Day trading is skyrocketing in popularity as more and more people are looking for financial freedom and the ability to live life on their own terms.
It takes time and dedication to learn the intricacies of this fast pace world of day trading, but with the right information and careful planning you can put yourself in a position to earn a great living.
In this detailed guide, I’ll dive deep into the world of day trading and demystify what it is we actually do and how you can get started.
What is Day Trading?
Day trading is a speculative trading style that involves the opening and closing of a position within the same day.
Quick example: If you open a new position at 10AM and close it by 2PM on the same day, you have completed a day trade. If you were to close that same position the following morning, it would no longer be considered a day trade.
Day traders, or active traders, typically use technical analysis and a trading strategy to try and make profits in a short period of time and will often use margin to increase buying power.
A successful day trader doesn’t just pick any stock and try to trade it. There has to be some kind of strategy involved with rules and money management parameters.
How Does Day Trading Work?
Day trading works by capitalizing on short-term price movements in a stock through the active buying and selling of shares.
Day traders seek volatility in the market. Without short term price movement (volatility) there is no opportunity. The more a stock moves, the more profit a trader can make or lose in a single trade.
That’s why traders must exercise excellent risk management skills in order to keep losers small while letting winners run.
You can think of day traders as being a manager of risk. We put capital at risk in order to try and make more money but if we mismanage our risk, we will have a hard time consistently making money.
Successful traders will often have predetermined entry and exit points before we even enter the trade.
This helps take emotion out of the trade, which in return keeps the trader from over managing their position (proven to have a negative impact in the long run).
What You Need Before You Start Day Trading
Before you start day trading with real money there are three things you need to do and have:
- Strong knowledge of day trading terminology and technical analysis
- A strategy that’s been back tested and proven profitable
- Proof of profitability in a day trading simulator
#1 – Strong knowledge of Day Trading Terminology and Technical Analysis
With years of day trading under my belt, I can confidently say day trading is an exceedingly difficult skill to become competent at, let alone master.
You can think of day trading like playing a professional sport.
Your ability to make money is based 100% on your ability to perform day in and day out.
Attempting to day trade without any sort of training or education is a recipe for disaster and loss of capital.
The first step to learning day trading terminology and technical analysis is reading books and watching videos! This is the process of gaining knowledge. But remember, just because you read a book on sky diving doesn’t mean you’re ready to jump out of an airplane!
One of the challenges with learning to trade is the overwhelming amount of information out there. Often times the things you learn will be contradictory.
The reason is because the technical analysis or entry and exit requirements that work for one strategy, may not work at all for another strategy.
It’s not helpful to your long term success to learn a little bit of 100 different strategies. It’s much better to learn as much as possible about 1 strategy that is proven profitable.
So while you’re looking at who you’ll learn from, it’s always important to ask yourself, is this person actually profitable?
I take pride in being one of the most transparent traders out there with all my trades verified and even posted on our YouTube channel.
Unfortunately, you’ll find very few people provide proof of profitability. The information they provide should always be taken with skepticism.
Whether you decide to learn more in my premium classes, or learn from somebody else that is proven profitable, the first step to learning how to day trade is studying.
If you’re curious, you can see our courses offer an extensive curriculum that covers everything you’ll need to build your day trading business. You can check out the course syllabus here.
#2 – Developing a profitable day trading strategy or adopting a proven day trading strategy
It took me about 2 years to develop the strategy I trade. As an aspiring trader, you have two choices. You can either adopt a strategy already being actively traded by other traders, or you can create your own.
If you create your own, be prepared to spend months, or even years backtesting and refining before you can trade with real money.
Most beginner traders, rather than trying to reinvent the wheel, decide to master a strategy that’s already been proven profitable. After mastering that strategy, traders may decide to put their own spin on it by making a few changes.
Regardless of your approach, it’s important to have a specific setup, trading system, or methodology that you’re comfortable with when you start trading.
It allows you to develop a competency at something, rather than trying to find opportunities for several setups at once, never really getting good at any one setup.
You can always learn more down the road if the setup/system you choose isn’t ideal for you.
The important thing is consistently sticking to one thing at the beginning and mastering it. If you try to trade 5 different strategies at the same time, how do you know whether or not one of them individually is profitable if one of the others is costing you a lot of money?
#3 – Converting Knowledge to Skill by Practicing in a Day Trading Simulator
You may have taken a few quality trading courses, read a book or two, and have been watching our daily trading breakdowns and feel like you’re ready to trade.
But the reality is you’re probably not ready. Beginner day traders notoriously overestimate their ability, start trading with real money, and lose.
Intellectually understanding day trading and actually being able to react to opportunities and effectively executing them in real time are two different things.
This is where practice comes into play.
You need a trading simulator where you can practice in real time your strategies until you are comfortable with order entries and trade management.
If you can’t make money in a trading simulator then chances are you can’t make money in a real account!
Jumping into a real trading account cold turkey is one of the worst moves a beginner trader can make.
Day Trading Tools – Everything You Need
What you’ll need to start day trading:
- Online Broker
- Scanners
- Charting Platform
Best Broker for Day Trading
Your broker is one of the bigger decisions you will make.
This is where all your money will be and you will rely on them to provide fast executions at a reasonable price.
There are several types of stock brokers out there, and most tend to serve a specific niche.
For example, Vanguard serves passive investors, Tastytrade serves options traders, and Lightspeed serves day traders.
Here are the brokers our mentors use:
- Ross – LightSpeed, TD Ameritrade and CMEG (Small Account Challenge)
- Mike – LightSpeed
- Roberto – LightSpeed
For day trading these are our favorite brokers:
- LightSpeed
- TDAmeritrade
- Capital Markets Elite Group (CMEG)
There are few things you need to consider when shopping for a broker: trade execution, commissions, charting platform.
Trade Execution
Day traders require certain things from their brokers. The most important thing is the speed of execution.
A few seconds can be the difference between catching and missing a breakout.
For this reason, serious day traders need a broker who provides direct market access (DMA).
You might be asking: ‘Don’t all brokers offer direct access to the market?’
The answer is no.
Most online brokers act as a middleman between the market and your order.
They route the order to the market on your behalf, often combining your order with other clients’ orders, and giving priority to certain routes over others when they sell your order flow.
To cut out the middleman, you need a broker that grants you DMA.
This way, if there’s a bid or ask that you’d like to trade with, you can simply take that liquidity instantly, rather than hoping the stock trades at your price long enough for your broker to fulfill the order.
One example of a broker who grants direct market access is Lightspeed Trading.
Commissions
Day traders trade so often that commissions can be the difference between a profitable month and a losing month.
Typically, when it comes to day trading brokers, there are two pricing structures: per-share and per-trade. The choice is dependent on your position sizing.
The smaller size you take, the more a per-share structure makes sense, and vice versa.
Per-Share: The per-share structure is popular with day trading brokers and proprietary trading firms. Typical per-share rates offered to the least capitalized retail traders are $0.005 per-share traded.
Some firms require a $5.00 minimum, which defeats the purpose of the structure for an undercapitalized trader.
Per-Trade: This is the most common commission structure in the industry. You simply pay a fee (most often around $5.00) per trade you make. When you reach a certain average position size, a $5 fee per trade becomes almost inconsequential.
Quick Note: It’s important to understand that just because a broker has cheaper commissions doesn’t automatically make them a better option. Some brokers get paid for directing their order flow to certain market makers which can take longer and result in worse fill prices. That’s why it’s important to make sure they have direct market access like we mentioned above.
Stock Scanner
There’s a distinct difference between a stock scanner and a stock screener:
- Stock scanners are constantly scanning the market and streaming real-time results
- Stock screeners simply searches the market for criteria which provides you with a static list of stocks, usually with data from the previous day
A good stock scanner is necessary for most day traders, especially those who trade on very short time-frames.
You can see a live example with our premarket gap scanner.
Most scanners can scan on time-frames as small as ticks, and move out as far as weeks, all while updating results in real-time.
Why do you need a stock scanner?
The reason scanners are so important is because you need to trade the right stocks. Stocks that are moving with some kind of catalyst on high relative volume.
We call them ‘stocks in play’.
Stocks that are in play are more likely to have follow through on breakouts as well as trend in a specific direction throughout the day.
This makes them more predictable and increases your chances of executing profitable trades.
There are a lot of different scanner programs out there but our favorite is Trade-Ideas.
Their scanners are fully customizable and very reliable.
Charting Platform
Having a robust and reliable charting platform is great for visualizing price action and helps when making trade decisions. Unfortunately, a lot of brokers’ charting platforms do not meet the demands of active traders, which is why we look to third party charting software.
eSignal is probably the most robust and comprehensive day trading charting software on the market and is the one we use and recommend.
You can check out our review on eSignal here.
They aren’t the cheapest, but we do have an exclusive deal with eSignal for Warrior Trading students to save 25% on their charting packages!
How to Start Day Trading
Once you’ve learned a strategy and are trading it profitably in a simulator, you can now start to look at trading in a live account.
Here are the steps you will need to take:
- Open a brokerage account and transfer money in
- Have a written trading plan you can review every morning
- Make your watchlist in the morning
- Trade your plan and stick to it
- Review your trades at the end of the day
One of the biggest pieces of advice we can offer new traders in a real account, is take it slow.
Don’t dive in head first and trade max size. Ease your way into it until you are comfortable.
Trading in a real account adds a lot more emotion and pressure to your trading, which is something that will subside as you gain more experience.
Besides, you don’t want to blow up your account and lose all your money on day one!
This leads me to our next topic: how much money do you really need for day trading?
How Much Money Do You Need for Day Trading?
This is one of the most common questions we get so we made a video covering this topic:
How much money do you NEED to Day Trade?!
The amount of capital you need depends on if you want to make day trading your full-time income or just a side hustle to make a couple extra dollars here and there.
As you probably know, I started a small account with just $500 and turned it into over a million in just two short years.
That’s an extreme example and most traders, even experienced ones, would have a hard time replicating that type of return.
My point is you don’t need a large amount of money to start day trading.
However, there are two questions you need to ask yourself when deciding how much money you need:
- How much are you looking to make per day?
- How much do you actually have to start day trading with?
Once we know the answers to those questions, then we just need to do some simple math.
Let’s say you are looking to make $100 a day but you only have $1,000 to put towards your day trading account.
That means if you trade a stock that is at $2.00 per share, you can buy 500 shares, which means you will need the stock to go up 20 cents in your favor to make your $100 goal.
This is a very simplified example, because we didn’t take into account margin which would allow you to have more buying power.
Make sure to watch the video above. I go into great detail about margin, PDT rule and using offshore brokers.
This will help give you a full understanding on how much money you should aim to have when you open your day trading account.
Day Trading with Cash vs. Margin
Day trading with a cash account means just that. You are only using the cash you have in your account.
With a margin account you have the option to use leverage or margin to increase your buying power by borrowing funds from your broker.
Below are the main differences between a cash account and margin account when it comes to day trading.
Cash Account
- You can day trade as much as you want as long as your funds are settled (takes two days from trade date to settle, click the cash account link for more info)
- You can only trade with the amount of cash you have in the account, no margin
- Placing day trades with unsettled funds could result in the account being suspended
Margin Account
- Can only place 3 day trades in a 5 business day period if you are under $25k
- You have 2x the buying power for accounts under $25k and 4x the buying power for accounts over $25k
- You can buy more shares than cash in your account since you are granted leverage
- You can lose more than you have in your account since you’re trading on borrowed funds
As you can see there are some major differences but most day traders trade on margin due to ability to leverage their account and trade bigger size.
This makes scalping smaller moves more profitable.
Just take note of the risks involved and manage your trades appropriately!
Click here for more information on the difference between a margin account and cash account.
Day Trading Rules for Margin Accounts
The main rule pertaining specifically to day traders is the Pattern Day Trader rule.
Pattern Day Trader Rule breakdown:
- PDT rule only applies to margin accounts
- 4 day trades within a five-day period labels you as a PDT
- Must have $25,000 in account to day trade once labeled PDT
- PDT accounts have 4x the buying power for day trading
The pattern day trader rule was designated by FINRA in 2001, after many retail traders lost their shirts day trading during the dotcom bubble.
The rule essentially states that traders with less than $25,000 in their brokerage account cannot make more than three day trades in a five-day period.
In other words, if you have a $5,000 account, you can only make three day trades (open and close inside a market session) within a rolling five-day period.
Most brokers will not allow you to make the fourth, but if you do, you will be labeled a pattern day trader and have your brokerage account restricted for 90 days.
Once you have $25,000 in equity in your account, these restrictions no longer apply to you.
Besides the PDT rule, there are few regulations placed upon day traders in specific.
Ways Around the PDT Rule
There are a couple ways around the PDT rule like opening an account with a broker who is offshore or outside the regulations of the United States.
Some that you can consider are TradeZero or CMEG.
You can also look at day trading futures. They are not required to follow the PDT rule like stocks are so you can day trade as much as you want
Day Trading Strategies for Beginners
There are a lot of different strategies to choose from but the one that we’ve had the most success with and find it the easiest for new traders to learn is the bull flag pattern.
A bull flag pattern is a high probability setup that forms a pattern which looks like a flag on the chart. Below is an example of a defined flag pattern.
A couple of characteristics to look for when trading a bull flag:
- A strong move higher on a stock that has a news catalyst (no buyout news)
- High relative volume
- Consolidation pattern following the strong move higher
- Followed by a breakout higher
Bull Flag Strategy
How to Day Trade Bull Flag Pattern
The first step is finding a stock that is surging on high relative volume, preferably one that is already in a longer term uptrend.
So, if you’re looking for a bull flag with a 5-minute chart, it’s much better if the daily chart is showing an uptrend.
The next step is to wait for the stock to consolidate. You want the consolidation to be much lower volume than the upward move.
Entry: Buy the stock when it breaks above the consolidation pattern with higher volume.
Exit: Your stop should be below the bottom of the consolidation pattern.
These are the types of trades that you can let run while taking profits as it moves in your favor.
It’s important to make sure you’re taking setups with at least a 2:1 reward/risk ratio. That means your minimum profit should be twice your stop loss.
All Day Trading Strategies Require Risk Management
Imagine a trader who has just taken 9 successful trades.
In each trade there was a $50 risk and $100 profit potential. This means each trade had the potential to double the risk which is a great 2:1 profit loss ratio. The first 9 successful trades produce $900 in profit.
On the 10th trade, when the position is down $50, instead of accepting the loss the untrained trader purchases more shares at a lower price to reduce his cost basis.
Once he is down $100, he continues to hold and is unsure of whether to hold or sell. The trader finally takes the loss when he is down $1,000.
This is an example of a trader who has a 90% success rate but is still a losing trader because he failed to manage his risk.
I can’t tell you how many times we’ve seen this happen. It’s more common than you’d think.
So many beginners fall into this habit of having many small winners then letting one huge loss wipe out all their progress.
It’s a demoralizing experience, and it’s one that I’m very familiar with!
Learn to Play Defense
As a new trader your focus should be on how to mitigate losses. Once you learn how to lose less, then you can focus on making your winners bigger.
Defensive Tip: Set a stop loss immediately after entering a position and then leave it alone. The worst habit to get into is constantly moving orders around because of what you think is happening during the trade.
Before you get into a trade you should already know where your risk is and how much you could lose. Having this understanding before you get into a trade is not only crucial for trade management but also your mindset.
How Much do Day Traders Make
This is a pretty broad question because a lot of different variables come into play — how much capital you trade with, your skill level, market conditions, etc.
Highly skilled traders can make 7 figures a year while new traders that are profitable can be anywhere from $200-$500 a day.
The markets are open about 253 days per year so if you’re average $200 per day, that’s $50,600 a year. Not bad!
If you’re doing $500 in profits a day, that’s $126,500 for the year!
I turned $500 into over $53,000 in 17 days of Day Trading!
In January of 2017 I began a $500 trading challenge to turn $500 into $100k. It took me 45 days. In December of 2019 I decided to try a $500 to $50k challenge, and I did it in just 17 days.
How was I able to grow my account so quickly? First of all, I used an offshore account that allowed me to day trade on margin with just $500. They do not enforce the PDT rule. The broker is called CMEG.
Additionally, CMEG offers 4x leverage up to $2,500, and then 6x leverage above $2,500. That means with a $500 cash balance, you have $500 x 4 = $2,000 in buying power. With a $5,000 cash balance, you have $5000 x 6 = $30,000 in buying power.
Once the brokerage account was setup, I just needed to follow the rules of my strategy. My strategy allowed me to risk up to $50 on each trade I took.
On my first trade I made $158 for a 3:1 profit vs loss ratio. I continued to increase my risk each day, as my account grew.
On four days during my challenge I doubled my account in 1 day. The only way you can double your account in 1 day as a day trader is by focusing on stocks that are volatile!
Keep in mind that you will have commissions, exchanges fees, data fees, software fees and taxes that will dip into your profits.
My total commission fees for the month were about $3,900, and my software fee was $125.00. My gross profit (before fees) was approximately $57,000 and my net profit was $53,000.
Bottom Line
This article should provide you with a good introduction to the world of day trading. But, it’s just that: an introduction. Don’t expect to read this and go take money out of the markets on a daily basis.
You won’t learn day trading in a day, or a week. It’s a lifelong commitment to learning, even for the most successful traders.
Fortunately for you, there’s so many resources easily available to learn about trading the markets.
Over time, several strategies have been developed and shared through books and courses, giving you the chance to expose yourself to many styles before picking one to stick with.
