying a very weak stock for a reversal, or on the short side, selling a very strong stock and looking for a bearish reversal. Early in my career, I was a big fan of reversals because I found them easier to visually understand my entry point. I would look for 8-10 consecutive red candles, then buy the first one that turned green. Makes sense, right? Unfortunately, when stocks fall sharply due to breaking news, reversal trading becomes a battle against the trend. You must have perfect timing to capture the reversal accurately.
Reversal Chart Patterns
Reversal trading is still popular today among many traders. In Figure 9, you can see two distinct patterns. The first is located at number 1. This is called a flat-top breakout. The entry was at approximately $3.40 with a stop loss at the low of the previous red candle. The target for this trade was 10% with a maximum loss of approximately 5%. This was a classic momentum trade.
Then we have the second pattern, at number 2. It's a reversal. The first candle to close in red is a sell trade with a maximum loss at the day's high. This was a rather dramatic pattern, as the stock recovered all of its gains from the rally.
In my experience, reversal trading can be beneficial for bottoms. However, a single large loss, timed incorrectly to a trend change, can easily cancel out several bottoms. This can result in a negative profit-to-loss ratio for traders. It can also be frustrating to have a single failed trade cancel out many smaller, winning trades.
Popular Markets for Day Trading
- Over-the-Counter (OTC) Stock Market: Stocks with prices ranging from 0.0001 (yes, 1/100 of a cent) to $1.00. Penny stocks (pink notes) present a unique risk due to the lack of required financial disclosures. I personally avoided these stocks entirely in my trading after losing $15,000 on a bad penny stock trade.
- Nasdaq and NYSE: These are the markets I trade. I focus primarily on small-cap stocks because they are more volatile than their larger counterparts, such as Apple, Tesla, Meta, Netflix, and Google.
- Futures Trading: Futures trading is popular among many traders because it offers extremely high leverage. However, trading with 10x or 20x leverage carries the risk of losses far exceeding the value of your account. This may result in a margin call or debt to the broker.
- Forex Trading: Forex is similar to futures in terms of leverage. In fact, leverage is necessary to profit from relatively small movements in currency pairs. I don't trade any type of currency.
- Cryptocurrency Market: I believe cryptocurrency trading is just as speculative as penny stocks. I don't think this is the right market to trade if you're looking to make consistent profits from day trading.
Skills Needed to Become a Day Trader
What skills do you already possess, which skills do you need to improve, and which skills do you need to learn? When I started trading, I didn't master all of these skills. I had to train myself to become more patient and disciplined in my trading. In fact, trading doesn't come naturally to most people. You need to work on honing yourself to fit the personality of a profitable trader. The process of turning general knowledge into skill is done through repetition. You should start by practicing in a day trading simulator and reflecting on your progress. This is the best way to learn.
Fast Learner
To become a great day trader (in less than 10 years), you must be a fast learner. It's essential to be proactive, self-motivated, and adept at learning new skills. For most people, this is a challenging experience. It's a hands-on learning experience where you jump into a day trading simulator and press the keys. I believe this also relates to the skill of intelligent problem-solving.
Independent Personality
While you can apply to work as a day trader at a trading firm where you go to the office every day, most of us are solo traders. This means you need to be an independent person who feels comfortable doing things on your own without much help from others.
Critical Thinking
As a beginner stock trader, you need to be able to think critically about what works for you and what doesn't. When you see other people making profits in day trading, you need to ask yourself: "What are they doing that I'm not? If I were doing everything they do, I would be profitable. How can I close the gap?"
Patience and Discipline
Two of the most important skills I've learned are patience and discipline. I consider them to be very interconnected. There are some days when great opportunities aren't available, and the worst thing you can do is take advantage of them. This is where large, unnecessary losses come in. It takes patience and discipline to control yourself during these moments.
Excellent Computer Skills
I'm fortunate to have grown up in a time when I learned to use a computer at a relatively early age. The ability to use a computer as an extension of your mind and body will enable you to interact in the market at a high level. The ability to enter and exit trades quickly requires excellent hand-eye coordination and strong computer skills.
Sharp Focus and Quick Decision Making
Excellent traders are extremely focused on the market while trading. We must focus on chart patterns as they form and read the market flow. Then, when the time is right, we must execute our orders and send them to the market. This requires precise focus, calm under pressure, and the ability to make quick decisions.
Be Comfortable with Risk
To be honest, I didn't consider myself a risk-taker when I started trading. Now I can see that I do take risks when I trade, but I think that given my track record, I don't consider it a huge risk. I don't consider trading gambling; I have a statistical advantage based on the strategy and rules I follow. But trading isn't risk-free. Therefore, it's essential to be comfortable with risk and learn how to manage it.
High Emotional Awareness and Emotional Intelligence
Day trading can be stressful and emotional. We experience significant ups and downs. It's essential to recognize when you're becoming emotionally involved. If I find myself becoming emotionally involved, I notice my heart rate rising, and my palms start to sweat. In these moments, feelings of loss, anger, frustration, and disappointment dominate my decision-making process. This is my cue to quit. It takes a high level of emotional awareness to recognize these triggers and quit before making a mistake.
Master's in Technical Analysis and Order Entry
Finally, you must master technical analysis and order execution skills. However, you'll notice that I placed it last on the list. If you're only adept at this last skill without possessing any of the others, you're unlikely to make a profit. For someone who already has the other skills, or wants to develop them, the ultimate task of learning technical analysis and order entry will be easy.
How much money do you need to day trade?
To understand how much money you need, you first need to understand some of the regulatory restrictions associated with different account types. You'll also need to understand your personal trading goals. Because this is one of the most frequently asked questions, we've prepared a video that covers this topic in detail.
As you know, in January 2017, I funded an account with $583.15 and began the Small Account Challenge. Within 45 days, the account had grown to over $100,000, an impressive return on investment. But things got better. By the end of 2017, my account balance was $335,000. In 2019, my profits exceeded $1 million from day trading. By the end of 2022, after the market's surge during the COVID pandemic, my account profits exceeded $12.5 million.
I understand the skeptics! This guy turned $583 into $12.5 million? Is Warrior Trading legit? How is that even possible? I've had all my accounting statements audited by an independent accountant according to AICPA standards. You can view my trading performance after the audit if you like. But that doesn't mean my results are typical. They aren't.
So, the answer is $500? Technically yes, but practically no. I recommend starting with 10 times your daily target, whatever it may be. Having more money in your account will give you a greater profit margin. Just remember that if your account is less than $1,000, expect slower growth.
Minimum Account Balance by Account Type
Cash Account: No Minimum Balance
The first type of account is the cash account. A cash account gives you zero leverage. You can only trade with your cash balance, and you must wait for each trade to settle before you can trade again. When you sell a stock, the funds don't settle immediately. When I started, it took 3 days to settle a single trade. This was called T3. Then it changed to T2, and now it's T1.
T1 means that if you open a trade today, it will settle overnight, and you can trade with that money tomorrow. This means that if you fund an account with $500, you can trade the full amount every day. Since I previously discussed limiting my account size to at least 10 times my daily target, the daily target for a $500 account is $50. However, the account can still grow, and as the balance increases, so can your daily target.
There are some limitations to a cash account. The first limitation is that once you run out of cash, you cannot trade until the trades are settled. The second limitation is the inability to short sell shares. The third limitation is the lack of leverage.
Margin Accounts: The minimum balance is $25,000 for US residents.
A margin account is an advanced version of a cash account. With a margin account, you can trade as much as you want and short-sell stocks. In the US, a non-retirement margin account is given 4x leverage. This means that your $25,000 account gives you $100,000 in purchasing power. However, US residents are subject to restrictions on margin accounts.
The Pattern Day Trader Rule
On February 27, 2001, the U.S. Financial Services Regulatory Authority (FINRA) adopted the Pattern Day Trader Rule. This rule applies only to margin accounts. The rule states that if you make more than three daily trades within a five-day period, you are classified as a "pattern day trader" and must maintain a minimum balance of $25,000 in your account. All U.S. brokerages are required to apply this rule. This means that U.S. traders have three options:
- We can trade with a cash account and wait for the trades to settle.
- We can fund a margin account with $25,000 (an individual retirement account or a taxable regular account).
- We can trade with an international broker.
Margin Accounts with International Brokers: The minimum balance is $500
Many international brokers allow clients to trade US markets. Because the broker is located in an international region, they do not apply the standard day trading rule. When I funded my small account with $583, I used an international broker.
For most traders, it is much better to trade with a cash account with ThinkorSwim or Webull, even if it means account growth will be a little slower. The problem with international brokers, in my experience, is that fees are higher and taxes are more complicated because they do not issue Form 1099s to US residents.
These brokers are not exempt from commissions like US brokers. The practice of paying for order flow, which allows commission-free trading in the US, is not permitted in other parts of the world. As a result, traders using these international brokers will face significantly higher trading costs than US traders.
Leveraged Trading
It's worth noting that while leveraged trading is essential for low-volatility securities, such as futures and forex, using leverage is not as important for small-cap stocks. When a stock price rises 50-100% in a single day on breaking news, even a cash account without leverage has a good chance of making a good profit. I currently trade a retirement account. Since I have over $25,000, I can day trade as much as I want, but I'm not allowed to short sell stocks, nor can I use leverage. These rules are specific to retirement accounts. However, I haven't found the lack of leverage to be a problem.
Leverage is a double-edged sword. While you can use 4x leverage and turn a 10% gain into a 40% increase in your account in a single day, you can also do the opposite. Remember, if you lose 50% of your account, you must double it to recover your full balance. Until you have a proven track record of success, it's recommended to leave leveraged trading to more experienced traders.
Your account size should be at least 10 times your daily target.
Trading with a margin account is always easier than trading with a cash account, for the simple reason that you can trade more frequently. If there are 10 winning opportunities in a single day, you can trade them all. With a cash account, however, you're limited to only one trade per day.
While a cash account is suitable for beginner traders, once you have a proven track record of success, you'll strive to increase your account balance to over $25,000. Or you can seriously consider spending the extra money on fees and using an external broker for a few months to grow your account faster.
Professional Trader at a Private Broker
Trading with a private broker can be attractive to traders with limited resources. Partner brokers offer trading desks in most major cities around the world and allow you to fund a small account with high leverage, meaning you're trading with the company's capital. This relationship avoids the "typical day trader" rule, but requires traders to obtain a Series 57 license and work for a partner trading firm. Profits are split across all trading proceeds.
Advantages of Preferred Brokers
- You can get leverage of up to 100:1 against your deposit.
- You can trade alongside other traders and learn from them.
Disadvantages of Preferred Brokers
- You must pay to apply, but this doesn't guarantee funding.
- There's no point in splitting profits once you're a proven profitable trader and can fund your own trading account with $25,000.
- Trading fees will be higher than those of a commission-free broker.
- You must obtain a Series 57 license to trade with the company's capital.
- The company must rely on approved trading strategies.
- The company can automatically close your trades and lock your account at any time.
- You must be close to a preferred broker.
The Non-Professional Retail Trader
The non-professional retail trader has much more freedom than the preferred broker. However, this freedom comes at the cost of fully self-funding. This is the path I took when I was starting out. I lived in Vermont, and affiliate trading wasn't an option for me. So, I automatically became a solo trader. There are two reasons why I believe affiliate trading may not last long.
The first is that commission-free trading is a game-changer. There's no longer a good reason to trade with an expensive affiliate.
The second is that I believe affiliate trading is only suitable for beginner traders. After you've made your first $100,000 trading, why would you want to continue splitting profits when you can easily fund your own account? Unless your strategy requires using the large amounts of leverage that only an affiliate offers, I believe solo trading is more attractive in the long run.
Day Trading Tools
There are several different tools traders use. The first is their broker, which is the platform they use to execute their trades. Whether the platform is provided by your own trading firm or by the broker you open an account with, your platform is an important choice you need to make. Additionally, you'll need to decide which platforms you'll use to analyze stock charts, scan them, and access breaking news.
Day Trading Brokers
Choosing your broker is one of the most important decisions you'll make. After all, this is where you'll be depositing your funds, and you'll rely on them to provide fast executions at a reasonable price. There are many types of stock brokers, and most tend to serve a specific segment. In recent years, most individual traders have switched to commission-free brokers because it's difficult to justify the cost of specialized brokers. I personally still use a commission-charging broker for my trades, and as you'll see in the table below, the areas where they excel relate to more advanced trading concepts.
Direct Access vs. Pay for Order Flow
Most commission-free brokers act as the middleman between the market and your order. In a payment-for-order-flow arrangement, brokers sell your order flow to a wholesaler. These wholesalers often fill your orders without sending them to the NASDAQ or NYSE. In this relationship, the wholesaler guarantees you a slightly better price than if your order were placed on the open market. You get a "price improvement" compared to the best national bid and ask price. This business model works because stock exchanges price stocks at a premium of $1 per share, with a minimum spread of one cent. However, wholesalers can split pennies.
This effectively means that when a wholesaler fills an order, they can split a penny into four parts. You get a quarter of a penny from the price improvement, the seller of the stock gets a quarter, the wholesaler keeps a quarter of a penny as profit, and the broker gets a quarter for order flow. With millions of shares per day, wholesalers and brokers make billions of dollars annually from this arrangement.
This is an order routing practice that prioritizes profit over speed of execution. I use a broker that offers direct market access. I pay direct fees to the exchanges for these orders, but in return, my orders are executed faster. In the fast-paced world of day trading, and with the volume I trade, I believe the cost of direct routing is worth it. However, for a novice trader, I believe commission-free trading is very attractive.