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What are the Basics of Day Trading?

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  • Written By: Ron Davis
  • Edited By: Allegra J. Lingo
  • Last Modified Date: 26 August 2016
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There are several basic principles a day trader must keep in mind to be successful. A profitable trading strategy is key. The trader must also have realistic expectations, including sufficient funds to pay every day expenses. Most traders are not successful right away, and so must be willing to practice.

The foremost consideration in the basics of day trading is that the trader must have a day trading strategy that is profitable. If the strategy he is using has a negative mathematical expectation, the trader will lose money. To find a strategy’s mathematical expectation, the probablity of winning times the average amount of the win must be greater than one minus the probability of winning times the average amount of loss.

Second on the list of the basics of day trading is to have realistic expectations. A prospective day trader should view learning to day trade like learning to play tennis or chess. Not many people become a huge success over night, and most can’t make enough money to support themselves for several months or longer.

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The day trader must have enough capital to pay the bills of daily living during the time needed to make the day trading business profitable as well as have a sufficient amount of trading capital. A reasonable point of view is that the trader needs to be able to survive for a year without any trading profits. The minimum amount trading capital needed is 15 times the trader’s monthly living expenses. To get by on such a small amount, the trader needs to make at least 8.5% profit per month, restrict his losses to a maximum of 2% of his trading capital and never have more than three consecutive losses.

Like football, tennis or chess, continual practice is needed to understand the basics of day trading. Experts suggest paper-trading in a simulated environment for at least a month. Many brokerages offer opportunities to day trade with as close to real conditions as they can make them. For a day trader, time at the study table reviewing the day’s charts, and time on weekends devoted to correcting errors and adding to the trader’s store of knowledge is necessary.

Day trading is a skill endeavor. No football team succeeds without practicing, nor does any winning tennis player or chess master. The basics of day trading are employing a winning trading strategy, having a realistic approach to the business of trading, always having enough living and trading patience, persistence, and practice.

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