Day trading can be an exciting way to supplement your income or even make a full-time living off the stock market. But day trading involves putting your money on the line, so it’s important to know what you’re doing before you dive in. In this guide, we’ll explain how you can learn how to day trade safely in five steps.
What is Day Trading?
Day trading involves trading around short-term price action in the stock market to turn a profit. Day traders use technical analysis to identify trading opportunities with a timeframe of minutes, hours, or at most a few days. The goal of day trading is to make a steady income from the market.
Importantly, day trading is distinct from investing. Investors focus on the long-term financial prospects of companies and often hold stocks for months or years. Day trading can be much riskier than long-term investing (which why it is often compared to gambling). Be sure to think carefully about what approach to the market is right for you.
Whether you want to day trade as a career or day trade as a hobby, it’s important to make sure you have a good approach to learning the craft.
The Importance of the Learning Stage
It’s hard to overstate how important it is to take time to learn the craft of day trading before you begin. Day trading is incredibly complicated, and the vast majority of day traders fail to turn a profit year after year. Just like you wouldn’t start any other business without preparation or finely tuned skills, you shouldn’t jump into day trading without knowing what you’re doing.
Of course, learning is also important because the stakes of day trading can be high. Real money is on the line when you’re day trading. The more you know, the better your chances of earning rather than losing money.
How to Learn Day Trading
Learning how to day trade is a long process with no easy shortcuts. That said, the process can be rewarding, and you can ultimately use the skills you learn to make money. So, consider learning how to day trade an investment in yourself.
Here’s how to learn day trading in five steps.
Step 1: Research and Learn
The first step to learning how to day trade is to get as much information as you can about day trading. There are dozens of day trading books written on this topic, and they’re a great place to start. There are also tons of free online blog posts, guides, and YouTube videos that cover the basics of day trading.
You might also consider taking a paid day trading course. When you’re just starting out, you might not know what topics you need to be researching. A day trading course helps to solve that problem by offering a clearly defined curriculum. After the course, you can turn back to free online content to dig deeper into specific trading topics.
Popular courses include:
- Learn Plan Profit (for beginners)
- Investors Underground (for intermediate to advanced)
Step 2: Define Your Strategy
Creating a trading strategy is one of the most important parts of day trading. Your success as a trader will ultimately hinge on how effective your strategy is and how well you execute it.
Your trading strategy is essentially your business plan for day trading. You’ll need to define what types of stocks you want to trade, such as large or small-cap stocks, highly volatile stocks, or stocks from a specific sector. You’ll also need to decide what types of trading setups you want to pursue and what your timeframe for day trading will be. Your strategy should also include your profit target for each trade and the amount you’re willing to risk on each trade.
Your strategy should be thorough and well thought-out, but it doesn’t have to be perfect right off the bat. You’ll test and refine your strategy as part of the next steps of learning how to day trade.
Step 3: Paper Trade
Once you’ve developed a trading strategy, it’s time to test it out. The way to do this safely – without risking real money – is to use a paper trading account. Paper trading accounts, also known as trading simulators, let you place virtual trades using real-time market data so you can track how well your strategy performs.
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It’s important to make paper trading as realistic as possible. If you’re planning to start trading with $10,000 when you switch to live trading, you should use a paper trading account that starts with around $10,000 in virtual money. Stick to your strategy and be invested in the outcome of your trades so you can practice controlling your emotions when a trade goes against you. If you wouldn’t place a trade with real money, don’t place it when paper trading.
After a few weeks of paper trading, take stock of your account. If your strategy has been consistently profitable, you can move onto the next step. If your strategy isn’t profitable, refine it or consider developing a new strategy altogether. Never move onto trading with real money if your strategy isn’t working for you when paper trading.
If you are looking for a good trading simulator to practice paper trading, you should check out our TradingSim review (paid service) and TradingView review (free service).
Step 4: Start Small
Now it’s time to start trading with real money. But instead of diving in head-first, it’s a good idea to dip your toe in the water and see how things go. If you trade with a commission-free brokerage, there’s no extra cost to trade a few shares at a time as opposed to opening large positions.
During this stage, your goal should be to prove that you can trade profitably and consistently under real trading conditions. The purpose of this stage isn’t to make as much money as possible, so be conservative with your strategy and err on the side of minimizing risk.
Step 5: Scale Up
If trading is going well for you and your strategy is consistently profitable, you can begin slowly scaling up the sizes of your positions. Don’t become overconfident, and keep in mind that market conditions can change. If you find that your strategy is no longer working the way it did before, it’s a good idea to pause and return to paper trading to adapt your strategy to the current market.
Conclusion: Learning To Day Trade
Taking the time to learn how to day trade and developing a reliable trading strategy are the foundations of successful day trading. Once you have a strategy, it’s important to use paper trading to test it out safely. When trading with real money, start small and be ready to adapt to changes in market conditions.