Day trading can be a very tough and emotionally draining job. Beginners are misled to believe that it somehow is going to be a cakewalk. This is simply not the case. Day trading is one of the toughest jobs that exists and humbles many very intelligent people on a regular basis. There are people all over the internet talking about how you can become a millionaire within a year or even overnight and its complete baloney. I'm here to give everyone the real and not to mislead you into false thinking. If anyone thinks being successful in this field is not going to require serious hard work and hustle then you will quickly be educated. Day trading is very similar to operating a small business and things are not always going to go your way. In fact, its the only job we are aware of where you can actually lose a paycheck. However, day trading can also be a highly rewarding pursuit. With proper discipline, patience, persistence, and resilience, you can achieve financial freedom, work for yourself from anywhere, and you can make a lot of money doing it. Below are 20 crucial day trading tips we've learned from experience...
1. Trade small when you are first learning. A new trader with a large account is a potential disaster waiting to happen. When you are trading with big money and don't know what you are doing, big losses are inevitable. Get practice and build confidence by trading with small amounts of money until you become more seasoned. Paper trading is not the same as trading with real cash because the true emotion is removed from the equation. Get a broker who is not going to destroy you with fees and wipe out a small account slowly. Something like Fidelity or Interactive Brokers is a good place to start. Certain lessons you will have to learn the hard way and you want the cost of tuition to be as cheap as possible.
2. Open two separate brokerage accounts. When you start out trading under $25,000 you will not be designated as a Pattern Day Trader (PDT). Instead of being able to make unlimited day trades you will be limited to three day trades in a five day rolling period. If you open two separate brokerage accounts you can get six day trades in a five day rolling period (3 from each broker). These rules can be a real pain, but this is not necessarily a bad thing. It can actually force you to be smarter and more careful about the shots that you do take. More trades does not necessarily equate to more money. It can also end up causing you more losses.
3. Trade like a sniper and wait for the right opportunity. Pick your shots carefully and be patient with your entries. With a limited number of day trades you don't want to waste them. The key is to focus on quality over quantity. Once you are designated PDT this won't be quite as important. Look more for swing plays because holding overnight will not count as a day trade. Look for strong news that can move a stock for a few days and ride the momentum.
4. Don't waste a lot of time on research. Research is for investing and day trading is an entirely different animal. You are trading on charts, price action, volume, and support/resistance, where as with investing you are betting on companies you believe will grow in the future. If you are investing in a company like Amazon for the long term then by all means dig in. With day trading, be more concerned with shorter term news catalysts. I will at times do a quick earnings check to get an overall view of the companies financial position.
5. Keep things cheap and simple to start. When you first start trading and have a small account, the last thing you need is to be paying for software that eats it up. I do not pay for any software. I use the software that comes free with my brokerage accounts. Keep it simple and as cheap as possible.
6. Keep living expenses minimal. Far too many people have over priced cars or homes and are spending way too much money to try and impress others. Instead keep the expenses low and live cheaply. Stick that money into your account instead and use it to grow. In my opinion, money is best used to make you more money. I would much rather have cash stacked in my account to do whatever I want, than to show off material baloney that really doesn't matter in the end. Later when you are printing dollars you can buy whatever you want. I personally recommend you use it more for life experiences such as travel.
7. Be sure you are using the proper trading software. Trading with the Robinhood app or via your brokers website is the same as playing baseball without a bat. You cannot see level 2, timing is delayed 15 minutes, and you just simply don't have the proper tools overall. Be sure you are utilizing real-time software such as Das Trader Pro, Fidelity Active Trader Pro, or TD's Think or Swim.
8. Investing is not going to get you very far. Making 10% a year return on a $10,000 account is not going to get you to full-time trader status. Trading large cap stocks won't help much either as the % gain potential is much smaller than with that of small cap stocks (unless you are playing with options). The OTC market is comprised of mostly scams and therefore I do not recommend messing with it. Small cap stocks on the Nasdaq and NYSE Mkt are what I find to be the bread and butter. They actually move with enough volatility to get someone ahead with a smaller sized account but are still legit companies for the most part. Watch out for Chinese stocks and shipping.
9. Do not over leverage your trades. When you trade too heavy you risk the possibility of margin calls and forced buy-ins from your broker. A beginner should never be in any single trade with more than 10% of their total cash (not total buying power.) A beginning trader should never borrow on margin from their broker. If you are wrong it will just accelerate your loss and could put you temporarily out of business.
10. Have a set loss % threshold. Controlling emotions is something that must be worked on and you will get better at it over time. In my opinion all humans are born naturally greedy and emotional (some more than others). Everyone's risk tolerance is different, but for me I start to get uneasy when my unrealized loss starts to exceed the $5,000 range. This of course is all relative to your specific situation and account size. Sometimes patience pays off and that unrealized loss can turn into a gain. However, when you cut losses before they get out of hand, at least you know you can live to fight another day.
11. Focus more on solid entries and exits. Try not to focus too much one how much money you are up or down, but on getting solid entries and exits. Practice and learn how to get wins. If these are on point, the money will be there eventually.
12. Be a consistent winner. I like to use the analogy of trading like Ted Williams and not like Babe Ruth. Williams was a very consistent batter and that is what you want when day trading for a living. Babe Ruth hit a lot of home runs but he also would strike out just as often. A big strike out when trading can not only mean the game is over, but the season as well.
13. Be sure to lock that green. This is probably one of the most important mistakes I see new traders make. They are profitable on a trade, but they decide to get greedy and proceed to give back every bit of their gain. Remember Gordon Gekko's quote from the movie Wall Street..."Bulls make money, bears make money, pigs get slaughtered." This is a very true statement!
14. Work off of support and resistance. You will find that in day trading this is your bread and butter. The meat of your gains will be knowing how to play in between the established floor and ceiling. Where is the stock holding support and where is it showing resistance? Short resistance areas and buy to cover at support. Buy long at support areas and sell into strength at resistance.
15. Set physical or mental stops. I personally prefer to use mental stops. I find that they work best for me. But, everyone is different. Stops protect you from the bad situations. For example, a random public offering of shares when long or very positive news when short. Keep in mind that sometimes the stop will not get triggered on very fast drops due to lack of buying. Also, you will want to keep the stop at least ten cents above resistance when shorting and below support when going long. Algorithms, market makers, and big fish love to trigger them.
16. Set price targets. Price targets are great, but there is no guarantee they will be hit. Be sure to know when its time to be patient and when its time to cut the loss.
17. Don't chase stocks long that are ridiculously high. Depending on the situation it usually best to be patient on big movers and not hit them right before the correction. Wait for the dip to support and get the stock at a cheaper price. Then let it ride.
18. Start out working full-time. A common question I get is "how do I become a full-time trader?" My answer is to start out working a full-time job to pay your living expenses and trade part-time, then graduate to trading full-time and working part-time, and then finally to trading full-time and dropping the job completely. You have to have enough capital to make money and also pay expenses to do this for a living. Make it a gradual process with that end goal in mind.
19. Be persistent and resilient. These are the most important aspects of day trading in my opinion. There are going to be tough losses at times and too many people quit the second things go wrong. Go ahead and assume you will take beatings at some point. Being successful in any endeavor requires beating back adversity and continue the journey no matter what.
20. Stay disciplined and stick to your rules. There is a reason for setting trading rules and they only work if you stick to them 100% of the time. It only takes disobeying them one time to pay a painful price. It's not easy as we are all emotional beings, but you want to trade as much like a machine as possible. Think Ex Machina or The Terminator. Day trading is like a business and you have to handle every decision with detail and care.