Do you want to find out what is involved and discover the process to be able to make money day trading? Day trading is a HUGE topic with a lot of information and confusing language. More often than not, people will have a go at trading before ever really learning anything about it, which results in massive losses.
This can create the thought that trading is risky and costly. Of course, there is a risk involved with day trading. Which is why it is crucial to understand that there is a process to follow, to be able to make money day trading. After all, if you do not have a solid education, proven experience and a personal set of rules to follow, consequently you are not a day trader you are a gambler.
In this article, I share with you an outline of the topics and steps involved to be able to make money day trading. Rather than explain each step in greater detail, which would require additional blog posts. This article focuses on the steps involved in the journey to make money day trading.
If you want to make money day trading for a living, this article is your road map, your plan of action and your guide on what you need to learn!
6 Stages To Make Money Day Trading
Please note: This article contains affiliate links.
Before we explore each stage of the trading journey, it is important to understand one thing.
How do you make money day trading?
As a simple answer, the key to making money from day trading is to be a consistently profitable trader.
Whereby the goal is not to always win and never lose, but to be consistently profitable. Losing trades are okay as long as they do not consistently outweigh the winning trades over a duration of time.
The trick, as Mark Douglas would say, is to think in terms of probabilities and with a ‘series of trades’ perspective. Success from day trading comes from the long term, not from each individual day.
For instance, day trading is risky and mostly unpredictable in the same way as coin flip betting. However, from a combination of study, experience, dedication and discipline, you are in effect weighting the coin of probability to your advantage.
Stage 1: Learning Phase
The learning phase is broken into two sections. To be a consistent winner and make money day trading, you need to have 50% of…
100% Technical Understanding
This involves an in-depth period of studying and learning all about the technical side of trading.
Here are some examples of trading topics that you need to be fluent in.
As a day trader, an understanding of stock charts is essential. There are different companies available that offer charting software. Some are more expensive than others and the features you require can depend on your personal trading strategy.
I currently use Trading View for my charts as they are both affordable and offer everything that I need for day trading. Such as; live market data, access to stocks and a variety of customisable tools aka technical indicators for analysing charts.
Generally your charting software will give options for different time periods for your charts.
E.g. 1 minute, 5 minutes and daily charts. Which are suited for most intra-day traders. In contrast, swing traders usually use a larger time frame chart.
E.g. 30 minute, 4 hour and daily chart or even the 1 hour, daily and weekly chart.
Alongside your charting software and how to set up charts for analysis, a day trader must have an understanding of candlesticks and what they represent.
There are many different technical indicators available to use for analysing charts. Although your choice of indicator can depend on your trading strategy, generally you need to have an understanding of the common technical indicators and how to use them to assist with analysing charts.
Common technical indicators: Moving Averages (simple and exponential), Volume Weighted Average Price (VWAP), Volume Bars and the Relative Strength Index (RSI).
Chart patterns are essential for day traders as they can help to determine key areas for either entering into a trade, or exiting a trade.
Common chart patterns: Bull Flags, Bear Flags, Flat Tops, 1234 (ABCD) and the Cup and Handle pattern.
In addition to the above mentioned points regarding charts. Another key component of technical analysis is the ability to recognise key levels of resistance, support and pivot points on a chart.
Usually this involves analysing different time frames for that chart, and more often than not, the daily chart presents the most accurate levels for this.
Alongside the technical understanding required for analysing charts, it is essential for a successful day trader to have a solid understanding of risk management.
Contrary to what people may think, to make money trading is not about having lots of winning trades, it is about reducing the amount of losers.
Capital preservation is key for anyone wanting to make a living or a career out of day trading. I would highly recommend that you carry out plenty of study and research into risk management.
As technology has developed enabling day traders to carry out trades from their computers rather than in the pits of the stock exchange, having a reliable broker software is important to make money day trading.
There are many broker platforms available, depending on your budget, location and requirement for features. I presently use the broker Trade Zero, as they allows me to trade from my current location in the UK. Alongside this, they are reliable, affordable and provide the features that I require for my day trading strategy.
Common features required from a broker: Order entry window, level 1, level 2, hotkeys and time and sales.
Finding stocks to trade
Stock selection forms a large part of your trading strategy. Whether you are trading large-cap stocks, small-cap stocks, for longer hold time periods (swing) or fast-paced scalp trading, knowing what types of stocks to trade is essential for success.
There are different platforms available to help you to locate stocks within your strategy.
Finviz offer both free and paid subscriptions. Their software includes stock scanners where you can filter for specific stock criteria.
E.g. price, gap, volume, sector etc.
Alongside scanners, Finviz also offer a news platform and extra features.
Another stock scanning software to consider isTrade Ideas. Slightly more expensive but more sophisticated and intelligent, Trade Ideas is my favourite platform to use for finding stocks to trade.
In addition to stock scanning software, finding relevant news for stocks also forms a large part of a trading strategy. Generally, depending on the type of news, certain stocks combined with breaking news can be ideal for potential trades.
E.g. if you are scalp trading with your trades lasting between 10 seconds and a couple of minutes, then a stock with breaking news which is moving rapidly is an ideal stock for a potential trade entry.
Benzinger is a really useful website which offers fundamental information for stocks, along with a news feed.
Focusing on your strategy
Mastering all of the above points is critical to be a successful day trader. In addition, a strategy involves taking all of the above and combining it together to form your personal trader tool belt of knowledge.
E.g. finding a suitable stock, discovering news, analysing charts, highlighting areas of support/resistance, recognising any chart patterns, planning risk and planning your trade.
Common trader strategies:
– Momentum trading (trend trading) which involves discerning the trend (long or short), highlighting a low-risk entry point and taking a position following the general trend.
– Reversals aka contrarian trading. Whereby a stock that has trended in one direction and, over time, becomes weaker from losing volume can be ready to reverse. Generally, when confirmation of a reversal is shown, a trade can be taken in the reversed direction.
Finally, the remaining part of 100% technical understanding comes from managing trades effectively.
This involves the ability to create a trade plan, knowing when to take an entry, where to place a stop order and at which point to get out of the trade. Another factor to take into consideration is the size of your position, which when trading stocks, means the number of shares that you purchase.
100% Emotional Discipline
The second part to the learning phase involves learning the personal psychology and emotional discipline required, to make money day trading.
Trading is difficult and in contrast to what you might think, it is not because of the complex language and strategies that you need to learn. On the other hand, it is because of the level of emotional discipline and psychological awareness that is required to be able to make good decisions and more importantly, to stick with them.
From trading, you can experience a heightened sense of emotional reactivity. This is where your emotions can override your logical mind and the ability to execute decisions.
As a result, this can be very dangerous as emotional trading is generally a road to disaster.
Common emotions experienced in market psychology:
Fear of missing out (FOMO)
This usually presents itself when you see a stock which made a great move and you didn’t trade it. Instead, you missed the move.
FOMO can override our decision making and affect the ability to judge a setup, which results in chasing the market. As a result this generally leads to losing trades. FOMO can also be caused from comparison with others
Fear of losing money
Which leads to taking no trades or, on the other hand, completely over-trading. Whereby both of these side effects are not constructive to becoming a successful day trader.
The fear of losing money affects the decision-making process and is usually caused by a lack of experience and/or taking too greater a position.
Fear of failure
Affects the ability to think positively for the trading career and is usually caused by short term loss. This type of emotional response can come from mistrusting your trading strategy and/ or doubting your ability to execute it.
These are just a few examples of how our emotions can have an impact whilst trading. Emotional trading can lead to bad habits, consistent red days and even account failure.
Consequently, to make money day trading takes 100% emotional discipline.
How can we manage our emotions?
Instead of trying to manage our emotions or even remove them, an effective way of overcoming the obstacle of emotional trading is from building our awareness to recognise our emotions.
A useful way to develop this is through the regular practice of mindfulness, especially before any trading activity.
Remember that discipline is a practice. The key is to trade the market, not your emotions.
Stage 2: Practice In A Simulated Environment
This stage involves applying all you have learnt in order to test and implement a strategy, in a safe environment with ‘fake money’.
The duration of trading in a simulator is dependent on personal circumstances and can be anywhere from 1 month – 1 year +. Many brokers offer a simulator as part of their package. It is best to check with them to ensure that the simulator provides everything you require to trade, including live market data.
Previously when I was practicing in a simulator, I used the simulator offered by Warrior Trading, which is also where I carried out my trading education.
Screen time experience is essential. As experience will ultimately prove whether or not you can be consistently green. Furthermore, your experience and consistency trading in a simulator will lead you onto stage 3 of your trading journey.
Stage 3: Transition To Live Trading
Transitioning from trading in a simulator to trading in a live account can be daunting for some as it is quite a personal experience. To assist with the transition, you could mix it up.
E.g. 2 days trading live and 3 days trading paper.
Trading live is where you really begin to learn to deal with emotions. Which over a period of time will bring self-confidence.
Remember that developing personal psychology for trading is also a skill, which is better developed in a live environment. As you need the reality of making or losing money, to really recognise and develop your emotional awareness.
Furthermore, it helps to focus on taking the best trades possible, along with focusing your attention on trade management rather than your profit & loss (p&l).
Stage 4: Survive Until You Thrive
Once you have transferred from a simulator to a live trading environment, your focus at this point in your trading journey should be survival.
It can seem natural to want to focus on making lots of money. However, this can lead to overtrading or trading from an emotional place, which can quickly lead to a fast depleting account.
In contrast, the focus should be on not losing, instead of winning. In addition, aiming for a-quality trades from the strategy that you practised in the simulator will increase your chances of winning green trades.
Cutting losers quickly is essential, along with remembering that patience is key. Instead of trying to make the most money each day, follow your personal rules and guidelines.
The goal is to survive until you gain enough experience, confidence and consistency to scale up where you can really begin to thrive.
Stage 5: Gradually Increase Profits
As confidence and consistency grow, you can gradually scale up your share size to effectively scale up the size of your winners.
E.g. from 200 shares to 500, 1000, 2000 etc.
Scaling up can be done over a period of time such as after a month of consistent profits from the previous position size.
Always allow for the ebb and flow of the market, so as to avoid scaling up at a low point and consequently, taking bigger losers.
Slowly but surely this will result in building the account size, which will, in turn, give more buying power for taking greater position sizes, resulting in greater wins.
After all of the learning and hard work, this is where the snowball effect can really come in to play. The key is to prove the strategy first, the money is made in the learning, the patience and the discipline. Then it’s just a matter of scaling up but still trading in the same way.
Stage 6: Long Term Capital Growth
Over a period of time from making consistent profits, and as your account size grows, position sizes can be increased to allow for greater gains.
However, remember to refine your strategy and to continuously readjust to surrounding conditions.
It is important to know when the time is right to push and trade aggressively, or when to be conservative, taking fewer trades and smaller position sizes.
The Snowball Effect
Below is a chart demonstrating the snowball effect that occurs as position sizes are gradually increased.
6 Stages To Make Money Day Trading
I hope that this article has served as a guide for your own trading journey and that you have learnt the steps involved to make money day trading. Which stage are you currently at with your trading journey? What do you want to learn more about? Let me know in the comments below!
Here is a list of the resources mentioned in this article;