Day trading is a popular way to make big bucks in the stock market. But it comes with plenty of risks, too, and those who dive in too quickly are likely to find themselves in financial hot water. If you want to day trade as a career and don’t want your enterprise to flop right out of the gate, then you need to take care of a few things before you get started.We’ve got you covered for with these day trading for dummies must-knows.
Build a (large) emergency fund
When you’re a day trader, you’ll have good days and bad days. On the good days, you’ll make a ton of money. On the bad days, you’ll lose a ton. And if you have a few bad days in the same week or month, you could find yourself unable to draw an income from your (non-existent) earnings.
What will you do then? Will you pack it in and go back to a salaried job? Not if you have enough of an emergency fund to live on while you wait for your luck to turn around and your magic touch to come back. People with inconsistent incomes need emergency funds, and day traders are no exception. Build a robust financial cushion, and gain the freedom to keep after your day trading dreams.
Research your strategies
When you’re investing to build a retirement nest egg, you don’t need to know much more than how to place a market order for a big index fund. But when you’re a day trader, you’ll need a bigger toolkit. You’ll need to know call vs put, short-selling, trading on margin, limit orders, and all of the other ways you can make bets on stocks. And you’ll need to know how to decide which of these tools to use, and when.
You’ll need to understand stock charts, highs and lows, and P/E values. You’ll need to know how to analyze momentum and potential turning points. And you’ll need to join a school of thought on how to interpret all of these indicators, because not everyone agrees!
No strategy is perfect, but a good one will help you win more positions than you lose. Sticking to one will mean that you can be consistent in your decisions, which is key to avoiding emotional mistakes. So do your research and pick a strategy — and then test it.
Test your strategies
This is an important one, folks. You may think that you’ve found the perfect strategy for making money on the market, but you won’t know for sure until you actually act on it. You need to put your chosen strategy through its paces.
But if you do that with your money, you might learn the hard way that your strategy isn’t everything that you thought it would be. What you should do instead, then, is practice using market simulators. Sure, you might be sad to see your play money earning profits that your real money could have, but you’ll be pretty relieved if your testing exposes weaknesses in your strategy that you didn’t have to pay real money to find out. Take the time to prepare your strategy before you put real money at risk. If your techniques don’t work in simulations, then they sure as heck won’t work in real life!
Evaluate your temperament
Day trading is an aggressive, stressful activity, and it tends to attract people who revel in those feelings. But you need to be careful as you make this decision — is day trading the right fit for you?
To be a successful day trader without losing your mind, you’ll need to be able to keep stress in check. You’ll also need to be able to make clearheaded decisions at times when everything seems to be moving quickly. The downfall of many day traders is their inability to make dispassionate decisions. When things get emotional, many traders lose money.
Decide if you have the emotional makings of a day trader, and then invest in the qualities that you know will help you. See a therapist or take up meditation to keep stress levels low. Set rigid rules and memorize your strategies so that tough decisions can be made in a disciplined way — by your consistent standards, not by your emotions. If you do all of that, you’ll be ready to get started.
