What should I pay attention to when starting day trading?
In recent years, it has become increasingly accessible to start investing. It is therefore hardly surprising that more and more people are starting to trade on the stock exchange. When it comes to actively trading on the stock exchange, there are only a few people who make a structural profit. Consistently making a profit turns out to be quite difficult. In 10 useful tips, we explain what you need to do to start as a day trader.
A day trader takes multiple positions within a day and closes them again on the same day. This is where the term ‘day trader’ comes from. It is rare for day traders to hold their positions for longer. It is relevant to see the distinction between active investors and actual day traders. The active investor invests quite actively, just like the day trader, only the active investor will usually hold shares for longer than 1 day. On the other side of the spectrum are the passive investors. These often have a relatively long horizon and they therefore hold positions for a long time.
1. Know what you’re getting into
Day trading is often romanticized. It is important to realize that day trading is quite intensive and that you need a lot of discipline to become successful. Working days are quite long for most day traders and they have to keep an eye on the market at all times and everywhere. You need to have a lot of knowledge of the market and you need to have the necessary skills. In addition, you need to be technically good at dealing with charts and you need to be able to switch off emotions. In short, it comes down to the following:
- Day trading is time-consuming
- You always keep an eye on the prices
- You are willing to continue learning
- You must be able to assess risks correctly
- You have to have discipline and be able to turn off your emotions
If the above character traits are characteristic of who you are and how you think, then you have come a long way. After all, most day traders ultimately fail due to one of the above factors.
2. Make sure you have enough money
It is actually impossible to always close all your positions with a profit. Taking losses is part of it. Ultimately, it is about trying to make more profit than you make a loss. However, it is also possible that you make more loss than you earn. In order to adequately absorb these losses, it is important that you have enough money available for day trading. This prevents you from getting stuck.
What exactly is meant by ‘enough money’ is of course difficult to say. It depends on your strategy and the money you have in your account. It is important to only trade with money you can afford to lose, especially at the beginning. There are many people who claim that you need a minimum starting capital of over 100,000 euros. Others claim that a few thousand euros is enough. It is relevant to set up a strategy for yourself. Include how many transactions you expect to make per day and how much costs you will benefit from this. These costs can add up considerably with active day trading, so do not underestimate them. You can read more about this in later tips.
3. Understand the market
As a day trader, it is extra important that you really understand how the markets work. First of all, you need to know exactly what time all the markets open and close again. For a day trader, every second on the market is important. You also need to have a good grasp of the more complex aspects of day trading. For example, you need to know how the market is likely to react to important news reports. In addition, you also need to be able to perform technical analyses on stock charts. Understanding the market can be technically very complex.
4. Know the instruments
There are various instruments that you can trade in. It is important to know how all these instruments function and what they react to. For example, an ETF will react very differently than a single share or a future. It is wise to only trade in instruments that you are comfortable with.
5. Design a strategy
Day trading without a strategy is a hopeless task. It is therefore sensible to set up a well-thought-out trading strategy. Preferably, you determine multiple strategies, so that you have room for growth. An important footnote here is that the market will always go its own way. For example, a strategy can work very well today, but produce little profit tomorrow. The market is dynamic and sometimes difficult to keep up with. This is why it is important to regularly reflect on your strategy. It is not a bad thing to adjust your strategy as you go along. In fact, it is advisable. You need to move with the dynamics of the market.
6. No strategy toe
Having a strategy is one thing, but actually applying the strategy is an important second step. So don’t make trades that don’t fit within your strategy. This is where discipline and consistency come into play. In order to make a strategy applicable in practice, at least the following aspects should be included:
- When you get in and when you get out
- How much money you deposit per trade
- Which instruments you will trade
- How often you will trade
7. Money management
A profitable trader is aware of the following adage: ‘maximize profits and minimize losses’. It is a fact that you will close positions in the red, but it is important that you close these positions early enough. For example, do you close 70% of your positions with a 1% profit and 30% of your positions with an 80% loss? Then you are not profitable, even if you close 70% of your positions with a profit. This is of course a somewhat extreme scenario, but it clearly illustrates the idea. For each trade you make, you should have determined in advance how far you are prepared to go with this trade. Do you expect the price to rise, but does it suddenly fall? Then you should have determined in advance at which price you will close the position with a loss. If you do not do this, there is a good chance that your losses will be far too high, which will suppress your profits. For this, you can use a stop loss order, for example. This order ensures that your security is sold/bought at a point set by you. This can prevent you from incurring additional losses.
8. Know the costs
Figures on profit and loss in relation to positions do not tell the whole story. There are always other costs involved. Because day traders close a lot of positions per day, the transaction costs will be quite high. In addition, you need to take into account costs that run outside of this. For example, think of a possible subscription for a provider of detailed charts or additional costs charged by your broker .
9. Practice trading
It would be a shame if you had to conclude with your hard earned money that you cannot be profitable with your current strategy. Fortunately, there is a handy solution for this. Many brokers offer the possibility to open a demo account. With such an account you can bet on real prices with virtual money. This way you can easily test a strategy.
10. Start small
If you are just starting out with day trading, it is not wise to use all your savings right away. It is important to start small and get a feel for trading. The psychological effect also plays a major role in this. With a demo account, as mentioned in the previous tip, it is after all about virtual money. When it comes to your own money, you will generally make different decisions. So start small and expand when the time is right. Opportunities will always present themselves in the market, so don’t be afraid to miss the train.
Before you start day trading
Do you want to start day trading? Then first look for a suitable broker. Use our comparison tool to find out which broker suits your strategy. Also pay attention to which broker offers the option of a demo account if you need it!
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