What it Takes to Be a Day Trader in the Stock Market
Day traders need excess capital to begin a career. Additionally, they must understand the stock market and other securities markets. If you are a novice, training with an established day trader helps you prepare. Along with historical perspective about how stocks trade, you should prepare a business plan. If you plan to focus on event-drive trades, outline how to obtain information surrounding the events. You should also have the professional tools required for day trading.
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Discretionary Capital
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Trade capital that you don't need for the essentials of living, according to the Securities & Exchange Commission's article "Day Trading: Your Dollars at Risk." By definition, day traders don't invest. They seek out short-term opportunities--within a single trading session--to buy and sell securities for a profit. Day traders must know how to manage stress and take losses. Most day traders don't have access to unlimited capital. They must rely upon access to borrowed money from a broker-dealer. Use of borrowed money, called leverage, allows the trader to achieve higher profits--and losses--on capital. Day traders must maintain a minimum of $25,000 in equity in an account at the close of each trading session, according to the Financial Industry Regulatory Authority (FINRA) Rule 2520. Intraday capital isn't monitored by the broker-dealer firm.
Broker-Dealer Considerations
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Choose a registered broker-dealer with whom to do business. Check with the North American Securities Administrators Association about the status of your firm. Private trading groups may offer access to capital and discounted capital. If the firm isn't registered with the Securities & Exchange Commission or has previously lodged complaints with regulators, don't do business with it. FINRA, the Financial Industry Regulatory Authority, issued Regulatory Notice 10-18 about unregistered firms in April 2010.
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Experience
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Work beside an experienced day trader if possible to determine your suitability as a day trader. Day traders may work alone or in small groups. Learn about the markets over a long period. Author Josh DiPietro wrote about his experiences in "The Truth About Day Trading Stocks: A Cautionary Tale About Hard Challenges." He had only six months' experience in the markets prior to taking a three-day trading course offered by a day trading group. He practiced trades in a virtual account, called paper-trading, and had good results. Unfortunately, a trader's cool perspective may change when he's trading real money. Making consistently profitable decisions within a single trading day is very difficult.
Tools
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Buy the best tools you can afford before deciding to work as a day trader. Start with a detailed business plan, says author David Borman in "The Everything Guide to Day Trading: All the Tools, Training and Techniques." The business plan should detail your mission, service and background--including computer skills and knowledge of the markets. Detail the equipment needed to accomplish your profit objectives. Describe your precise method of how and when to take profits. Spell out your capital requirements: how your day-trading job will be funded and what ongoing capital contributions are anticipated. Finally, plan a schedule of capital withdrawals. Taking money out on a scheduled basis helps conserve capital needed to sustain the business.
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References
- Securities & Exchange Commission: Day Trading
- Financial Industry Regulatory Authority: Regulatory Notice 10-18
- "The Truth About Day Trading Stocks: A Cautionary Tale..."; Josh DiPietro; 2009
- "The Everything Guide To Day Trading: All the Tools, Training and Techniques"; David Borman; 2011; Page 39
- FINRA: $25,000 Margin Requirement
Resources
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