How to Make Money as a Day Trader in the Stock Market

Buy strength and sell weakness.

Making money as a day trader is a daunting task. Only a small percentage of all day traders make money consistently from the stock market. Trading requires attention to detail and years of practice in bull and bear markets. Those who succeed find much freedom in the ability to make their own hours and own decisions.

Things You'll Need

• Trading program Online Data Subscription Spreadsheet program for recording trades

Instructions

1. Read and learn as much as possible about the four important elements of trading, beginning with the Resources section (below). Learn money management techniques, diversification, stop-losses, and entry and exit setups. More importantly, determine whether you have the discipline and determination to take many small losses rather than large losses.

2. Know that professional investors risk no more than 2 percent of the total value of all their assets per trade. Money management is about how much to risk overall in the market and per trade. Day traders rarely carry more than 5 to 10 positions at a time. Understand that day trading does not allow traders to carry positions overnight without affecting their liquidity and amount of cash available for trading.

3. Enter buy and sell orders through online brokers. Use online systems because they are cheap and fast, and errors can be corrected quickly. Know that the trader is responsible for any mistakes until they are corrected. Consider adding a second online broker in case you cannot reach your regular broker. Trade using online brokers so that in an emergency, you can resolve trade disputes and problems with a human broker.

4. Diversify your assets as much as possible. Day traders tend to buy hot sectors and are less diversified than long term investors. Consider the use of options if you think a move is imminent, but you cannot tie up additional capital with more positions. Trading costs rise when using options, but risk is reduced.

5. Use trading software such as Metastock to plot trade strategies and automate trades to your online broker. Automate trading also can reduce errors. Use popular trading systems such as stochastic oscillators and moving averages to initiate trades and spot exits. Use stops to limit losses at entry points. Stops should be placed no more than 8 percent below the entry point. Sell when positions have declined to their lowest level in the last 20 bars (bars are units of time--usually day traders use five-minute bars) or 20 percent of potential profits are lost.

6. Use spreadsheet programs to copy details of trades. Keep a diary to understand why you bought and sold securities, especially if you did not follow your trading rules for entry or exit. Remember that profits are sporadic and that the investor will go through long periods of small gains or losses. Do not try to make profits consistent. Profits and losses come in groups.

7. Open your brokerage account with at least $25,000 so no one trade or bad day will make or break your confidence and ability to trade. Open a margin account so you can trade options or borrow on margin if necessary. Most importantly, remember that day traders end all trades by the close. Make sure all trades are closed so you can start with no trading issues the next day.

Tips & Warnings

• Talk to other day traders and learn if you have the psychological tools to be a day trader. Have an outside source of income until you are certain you can succeed as a day trader.

• Never trade full-time until you have tested a theory with a variety of securities under a variety of market conditions.

References

• Metastock Homepage
• Diversification Study by Ed Seykota
• Trend Study by Ed Seykota