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Daytrading And How To Get Started
from: Ray JohnsOne working definition of a Day Trader is, "A person whose goal
is to make his or her profits from a security in the shortest
amount of time [preferably during a single day.]" Though this
definition is simplified, the day-to-day job of a Day Trader is
a far more complex series of events and strategies that must be
learned and implemented.
My description of daytrading has largely been based on past
experiences with the markets, as well as the changes in the
markets and the global economies themselves. Keep in mind; the
stock market is not your friend. Much like war, in day trading
and/or short-term investing, you are pitting your wits against
every other person in the market. Every dollar you make is on
the back of someone else's losses. Your goal is to win with your
investments and your trading, and that requires someone else to
lose. Try to make sure it's not you. Never forget that, and
you'll be off to a much better start in the markets.
How risky is daytrading? Well, before you read on any further,
imagine taking about $10,000 in crisp, brand new one hundred
dollars bills out into the backyard. Put them on the ground and
douse them in lighter fluid. Then strike a match. Don't burn
your money just yet, but just stand there. That's about how
risky daytrading is.
Always remember: at any given time, when you are daytrading for
a living, you are risking probably that much money (if not quite
a bit more), and your money is in perhaps just as much risk.
While we are not suggesting that you actually set fire to your
money in the backyard, our analogy is fairly accurate. If that
bothers you, then perhaps you might consider another line of
work, or a good mutual fund, because I don't know any good day
traders that haven't seen at least $10,000 go up in a puff of
smoke during market hours. It's simply unrealistic to expect to
be able to trade professionally and profitably from day one.
Mistakes will be made; lessons will be learned; money will be
lost as you learn. It's a never-ending process to a large
degree. In fact, the day you feel you have mastered the markets,
that's the day you get your head handed to you.
In the years I have traded, I have seen many people come and go.
I've seen people make and lose large sums of money very quickly.
I have made and lost large sums of money very quickly! I've seen
stocks go from pennies to hundreds of dollars and back again,
taking traders and investors for a ride in both directions. And
yet, still, in all the years I have been in this business, I am
sure of only one thing about the stock market--that I have not
seen it all yet. If anyone claims to have all the answers about
the stock market, or claims to be the only person you should
listen to - run, don't walk away from them and/or their services.
One of the most frequently asked questions is, "How much capital
do I need?" It is a somewhat difficult question to answer. How
much do you really need in order to start day trading? How big a
"stake" (a term used to refer to your starting capital) is
required to get going? The only answer is that it's different
for each person, and it's something you must consider for
yourself before you start. However, I personally feel, in
general, you should have enough trading capital to purchase
between 500 to 1000 shares of any given stock. Ideally, this
would be without having to use margin.
If you are in the habit of trading $40 to $80 stocks, this could
mean you need as much as $40,000 to start. At the same time, one
can trade with as little as $10,000 and get their feet wet. It
also doesn't hurt to have enough capital to diversify into
several different positions (two to five generally) at one time
- each with say 300 to 500 shares. Just remember, if you are
starting small, keep your expectations realistic. Certainly,
someone trading with $10,000 to $20,000 is going to have a much
more difficult time generating $1,000 per day than someone using
$100,000 or more. As long as you keep this in perspective, it
will help keep you grounded as you begin learning.
When you get into the bigger leagues of day trading, then it's
nice to be able to "step on" (i.e. purchase or short) a "block"
or two of stock. This would be generally defined as 10,000
shares of stock. This typically is going to require $500,000 or
more of trading capital, plus some use of margin in limited
situations and for a limited time. When you reach this level,
it's easy to see how daytrading can become quite profitable (and
quite risky!). A few points (or even a few fractions) across
10,000 shares can return quite a bit of money quite rapidly.
Just remember it goes both ways; you can quickly lose quite a
bit as well.
As you can see there's no right or wrong answer with regard to
how much you need to start. Simply keep your objectives in
perspective and reasonable. This will go a long way to giving
you a good start in the markets. Also understand that if you are
starting small, factoring in things such as equipment fees and
transaction costs may become much more important. . Comments and
questions can be sent to marketing@TraderAide.com.
Good luck in the markets!
No permission is needed to reproduce an unedited copy of this
article as long the About The Author tag is left in tact and hot
links included. Questions and comments can be sent to Ray at
articles@daytraders.com.
About the author:
Ray Johns is the founder and Senior Market Editor of
http://www.daytraders.com, since 1996. He publishes the award
winning Morning Stock Market Report. Daytraders.com is also home
of the Internets finest real time trading desk. Ray has appeared
as a guest on a number of radio and television shows including
CNBC's Market Talk. Log in for a free trial at
www.daytraders.com.
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