Day trading is turning out to be a buzzword among millennials. Millions of people across the world try stock trading, and more than 90% of them fail. Pattern Day Trader Rules for beginners are simpler than you think. Many people see trading as gambling, and that’s the biggest reason they don’t make money.
Trading is a business; you need a strategy, plan, ability to take risks, and money management. If you’re serious about turning your life around and watch profits roll in, follow this step by step guide to start day trading for beginners.
Day trading for beginners: Carry out a self-assessment
Pattern Day Trader Rules for beginners include a combination of skills, knowledge, traits, and commitment. It’s not a casino where you put your money in a stock, cross your fingers, and hope for it to go your way. Stock trading is not gambling; you’ll need to be adept with mathematical analysis, financial knowledge, behavioral psychology, and risk management.
You’ll need to have the stomach for entrepreneurship, and you should be willing to live a hard life, at least for the first few years as a day trader. Here’s what being a day trader actually requires:
Long working hours
Little to no leaves from work
Continuous self-learning with no guidance
High levels of risk
How to start day trading? It all starts with the right mindset. Unless you’re willing to devote time, self-learn, take risks and suffer losses, don’t get into day trading. Of course, the benefits are exciting, but you’ll need to put in the hard work.
Arrange sufficient capital
The best day traders in the world lose, too. No one makes consistent profits; intermittent and extended losses are a part of day trading. You may suffer four losses in a row, and recover with profit on the ninth trade. In order to handle these risks and still be able to continue, a trader must have a sufficient cushion of capital. Entering the trading world with a small amount of money is a sure shot failure.
So, before you quit your job to trade full-time, have at least $100,000 for trading. If you’re a novice who’s trying to learn, you can start with smaller amounts, depending on your plan and frequency. To actively day trade, your trading account should have a minimum balance of $10,000.
Pattern Day Trader Rules: Understand the market
As a day trader, you’ll need a solid foundation of knowledge about how to stock markets work. From simple to details like trading hours and holidays to advanced information like the impact of news events, margin requirements, etc., you’ll need to have a broad knowledge base.
There are a lot of different types of securities in the markets – stocks, futures, options, ETFs, mutual funds, and more. All these securities trade differently, and to initiate a successful day trading strategy, you’ll need to have a clear understanding of the characteristics of each security.
For instance, you should know about the margin requirements for futures, options, and commodities, and how it affects the trading capital. Lack of basic knowledge of securities can lead to losses. So, before jumping on the trading terminal, make sure you’re fully familiar with the trading of different securities.
Pattern Day Trader Rules: Create a trading strategy
One of the most critical steps to succeed in day trading for beginners is to set up a trading strategy. There are a bunch of day trading strategies out there, such as Ichimoku Kinko Hyo, RSI and Stochastic Oscillator, and Post-Gap Trading with Price Action. Your strategy would also depend on whether you want to be an intraday trader, swing trader, or scalper.
The world of trading is dynamic. A trading strategy can help you make money for months and then fail suddenly. So, besides having a winning strategy, you also need to monitor its effectiveness and keep a close eye on other strategies and development.
Integrate your strategy and plan
Creating a strategy is not sufficient. In fact, most strategies are already pre-made, so you can simply use it for your own trading. What’s important is a trading plan that complements the strategy. Here are a few points to cover to come up with a trading plan:
How will you use the strategy (entry/exit)
How much capital will you use?
How much money will you put in one trade?
How much assets will you trade?
How frequently will you place trades?
Answering these questions will help you come up with your trading plan. Then, you can integrate your plan with the trading strategy and start trading.
Practice money management
Let’s say you’re starting with $100,000 trading capital, and you have come up with an excellent trading strategy plan that offers a 70% success rate (7 out of 10 trades profitable). How much will you spend on your first trade? What if the first three trades you make turn out to be a failure? What if your strategy suddenly stops working? The trading world is full of ‘ifs’ and ‘buts,’ and if you don’t know how to manage your money, you’ll be kicked out of the market sooner than you could think of.
Money management helps you address the volatility and uncertainty of the market and increases your chances of profitability. Effective money management can help you be profitable only if you win only four of your ten trades. So, practice, plan, and structure your trades according to your capital allocation and money management plan.
Research brokerage charges
Day trading involves frequent transactions, especially if you do high-frequency trading. This can result in high brokerage costs. Therefore, conduct thorough research and select the brokerage plan wisely, If you intend to make one to two trades per day, look for a per-trade brokerage plan. If the trading volume is high, staggered or fixed plans could be a better choice.
Apart from trade execution, a broker offers trading utilities like the trading platform, research tools, charting application, technical indicators, and more. Some of these features may come with a price tag, which can eat your profits.
Therefore, select a broker and the features depending upon your trading requirements. Don’t go overboard with features and end up subscribing to ones you don’t need. Beginners should begin with a low-cost brokerage package to match their learning requirements. Once you’ve understood what you’re getting your feet into, you can think of upgrading to advanced versions.
Pattern Day Trader Rules: Simulate and test
Once you have a strategy and plan in place, simulate on a test account with virtual money. If your broker doesn’t offer test accounts, you can do paper trading to test your strategy. In paper trading, you write your trades instead of making them with real money.
Start small and expand
If your strategy works in virtual or paper trading, you can use it for trading with real money. Start small, even if you are really confident in your strategy. Once it works out, increase your capital and enjoy big profits. One of the common traits in all successful traders is that they’ve invested time and effort in building day trading strategies and following them religiously.
Pattern Day Trader Rules: Conclusion
Hope this guide helped you understand how to start day trading. Being a day trader is not easy. Nine out of ten traders fail, and you can be one of them. Being a successful trader requires commitment, hard work, will, and the ability to take risks. On top of that, you’ll need effective day trading strategies to back them up.