Weighing a Day Trading Career

4 Steps Before You Jump In

Worldwide trading chart and map

Youst / Getty Images

Starting a day trading career isn't a decision to be taken lightly. It is possible to be successful and earn a good living trading only a few hours per day, but that’s likely many months away for people just starting out. The first year is tough; there are lots of ups and downs, and your first realistic goal should be simply not to lose everything. 

If these prospects don’t deter you, don’t jump in blindly. Planning ahead is key for a day trader. Here are four things you need to do in order to put yourself on the right path.

1. Consider Goals and Constraints

Before you invest time in creating or learning and then practicing a day trading strategy, consider your goals and constraints. 

  • Do you have enough capital to day trade? If not, wait until you do. In the meantime, you can continue practicing your strategy.
  • Becoming consistently profitable takes six months to a year when practicing several hours each day. It will take longer if you do it only intermittently. Are you willing to put in that amount of time?
  • Once you are trading live, can you commit to trading two to three hours a day, accounting for your job and other commitments?
  • You shouldn't give up your job until your trading profits replace your income. Therefore, given your other commitments, what time of day can you trade? Is your strategy designed for that time of day? Your strategy needs to fit your life.
  • Are you day trading because you want to quit your job? You will likely have to trade for a year or more to get to the point where you can replace your income by day trading. 

Consider all these questions before investing a lot of time or money in learning to day trade.

2. Know the Capital Requirements

Capital to a day trader is like inventory to a store owner. You need it to operate, and how much you have—and how you manage it—will determine your income.

  • Stocks: To start day trading stocks in the U.S., you legally need $25,000. To give yourself a buffer, deposit at least $30,000. If you enter and exit stock positions on the same day with less than $25,000, your account will be flagged and you run the risk of losing your trading privileges. 
  • Foreign exchange: Forex day trading doesn't have a legal minimum, but start with at least $500. Less than that and you're limited on the number of trades you can take. If you want to produce a monthly income that's worth withdrawing, start with $5,000 or more.
  • Futures: To day trade futures, start with at least $2,500, but $7,500 to $10,000 is better. Some contracts cost more to trade than others, but if you plan to trade the common E-mini S&P 500, that range of capital will suffice.

Making an income is possible, but not easy, with these recommended deposit amounts.

3. Create or Learn a Strategy

Day trading isn't something to do on a whim. It requires a sound and rehearsed method that gives you a statistical edge on each trade you make. 

Start by watching live charts (available for free) of an asset move. As you watch, ask yourself:

  • How would you get into a trade?
  • How would you get out (for both winning and losing trades)?
  • How much would you risk on the trade and what position size would you take (how many shares of stock, lots of currency, or futures contracts)?
  • After deciding all this, what are the odds the trade will be profitable? And if you take similar types of trades 100 times, what tendencies does your strategy show?

The only way to answer these questions is by implementing the same method over and over again and monitoring the results. You can create a strategy by finding tendencies in the daily price action of an asset, or you can learn a strategy from someone else. 

4. Practice a Lot

Practicing is key in day trading. Even at a minimum-wage job, the boss usually makes you practice what you are supposed to do before you do it for real. With thousands of your hard-earned dollars at stake, practice is extremely important. Yet, new day traders rarely practice.

To get started, practice in a demo account before you risk a single real dollar. Do so methodically, trading your created or learned strategy over and over again. What you will find is that no two trades are ever exactly the same. Today may be volatile, while tomorrow is sedate. Today is trending, while tomorrow is ranging. If you don't practice, you may miss trade signals or be inclined to make trades that aren't part of your strategy.

Practice only the strategy you are working on. Know it well and perfect it. Once you add the pressure of trading real capital, you don't want to still be thinking about whether you should take a trade or not. 

Bottom Line

Day trading is risky and stressful. Before you make a definitive move to this profession, consider your motives and circumstances carefully, weigh the capital requirements, decide on a strategy, and then practice, practice, practice. Only after you’ve been able to make money in a demo account for several months should you consider opening a live account. Then you can take the next steps, making the logistical moves needed to become a beginner day trader.