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Are you a disciplined individual with a strong frame of mind?
Are you patient and have an interest in the financial markets?
Are you creative and have the determination to persist when things get tough?
Unlike scalping—a short-term trading style that involves the scalper executing multiple trades per day—a day trader is an active trader who tends only to make one or two trades each day and usually liquidates before the close of his or her trading session. Day traders typically target small daily price movements and largely focus on technical analysis to determine their trading decisions.
To be clear, you do not need to be a math genius to day trade successfully. Successful trading, however, does require a unique skill set, ranging from analytical and research competence to the ability to function objectively when under emotional pressure.
While day trading may seem straightforward initially, do not be fooled. It requires a lot of work and dedication to perfect your trading approach; it is no different to any other vocation that involves time, study and discipline.
Having the correct education is a vital aspect. Reading the correct books on trading psychology, risk management and trading techniques is important. You will need to learn about the different types of financial instruments, how to read charts, how to use technical indicators and grasp the basics of economics (mainly news events) and financial ratios.
Why do you want to be a day trader?
Do you just want more time to spend with loved ones or want to supplement a retirement income?
Whatever the case, it is recommended to define your goals in terms of what you want to achieve from your trading. While the ultimate goal is to produce a return, it does not need to be a fixed weekly, monthly or even quarterly monetary value, as this can prove challenging to attain consistently and can lead to unnecessary pressure to reach these monetary objectives. This could result in taking excessive risks to fulfil those goals, leading to overtrading.
The bottom line here is not to set unrealistic goals. Start trading with a small amount of capital and familiarise yourself with the account size and risk before increasing your account (assuming you achieve consistency with a smaller account, of course). It is also crucial to employ a trading journal, allowing you to note reasons for opening and closing your trade and providing a chance to jot down your emotional state before, during and after a trade is completed. The importance of understanding the psychological influences in trading cannot be overstated.
Alongside an understanding that trading is about accepting the risk (your pre-determined risk tolerance per trade), experienced traders understand that trading is not about being right or wrong. This is difficult to grasp for many new traders but is key to achieving a trader’s mindset. You can have a trading strategy that only wins 40% of the time and produces a consistent return. The idea is to win more on winning trades than you lose on those losing trades. This is where a solid risk-management strategy comes into play and is a necessary component of any successful trader’s strategy.
Working with a defined trading strategy is essential. Whether you’re a partially discretionary trader or have chosen a non-discretionary algorithmic trading approach, a trading strategy defines entry and exit criteria. Developing a trading strategy is a lengthy process, one that requires a thorough back-test and (preferably) ample forward-testing on a demo trading account or small live real-time trading account.
The point is that without a trading strategy, you will be trading blind and have no edge (a trading strategy with positive expectancy). The idea is to trade your edge, and over enough trades, you should generate a consistent return. Importantly, irrespective of your success rate or risk/reward ratio, no one knows what will happen on a trade-by-trade basis; the edge will only play out over a large sample of trades.
Of note, a trading strategy fits into the overall trading plan, which covers everything from the trading strategies you employ to your current goals and risk management and money management plan.
You must also understand that at the beginning, you will be confronted with several different trading strategies. Do not rush. A common problem among day traders is that they regularly switch strategies when they get a handful of consecutive losses. And the worst thing is that the strategy they have just ditched could be a winning strategy. The only way to determine if your trading strategy has an edge is to execute at least 30-50 trades through either a demo account or a small live account; this will provide a large enough sample set to determine the trading strategy’s effectiveness.
Back-testing and forward-testing do not get enough air time. It should. Once you have developed a trading strategy, you must back-test it. This means testing your strategy on historical data to see how it would have performed in the past. Back-testing your strategy will help you identify potential flaws and make necessary adjustments.
Assuming the back-test and forward test are successful, it is recommended to start small when you trade live money. Oversizing your account equity when unfamiliar with the risk will often encourage you to make rash decisions, which is a recipe for disaster. It can also open the door to things like revenge trading.
If you are thinking about becoming a day trader, it is crucial to get educated, develop a trading strategy with a defined edge, and start exploring the financial markets with a demo account. It is also essential to be disciplined and to have a risk-management plan in place.
If you are willing to put in the hard work, achieving day trading success is possible. Consider opening a demo trading account (sometimes referred to as paper trading) with FP Markets. The opening procedure takes only a few minutes, and you’ll then have access to the global markets on some of the world’s most popular trading platforms, like MetaTrader 4 (MT4), MetaTrader 5 (MT5) and cTrader.
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