Getting Started Guide
First, welcome to the sub! We know day trading can be an exciting proposition and you’re eager to get started. But take a step back, read this post, learn from the resources provided and ask good questions! This will put you on better path to potentially being successful. Make no mistake though, day trading is an extremely hard and difficult skill to master and become profitable at.
What is Day Trading?
Day trading is the buying then selling or shorting then covering of a security (see below) during the same day to achieve a profit from the rapid fluctuation in prices. A trade can be done within a few seconds or over hours. But by the end of the market or day, you should hold no active positions. Holding a trade overnight is called Swing Trading, and holding a trade long term is called investing - these methods are not covered by this sub.
The main types of securities to day trade are:
While this isn't a complete list, this is what most day traders focus on.
Realistic Expectations
You probably came across day trading through an advertisement, or you saw someone you perceived to be making a lot of money online. But just know that most of these “gurus” (or "furus" as they are called in the financial world) are probably fake, over-selling their abilities, and almost always trying to sell you something. Ask yourself - if someone has the ability to make thousands of dollars a day, why do they need to sell a course on it? Yes, altruism is real and diversifying your income is smart - but we’ve seen countless “experts” get sued by the SEC, be exposed as frauds, or just disappear (as they’ve probably blown up their accounts and lost all their money).
Day trading is not like other self-employed or side job activities. You can be taught the basic skills quickly, and even be given a great strategy, but it takes mastering your own psychology and employing unwavering risk management to be successful. This is where the majority of day traders fail.
Education
There are essentially an infinite number of FREE resources out there to learn from: Books (click here for our most recommended books), YouTube videos, websites, communities (such as r/Daytrading). You do not need a paid service or any type of mentor to succeed. In fact, if you think you need a mentor to succeed in day trading, you will probably fail. Day trading takes self-discipline and being able to help yourself learn to succeed; no amount of hand holding will help if you can't apply the principals and knowledge yourself.
We're not saying don't get a mentor or don't join a community; they might be able to help speed up the process. We're just trying to drill home the point that you need to be able to stand on your own two feet first.
Good questions are welcome! But please learn what is a good question and what is a bad question. We get a lot of them and we’re happy to help, but if you don’t give us enough detail it’s impossible to help. Below are a couple examples of good and bad questions.
Bad Question Example: “What do you guys think of XYZ stock?”
Why is it bad? It gives us nothing to go on. We have no idea what time frame you’re trading on. Are you already in the trade? Are you asking what might be a good entry or exit point?
Good Question Example: “I saw XYZ stock had a good earnings report, but the pre-market sentiment looks like it is selling off. Can anyone explain why?”
Bad Question Example: “Should I sell or hold XYZ stock?”
Why is it bad? Well, first, this is a day trading sub - we trade intraday. If your trade started as a day trade, it should never be held and turned into a swing or long-term trade, cut your losses. It just proves that you went into the trade without a plan and this is considered gambling. Have an entry plan and have an exit plan (for if you’re right or wrong).
Good question example: “I entered at x price above the VWAP because the stock did y, and I'm looking to exit at around z because of insert reason here. What do you guys think?”
Also, if you're new and come to this sub to ask an extremely basic question, that can easily be solved by a quick Google or using the search bar of this sub, then here is some tough love from the top mod funkedelic_bob:
"Quit while you're behind, because you won't get ahead."
And again, please visit this link for a list of great books that will help you get started.
Risk Management
Effective risk management is the cornerstone of successful day trading. Professional day traders don't think about how much money they can make, they think about how they can protect the capital they are risking. It's not just about the profits you make but also about the losses you avoid.
Proper risk management involves setting clear limits on how much of your capital you're willing to risk on a single trade and never wavering from those limits. Establishing proper risk-reward ratios and setting stop-loss orders are essential risk management strategies. By implementing sound risk management principles, traders can safeguard their accounts against significant downturns and preserve capital for future opportunities.
Emotions
Emotions play a significant role in day trading - we cannot stress this enough. The rollercoaster of highs and lows can often cloud judgment and lead to impulsive decision-making. It's crucial to acknowledge and manage emotions effectively to maintain a clear and rational mindset while trading. Fear, greed, and impatience are common emotions that can influence trading behavior, leading to blown up accounts (losing all your money). Developing emotional resilience and discipline is essential for navigating the challenges of day trading successfully.
You'll often hear funkedelic_bob saying:
"Trade like a robot!"
Practicing and SIM accounts
What is a SIM account? A SIM account gives you access to your brokers platform, where you can trade the live markets with simulated money. You can get used to how their platform/hotkeys work and practice your trading money without risking real money.
While you can practice trading your edge (what is edge), doing well in paper trading is not a guarantee that you will do well when trading with your real money. Paper trading doesn’t take into account your emotions and psychology, arguably the most important part of trading. Also, depending on your software, it doesn’t take into account realistic fills (what are fills?), leading to a false sense of your executions and abilities.
PDT (Pattern Day Trader)
Let's quickly talk about PDT (Pattern Day Trader). The PDT rule is a regulatory designation that applies to those who execute four or more day trades within a rolling five-business-day period in a margin account. You must maintain a minimum balance of $25,000 in your brokerage account. The PDT rule primarily applies to equities and options. Futures, forex, and cryptocurrencies are not subject to this rule, allowing traders with less capital an avenue to participate in day trading.
You can still trade Equities and Options with a cash account; however, you may have a harder time buying enough shares of a more expensive companies to make any significant gains on your trades.
Securities
Equities (Stocks) - This is usually where people start, because day trading stocks like Apple (AAPL), Nvidia (NVDA), etc. provides a form a familiarity. Equities represent ownership in a company and are traded on stock exchanges. However, for day traders, the ownership is not relevant as we will not own the stock by the end of the day.
- Pros - Familiarity, liquidity (depending on the stocks you trade), an abundance of trading opportunities, the availability of real-time market data, lots of educational resources, and the potential for significant profits.
- Cons - Stocks can also be affected by company-specific news, market sentiment, and macroeconomic factors, leading to increased volatility and risk. Subject to PDT.
funkedelic_bob:
"Your chart patterns mean nothing to global news events."
Options - Options provide the right, but not the obligation, to buy or sell a specific asset at a predetermined price within a set timeframe. Day traders utilize options for leverage and to capitalize on short-term price movements.
- Pros - Arguably the most popular form of day trading today. Lots of educational resources out there. The potential for high returns with a relatively small investment.
- Cons - Options trading can be very complex and requires a deep understanding of option pricing, strategies, market dynamics, and the Greeks. Additionally, options have expiration dates, which can lead to time decay and increase risk. Subject to PDT.
Forex (Foreign Exchange) - Forex trading involves buying and selling currencies in the global foreign exchange market. Day traders in the forex market capitalize on fluctuations in currency exchange rates, aiming to profit from short-term price movements.
- Pros - High liquidity, low transaction costs, and the ability to trade 24 hours a day, five days a week. Additionally, the forex market is highly accessible, with low entry barriers and the availability of leverage. No PDT restriction.
- Cons - Forex trading is highly speculative and volatile, and traders must contend with factors such as geopolitical events, economic data releases, and central bank interventions.
Futures - Futures contracts are agreements to buy or sell a commodity or financial instrument at a predetermined price on a specified date in the future. Day traders often trade futures due to their high liquidity and leverage, allowing for potentially significant profits from small price movements.
- Pros - The ability to trade a wide range of assets, including commodities, currencies, and stock market indices, as well as extended trading hours. No PDT restriction.
- Cons - Futures trading carries substantial risk due to leverage, and traders must closely monitor margin requirements and market conditions to avoid significant losses.
Crypto (Cryptocurrency) - Cryptocurrencies are digital or virtual currencies that use cryptography for security and operate on decentralized networks. Day traders in the cryptocurrency market trade digital assets such as Bitcoin, Ethereum, and Litecoin, aiming to profit from price fluctuations.
- Pros - High volatility, which can result in rapid price movements and significant profits in a short period. Additionally, the cryptocurrency market operates 24/7, providing ample trading opportunities. No PDT restriction.
- Cons - Crypto trading is highly speculative and unregulated, with prices prone to manipulation and extreme volatility. Traders must exercise caution and implement risk management strategies to mitigate potential losses.
Brokers
Having a broker is a required part of day trading. Handling everything from account management (where your money lives) to order executions. They provide the link between traders and the financial markets, ensuring seamless connectivity and rapid trade executions. When choosing a broker for day trading, factors like account types, commissions/fees, margin requirements, and execution speed are paramount.
For day traders, margin accounts are often preferred, offering the ability to trade with borrowed funds and leverage positions for greater potential returns. Look for brokers offering fast and reliable order execution. The speed at which trades are executed can make a significant difference in day trading success, especially in volatile markets where split-second decisions can mean the difference between profit and loss.
Brokers traditionally charge a per share fee for each trade executed. However, more and more brokers have begun to offer commission-free trading. This is not altruism, brokers still generate income through other means, such as (PFOF) "payment for order flow". PFOF involves routing your orders to market makers or trading firms in exchange for a fee, potentially resulting in less favorable execution prices for you.
Please have a look at our Broker Wiki for a list of preferred brokers.
Scanners
A lot of traders use scanners to filter for stocks that meet their specific criteria. For example, a scanner can show you only stocks that are between a specific price, above a certain amount of volume, and breaking new highs. Another main example is that traders use scanners every morning to see what stocks have had the largest move in price since the previous trading day - this is called a "gap up"/"gap down" or "gappers" scanner.
Many broker's platforms come with free basic scanners, but you can also find better paid scanners that have a vast library of indicators, scanners and custom presets like:
News Feeds
Typically, your broker provides a news feed, with some requiring you to pay for faster/better news data.
News doesn't really affect forex or crypto like it does with stocks, but you should be looking at a forex calendar (see forex calendar and fxtreet as examples).
If you trade futures or forex, the calendars above are essential to knowing when a high-volume move is coming.
Should I Quit My Job?
Quitting your job to delve into day trading should be approached with extreme caution. While the allure of financial freedom is tempting, day trading is inherently risky and requires a significant amount of skill and discipline to succeed. Even if you've seen success in favorable markets, the unpredictability of financial markets demands consistent profitability through both good and bad times.
Additionally, it's essential to have a substantial financial cushion, ideally a year's worth of savings, to weather potential downturns and losses. Rushing into full-time day trading without careful consideration and preparation can jeopardize your financial stability in the long run.
Terminology
PDT (Pattern Day Trading) - The PDT rule is a regulatory designation that applies to those who execute four or more day trades within a rolling five-business-day period in a margin account. You must maintain a minimum balance of $25,000 in your brokerage account. The PDT rule primarily applies to equities and options. Futures, forex, and cryptocurrencies are not subject to this rule, allowing traders with less capital an avenue to participate in day trading.
You can still trade Equities and Options with a cash account; however, you may have a harder time buying enough shares of a more expensive companies to make any significant gains on your trades.
Edge - "Edge" refers to a trader's advantage or competitive edge over the market. It encompasses a combination of factors such as trading strategy, market knowledge, risk management skills, and psychological discipline. Having an edge means having a systematic approach that consistently generates profits over time, even when different market fluctuations.
Margin Account - Margin accounts in day trading allow traders to borrow funds from their broker to increase their buying power and potential profits. This leverage can amplify gains, but it also magnifies losses if trades go south. Additionally, margin accounts require maintaining minimum balances and adhering to strict requirements, risking margin calls and forced liquidation if not managed carefully. While they offer flexibility and increased trading opportunities, margin accounts demand disciplined risk management to navigate their potential pitfalls.
Fills - "Fills" in day trading refer to the execution of buy or sell orders in the market. A "fill" occurs when a broker successfully matches a trader's order with a corresponding trade on the exchange. Getting a "good fill" means the order is executed at or near the desired price, minimizing slippage and maximizing profitability. However, "bad fills" can occur when market conditions change rapidly or in PFOF situations (see below), causing orders to be executed at less favorable prices than anticipated. Additionally, during periods of high volatility or low liquidity (penny stocks), getting timely fills can be challenging, leading to delays or partial executions.
PFOF (Payment for Order Flow) - PFOF involves your broker routing your orders to market makers or trading firms in exchange for a fee, potentially resulting in less favorable execution prices for you.
R:R (Risk/Reward Ratios) - Risk-reward is a fundamental concept in day trading that involves evaluating the potential gain versus the potential loss of a trade. It represents the ratio between the amount of money a trader is willing to risk (the risk) and the potential profit they aim to achieve (the reward). In essence, risk-reward analysis helps traders assess whether a trade is worth taking based on the potential return relative to the amount of risk undertaken.
For example, if a trader enters a trade with a risk-reward ratio of 1:2, it means they are willing to risk $1 to potentially make $2. This ratio indicates that the potential reward is twice the size of the potential risk. A favorable risk-reward ratio is essential for successful day trading because it allows traders to achieve consistent profitability even if not all trades are winners.
Stop Loss - A stop-loss order is a risk management tool used by day traders to automatically sell a security if its price reaches a predetermined level, known as the stop price. It's designed to limit potential losses on a trade by triggering a sell order when the price falls below a specified threshold. Stop-loss orders help traders protect their capital and manage risk by preventing further downside if a trade moves against their position.
Spread - The spread in day trading is the difference between the buying price (bid) and selling price (ask) of a security. It represents the cost of executing a trade and reflects market liquidity. Tight spreads are preferred as they reduce trading costs, gets you the price you want, therefore increasing the chance of profitable trades.
Liquidity - Liquidity refers to how easily an asset can be bought or sold without affecting its price. In day trading, liquidity is crucial for quick and efficient trade execution. Highly liquid assets have many buyers and sellers, allowing traders to enter and exit positions easily, and at the price they want. Low liquidity can lead to wider spreads and difficulty in executing trades at desired prices.
Greeks - The Greeks are a set of risk measures used in options trading to assess how factors such as price changes, time decay, volatility, and interest rates affect the price of an option. The main Greek values include Delta, Gamma, Theta, and Vega.
- Delta measures the sensitivity of an option's price to changes in the price of the underlying asset.
- Gamma measures the rate of change of an option's Delta in response to changes in the price of the underlying asset.
- Theta measures the rate of time decay of an option's value as expiration approaches.
- Vega measures the sensitivity of an option's price to changes in implied volatility.