17 min read

The Beginner’s Guide to Day Trading

So you want to be a day trader? You want to make that fast money? We get it. Who wouldn’t, right? Well, before you jump in head first and start pushing buttons, give us a bit of your time to discuss everything you need to know, first, in this beginner’s guide to day trading.

Day Trading 101

The Lure of Day Trading for Beginners

Success theatre has made a big impact on the lure of the average Joe into day trading in recent years. The constant barrage of juicy wins being shared on Twitter and YouTube these days make it sooo tantalizing. After all, if Jimmy Guru could go from barista to baron in just a few short months, surely he can teach you how to as well?

All kudos to Jimmy Guru, but the reality of day trading is that it’s very difficult to reach a high level of success. It’s then even harder to maintain that level of success

Nonetheless, we are in the business of helping traders reach that success, so don’t get the wrong picture. We believe it is attainable. And, for the right person, we believe it is worthwhile.

That being said, our goal in this beginner’s guide to day trading is to paint a realistic picture for you, rather than the pomp and glamour you’ve been exposed to. Along the way, we’ll give you some valuable insights into what to expect, what you should know, and what you should avoid.

What Is Day Trading?

Day trading is simply the buying and selling of a security, asset, or commodity in the same day. Holding positions overnight is what we call swing trading, and that’s a whole other discussion.

Simply put, if you open a trade in the market, then you close it the same day, you’ve made a “day” trade.

This can apply to stocks, currencies (forex), futures, crypto, or anything else that’s tradable on the markets. It doesn’t really matter. 

How Much Do Day Traders Make?

This is a bit difficult to say. Honestly, most day traders don’t make money…they lose money. However, professional traders, we have written a great article that outlines a typical day traders salary here.

Online, you’ll be quick to find many YouTube videos and gurus who’ve made millions. Their results are not typical, and can be difficult to replicate. In fact, many of these gurus are suspect regarding their trading practices, knowing they have so many followers who may buy a stock based simply upon their recommendation.

All in all, a great way to think about this is to see how little you need to make each day in order to meet your financial needs. Here is a great tweet from a market veteran on how little it takes to make a living, if you’re consistent:

Along those lines, we don’t recommend focusing on how much you can make, but on your process. We’ve done a few great interviews with guys who’ve gone from $1500 to almost a million in a short time. Be sure to check those out on the SimCast!

What Does It Cost To Day Trade?

Aside from the risks of losing money, you can day trade nowadays for practically free. Most brokers will offer free trading. However, not all brokers are created equally.

If you’re planning on day trading with precision and larger share size, you will eventually want a quality platform.

The drawbacks to having a quality platform, which doesn’t sell your order flow, is that you will pay commissions and fees.

There are a few different ways that this can be calculated depending on the broker:

Per-Trade Commissions in Day Trading

Per-trade commissions are usually calculated for low volume traders. Typically, the per-trade commission standard is around $5-$7 dollars per trade.

So, think about it this way. If you place 20 trades in a single day, you’ve racked up around $50 or so in commissions. 

Obviously, for small accounts, this can add up quickly. For that reason, you want to either limit the amount of trades you make, or have enough starting capital to support these costs.

Per-Share Commissions in Day Trading

Usually, the per-share commission structure is applied to traders with larger accounts and higher frequency trades. The rate can be as low as $0.002 per share. Most brokerages will have a tier system depending on the amount of shares you trade. 

The more you trade, the lower your per share commission size, typically. As you can see from doing simple math, it would take 1000 shares to add up to a $2 commission.

In addition to commissions, there are ECN fees, and other items to consider. Once you become more proficient at trading, you can even get rebates depending on how you route your orders.

Why Day Trading Is Attractive

Unlike swing trading or long-term investing, day trading can provide opportunities to make high percentage gains in a very short amount of time. 

Think about it this way. If a stock has the ability to move 20% in a single day, would you like to capitalize on that opportunity? Or, would you rather wait days, weeks, or even months for a stock to reach 20% in gains? 

Therein lies the temptation.

Everyday in the market, there is usually an opportunity for a stock to make a big move. Seasoned day traders know how to anticipate these moves based upon volatility and momentum. Add some amount of leverage (margin) into the mix and you have a recipe to either increase your account exponentially in a short time, or lose it all.

Sounds a lot like gambling doesn’t it? Well, we’ll discuss that next.

Is Day Trading Gambling?

In short, it all depends. Day trading, or any other trading for that matter, when done properly, is a game of probabilities. Most new traders don’t understand this, no matter how many times you tell them.

To new traders who are itching to make millions — the faster you can get there, the better. Unfortunately, this leads to gambling. 

Irresponsible gambling is throwing a bet on something with no idea what your outcomes may be for success. Your “odds,” so-to-speak. When you don’t know your odds, you’re at the mercy of happenstance. Who knows where the chips may fall, right?

So it is with trading. If you trust a guru with your money to tell you what is going to work and what isn’t, how did that guru earn your trust? Did he/she provide the probabilities of a successful outcome with you? 

If not, what are you trusting in? 

Likewise, if you take a trade based on a hunch, or “to see what happens,” you’re essentially gambling. You might as well be in Vegas.

Gambling vs Probable Outcomes

The difference between blindly gambling and successful trading comes through a deep understanding of your probable outcomes. Using the example above, if we throw a bet on something we know has a 75% chance of success, we are no longer gambling. 

The trick is figuring out what variables and patterns play out in the markets, time and again, in order to find these outcomes. Once you do, you are armed with an edge – a strategy. The rest is simply monitoring your position size and growing your account over time by keeping your risk in tact.

Discovering Your Edge Before You Start Day Trading

To avoid gambling your hard-earned money or life savings away, this may be the most important aspect of your budding career in trading — discovering your edge

Lessons from Jesse Livermore

There is a famous trader that you may or may not have heard of by now named Jesse Livermore. In a book that profiles his life, he says the following:

“The game taught me the game.”

The Life & Death of Jesse Lauriston Livermore - Beyond Debt
Bucket Shops – Photo taken from The Life & Death of Jesse Lauriston Livermore – Beyond Debt

Livermore grew up working in what were called bucket shops. They were local trading rooms where you could place bets on the market. Back then you were basically all in. Every trade was all or nothing.

Having worked there for so long, Livermore began to see patterns play out in the prices of stocks as they were printed on the “tape.” Before long, he began betting on these patterns, and winning handsomely.

Observe Before You Bet, Look Before You Leap

The reason we mention that story is twofold:

  1. If you spend enough time observing the markets, you’ll discover an exploitable pattern that can make you a handsome living.
  2. Skip this integral part of your journey, and you’ll spend a lot of long, hard years suffering set back after set back.

Observation and discovery are the keys to your success. We believe it so much that we created a niche market discovery tool that allows you to replay the entire market for up to three years.

Ponder this for a moment: 

Let’s assume you’re a soldier and you have a mission to accomplish. Would you rather jump out of an airplane into enemy territory with no prior knowledge of the terrain, the enemy, the target, the climate, or the language; or, would you rather train for a few months on what the enemy looks like, the compound where he may be hiding, how many guards he has, the terrain you’ll have to traverse, the language of the people, etc.?

In which scenario will you be more successful? Which one is more of a gamble?

Day trading is not a safe market for an uneducated trader to put his money. It’s dangerous. Literally speaking, 94% of traders lose money in the market over time. Let that sink in. 

How to Find a Strategy for Day Trading

All that being said, there are a few ways to go about discovering an edge for day trading. Like we just mentioned, you can observe enough market action until you see a repeatable pattern. Conversely, you can study a guru who has published his/her own strategies.

We are big proponents of as much original observation as possible. However, we also believe that the learning curve can be drastically reduced through quality and trustworthy education, like good podcasts for example!

In the end, though, your “edge” needs to be yours, no matter what bits and pieces you learn from here or there.

3 steps to find your edge as a beginning day trader

Step 1 for Discovering Your Edge in Day Trading: Patterns

Look for cookie-cutter patterns. You know, the flags, the wedges, the pennants, the cups with handles, the head and shoulders, the abcds, etc. Maybe you want to trade with the trend, perhaps you find reversals are more lucrative. 

You should also study candlestick patterns. We have a great guide for these.

Regardless of the pattern, the same ones that have been documented for years and years still play out in the market every single day.

Along these lines, start observing the biggest moves in the shortest amount of time. What happens when stocks gap up or down on large volume? Can you find predictable volatility in order to exploit a large intraday move based on what you find?

At the end of the day, the goal of a day trader is to make the most amount of money in the shortest amount of time, all while managing risk. In order to do this, you must find the largest, yet most predictable, price swings intraday. That’s it. 

Find enough of these, and you’re well on your way. We’ll discuss a few strategies in a moment.

Step 2 for Discovering Your Edge in Day Trading: Picking a Side

Once you find a pattern, pick a side. In the beginning, it will help you focus by choosing the long side or the short side. The goal here is to become consistent. It doesn’t mean you’ll stay a bull forever, or a bear forever. 

To a beginning trader, flipping your position here and there and then back again can be utterly confusing and confounding. Therefore, pick a side. If you see a pattern of low priced stocks gapping up and then failing, maybe shorting is better for you.

To the contrary, if you’re a more optimistic personality, perhaps you like the long side. Either way, it’s best to pick a side in the beginning, then study it until you’ve mastered it. You can always add strategies further down the road.

To that point, pick a side that fits your personality.

Step 3 for Discovering Your Edge in Day Trading: Backtesting/Outcome Testing

Like we said earlier, you’re only as good as your known probable outcomes in the market. 

As the late Mark Douglas once said, “anything can happen” in the market. Day trading is often risky and is never certain. There is no edge that will have a 100% win rate, ever. If there were, we’d all be rich.

Understand that losses will be a part of your experience more often than not. Unless you can embrace this, your odds for success are slim. It all boils down to testing your outcome for a specific strategy.

For example, if you know that stocks with a float size of less than 20 million that gap X% on Y million shares of volume have a Z chance of breaking down after 10am in the market and will close lower than they opened on the day 70% of the time, then you can place your bet knowing your probable outcomes. 

30% of the time you’ll be wrong. Then it becomes a matter of managing your position size each time.

This is just one example, but there are myriad examples like this. The bottom line: test the pattern you see with as much data as you can and with as many examples as you can.

Then, narrow down your criteria for entry, rules for trade management, and criteria for exiting the trade.

This is where true confidence comes from in trading. Don’t take our word for it, take Qullamaggie’s word for it.

The Importance of Simulation and Paper Trading

Paper Trading Apps for Day Traders

Simulation plays a huge role in day trading, mainly because it allows you to backtest and outcome test much faster. Trading live each day will take you many years to accumulate the amount of chart/screen time necessary to build pattern recognition in your mind.

Not only do you want to rely on your data, but you also want to rely on your “chart eye.” Your chart eye becomes a necessary component to your trading, unless you are a systematic/algorithmic trader.

Most traders are not algos. They are discretionary. However, as discretionary as many traders may seem, the repertoire of patterns they have become accustomed to essentially becomes systematic. 

You learn what qualities you need to see in volume and price action before you put on a trade, for example.

With paper trading, time is condensed. You can trade whenever you want, testing as many strategies as you want, on as many tickers as you want. And if the platform is complete, you’ll be able to track your strategies in an analytics page, like we provide here at TradingSim.

Don’t listen to the naysayers who will tell you that paper trading doesn’t prepare you emotionally for the real environment. The most successful traders in the world will tell you differently. We’ve already debunked this myth with the most prolific trading psychologist in the world.

It’s all about discovering your probabilities. That is what builds confidence.

The Pattern Day Trading Rule and What It Means for You

Pattern Day Trading Rule

When getting started in day trading, a lot of your success may actually depend upon whether or not you’re affected by the Pattern Day Trading rule (PDT). This rule limits the amount of day trades you can make in a week if your account is below $25,000. 

On a margin account, you’re only allowed 3 day trades in a 5 day period. So, if you make 3 day trades in one day, you’ll have to wait 5 days to make another.

We discuss ways around this and the potential for international brokerages to free up your available trades, but you need to understand how this can affect your performance.

  1. You’ll be more inclined to hold losing trades because you won’t want to burn a day trade.
  2. Unless your strategies are built on high win rate and high profitability ratios, it may take you a looooong time to get over PDT.
  3. If you can find access to a brokerage that allows you trade freely, you’ll have to exercise discipline to overcome the “over trading” habit.

As you can see, there are quite a few caveats here, but at the end of the day your success will revolve around two things:

  • Your ability to trust your edge/strategy
  • The ability to stay disciplined enough to only trade your edge

That being said, whether you’re affected by the PDT rule or not, the goal is the same. Only trade the highest quality setups that you’ve tested well enough to trust. 

Lastly, if you place more than 4 day trades in a 5 day period, know that you will be flagged as PDT. If you don’t top up your account, you’ll have to wait 90 days, or apply for a waiver in order to trade again.

How Much Money Should You Start Day Trading with?

This is a tricky question. On the one hand, if you are above the PDT rule mentioned above, you should have plenty of money to make a good living at this. If you are under PDT, you’ll likely need more time. 

At the end of the day, it doesn’t really matter how much money you start with. In fact, we recommend starting small if you can. If you’re above PDT (above $25,000 in your account), then you may be prone to trade with large size.

Likewise, if you have an international broker, you might be able to start with only $5000, but not be affected by the PDT rule. Fees and commissions aside, we like to say that if you can’t make it with $5k or $25k, you won’t be able to make it with $100k. 

Granted, the amount you have to trade with may influence the types of stocks you trade. Larger accounts can capitalize on the slower moves of larger stocks and still make good money. Whereas smaller accounts can get in and out of smaller stocks that give bigger intraday gains.

Cash or Margin for Day Trading

This is a great question for beginners, especially depending upon whether or not you’re under the PDT rule. 

Cash or margin for day trading beginners

Using Margin

Using a margin account has its benefits if you want to trade more. Essentially, this allows you to trade as often as you want, granted you aren’t affected by the PDT rule. It can also give you up to 4x or even 6x leverage on your buying power.

But, before you think about this as a blessing, it can often be a curse if you don’t know what you’re doing.

Here are a few other key points for margin accounts:

  • If under PDT, only 3 day trades in 5 business days
  • Potential to lose more if on leverage
  • Can buy more shares than a cash account
  • The ability to also open a cash account

Using Cash

On the other hand, cash accounts allow you trade with your available cash only. Each trade you make will take two days, plus the day you traded, to reconcile. For this reason, you might consider having two accounts open as cash accounts.

This will allow you to place more trades.

Here are a few key points for cash accounts:

  • The ability to place more trades by using less of your cash per trade
  • Can be opened with a margin account, giving you two accounts
  • No leverage, so less risk
  • If you place a trade with unsettled funds (T+2), then you could get suspended

All in all, there are pros and cons for each. It really all boils down to how much money you have and how disciplined you are no matter what kind of accounts you open.

For more information on cash versus margin accounts, click here.

Tools of the Trade

Like any job, you will want quality tools to enable your success. While some people are able to make money simply using their phones and a Robinhood account, the best traders prefer quality tools.

Let’s look at a handful of things you’ll need to get started:

A Decent Computer

Unless you want to day trade on your phone, or by calling in orders to your broker (really old school) you’re going to need a laptop at a minimum. It can be difficult to navigate order flow on a phone, and you should be able to see charts and Level II data to make your decisions.

Many brokerages nowadays use both Windows and Mac for their platforms. That being said, Windows is much more prevalent for many brokers. You can, however, run Windows on a Mac with Bootcamp or a virtual desktop application.

That being said, if you decide to run multiple screens and chart windows, you’ll want a computer with a decent amount of power to support all of that. Consider using the most recent processors available, consult with the computer company about your plans, and you’ll find one that works for you.

Multiple Monitors

Not every trader likes to trade with multiple monitors, but as a general observation, most professional day traders do. There are plenty of options available from vertical screens, to curved gaming monitors.

Whatever you decide, just make sure you understand that more screens and more charts is not always best. Sometimes less is more.

At the end of the day, it is about what works for you. If you want to monitor multiple tickers, news sites, fundamental sites, chat rooms and more, then maybe you need more monitors. Sometimes cutting out the noise and having fewer screens can be beneficial as well.

A Brokerage Account and Charting Platform

Most brokerages provide you with a charting platform. However, some will charge you for using the platform.

There are handful of options like Sterling Trader Pro, or LightSpeed, among others. These platforms are considered high end day trading platforms that connect with multiple brokers to provide fast order execution.

Other brokers like WeBull, or ThinkorSwim, or Interactive Brokers have their own charting and order execution platforms. They offer free options as well. It will be up to you to decide which one is best for you.

Despite the plethora of brokerage platforms, many traders opt to use a secondary charting platform outside of their brokerage. The most popular platform for this is TradingView.com.

Essentially, this allows you to chart on one platform and trade on another.

Morning Scanners

In addition to a charting platform, you need to make sure that your system comes with a quality scanner. This is imperative for day traders who are looking to find high quality momentum setups intraday.

Many scanners will show you the highest % gainers or losers on the day, along with the highest volume or most active symbols. The best scanners will allow you to filter your resutls according to your strategy criteria, like float size, market cap, etc.

Here at TradingSim, we are one of the few simulators that allows you to replay the market with a live scanning engine. Here is example of some of the features in our scan filter.

TradingSim Day Trading Scanning Filter
TradingSim Scanning Filter

A Paper Trading Simulator that Allows You To Use Replay

The last tool we will mention is the ability to replay your trades. So many great educators and traders recommend recording your screens while you trade, like Nate Michaud. The reason for this is that it’s great review.

When you can replay the market, you can relive the experience and make notes on what you can do better next time. Maybe you missed something in the Level II or Time and Sales. Whatever the case may be, review is done best through replay.

Our Favorite Day Trading Strategies for Small Accounts and Beginners

Let’s be clear, you can find a million different ways to make money in day trading. There is is no right way or wrong way. Nonetheless, what is most important is that you find a strategy that you can master.

As the old adage goes, you don’t want to be a jack of all trades and a master of none. This is doubly true for the stock market.

Along those lines, here are our two favorite strategies for growing a small account, one for the long side, and one for the short side.

The Intraday Volatility Contraction Pattern

We talk about this strategy in depth in this article. It is essentially a fantastic way to keep your risk defined to a certain level while going long anticipating a breakout intraday. Typically it is more of a continuation pattern. Here are the 5 things to look for before the setup forms:

The Day Trading Volatility Contraction Pattern Criteria:Strong Underlying Demand Recent Overbought/Supply pressure Diminishing supply characteristics Decreasing volatility Explosive breakout

As part of this pattern, we borrow from the wisdom of Minervini’s Volatility Contraction Pattern and Gil Morales’s pocket pivots and vdu. Here’s a rough sketch of what this pattern looks like:

Intraday day trading volatility contraction pattern
Intraday volatility contraction pattern

For the setup you want to look for a nice momentum burst off the open, followed by a tightening or contracting in the base. As each consecutive higher low forms, it gives you an opportunity to enter long and risk to just below the prior higher lows.

To time your entry, we like to use the volume and price analysis that Gil Morales teaches. Here’s an example of what this looks like inside Tradingsim:

small account strategy with pocket pivots and vdu
NTEC VCP with VDU and Pocket Pivots

Notice that you can take the entry on the pocket pivot after anticipating a launch higher after the volume dry up.

This often leads to very large gains in relation to the risk you have. Here is what NTEC did on this particular trade:

Small account strategy with stop and gain
High reward to low risk

As you can see, this setup provides a very low risk to high reward, exactly what you want as a trader.

The 1-3pm Blood Bath Setup

We discuss this strategy in depth here.

In the world of low float, low-priced stocks, most of the momentum you see eventually fizzles. It’s true that most of these companies are not financially sound and are simply using the market as a tool to raise money.

As astute traders, it is our job to not believe the hype, but to trade the reality. on that token, the reality is that most penny stocks will pump and then dump through a means of diluting the shares.

One great way to take advantage of this is by anticipating the “dump” phase. After watching these pumps over and over again, you’ll begin to notice that many of them will clear out the long chasers and early shorts, then dump the price towards the end of the day.

Here is what the criteria looks like:

1-3pm Bloodbath criteria

One example of this occurred on ticker COCP. This symbol was a low float ticker that was up over 273% intraday. It had a high chance of dilution, and announced an offering after 1pm on the day of its big run.

Notice how the stock was trying to breakout to new intraday highs shortly after 1pm.

COCP double top at 273%

Shortly thereafter, COCP announced an offering at $1.54 per share, much lower than it was trading. It had an open shelf offering, which alert traders would have known about.

The result of the offering announcement was devastating. It lost half its value you in a matter of minutes.

COCP 1-3pm bloodbath
COCP 1-3pm bloodbath

Clearly you can see that this didn’t workout well for breakout buyers. As a great additional resource, we recommending studying this setup through the articles found here.

Getting Started as a Beginner in Day Trading

Now that you understand many of the basics about day trading, we encourage you to proceed with caution. This is a marathon, and not a sprint. Keep your expectations low, and your effort high.

To that end, we recommend the following activities as a summary of steps to get going:

  1. Devour as much education as you can in 6 months to 1 year.
  2. Find a solid mentorship program
  3. Begin day trading in a simulator for the first year.
  4. Only put real money to work with a broker when you can prove you have a profitable system in a simulator.
  5. Tweak your system and manage your risk over time
  6. Add to your system with new strategies only once you can provide enough income for your needs.

Feel free to reach out if you need help at Support@tradingsim.com. We’d love to hear your feedback!

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