You'll need money, and plenty of it, to get into the day trading market.
We'll spell out exactly how much cash outlay you need to be a day trader below, but first let's examine what a day trader does, and what day trading is in the daily financial trading markets.
By and large, day trading is the daily buying and selling of stocks (almost always growth stocks) in a "quick turnaround" fashion. The idea of day trading is to buy a stock, wait for an uptick or two in price, and sell it the same day (thus, the term "day trader.") A day trader may also trade higher risk futures and foreign exchange currencies.
The U.S. government also has its own definition of what constitutes a day trader.
"This definition encompasses any security, including options," the SEC notes. "Also, the selling short and purchasing to cover of the same security on the same day is considered a day trade. Exceptions to this definition include a long security position held overnight and sold the next day prior to any new purchase of the same security; or a short security position held overnight and purchased the next day prior to any new sale of the same security."
No doubt, day trading is a high-risk profession and plenty of smart people don't make it a year as a day trader, often "blowing out" in Wall Street parlance after a series of money-losing trades.
A recent study called "Day Trading for a Living" by the Saõ Paulo School of Economics in Brazil estimates it is "virtually impossible for an individual to day trade for a living, contrary to what experts claim."
The researchers tracked day-trading trends among individuals who began to day trade between 2013 and 2015 in the Brazilian equity futures market, and who did so for at least 300 days. According to the report "97% of them lost money, only 0.4% earned more than a bank teller (US$54 per day), and the top individual earned only US$310 per day with great risk (a standard deviation of US$2,560). Additionally, we find no evidence of learning by day trading."
Ask your average day trader and you might get a different opinion, but there's no doubt that day trading is a tough, high-risk way to make a living.
Yet if you live and breathe growth stocks, and you have the discipline to buy when you should and sell when you should, day trading might be worth a shot.
In Day Trading Terms, What Is a Growth Stock?
Day traders make their bread and butter by leveraging stock market volatility, most often in the growth stock sector.
Growth stocks are stocks in companies that are just getting off the ground and that usually trade for low prices, but that generally bounce around, price-wise, during the trading day.
Growth stocks are companies that are often only a few years old and that offer new products, services and technologies that show promise of paying off commercially. But as young companies, growth stocks often tend to fluctuate more than traditional (and stable) larger stocks, like value stocks or mid-cap and large-cap stocks.
News of a lawsuit, a critical column in the financial and business media, or a downbeat earnings report can all negatively impact a growth stock, and do so quickly. Conversely, a good column in praise of the company, a lawsuit verdict in its favor, or a solid earnings report can make that same stock shoot upward, and just as quickly.
That potential volatility is why growth stocks are a day trader's hunting ground.
When they start prowling the landscape for a good deal, here's how day traders go about that growth stock hunt:
- By dissecting industry trends before pulling a trigger on a specific stock.
- By looking for young growth companies with buzz, and that show signs of connecting with consumers.
- By analyzing companies with new technologies that have the potential to change an industry, much like Amazon (AMZN) - Get Report did to the retail industry starting in July, 1994.
- By closely monitoring the initial public offering (IPO) market for burgeoning new growth stocks that are ready to pop.
- By closely tracking companies that are buyout candidates, much like Instagram before it was bought out by Facebook (FB) - Get Report in 2012.
- By pouring over financial statements and company quarterly earnings call transcripts to glean an opportunity worth buying.
- By looking for new government rules and regulations that may help a company break out, like cannabis companies once states began allowing medical marijuana and cannabis products to be sold legally.
Primarily, day traders hunt for growth stocks that show signs their share price will rise and quickly -- long-term and dividend plays aren't invited to the day trader growth stock party.
That's exactly what birthday traders send their days bagging and tagging, only to likely sell the same growth stock later the same day.
What Does It Cost to Day Trade Stocks?
Day trading isn't cheap - not by a long shot.
Day traders working the U.S. stock market is required to have a minimum account balance of at least $25,000, according to rules issued by the U.S. Security and Exchange Commission.
If your day-trading account falls below the $25,000 threshold, you won't be able to day trade stocks until the $25,000 minimum account balance is restored.
Thus, it's highly advisable for newly-minted day traders to maintain an account balance well in excess of $25,000 - aim for at least $30,000 in your account when you begin day trading.
Note that to meet the minimum trading requirements to be a day trader in the U.S. you'll need to have at least four day trades a week. That will officially classify you as an active day trader and will trigger the $25,000 account minimum requirement.
What Does It Cost to Day Trade Forex?
Trading Forex securities on a daily basis is, at first glance, decidedly less expensive that day trading U.S. stocks.
Basically, Forex brokers require day traders to hold a minimum of $100, with some countries allowing day traders to handle Forex trades for as little as $50 in their trading accounts. These figures will vary on a country-by-country basis, and on a broker-to-broker basis.
Yet only having $50 to start trading foreign currencies is likely a fool's mission. The Forex market is fraught with risk, and it's highly advisable for Forex day traders to risk no more than 1% of their entire Forex account on a single trade, to minimize the risk of excessive losses.
Thus, it's better to start trading currencies with at least $1,000 or more to absorb potential losses in a highly volatile, 24-hour-a-day Forex trading market.
What Does It Cost to Trade Futures?
Like Forex trading, futures traders should know they're engaging in a high-risk, high volatility trading market where contracts on commodities like oil and gas, and on stock market indexes are traded on a daily basis.
You won't need $25,000 to start trading and there is no government-sanctioned minimum account balance to meet, but you'll still need $10,000 or more to get started trading futures on a daily basis. (Most futures brokers expect day traders to have at least $1,000 to get started in their trading accounts, but those figures vary from broker to broker.)
Why $10,000? Because that's the recommended amount of cash futures trading experts say you'll need to absorb the potential risk of futures trading losses and have the flexibility needed to trade the futures market correctly - and without losing too much sleep at night.
The Takeaway on Day Trading Financial Needs
Day trading isn't for the faint of heart, nor is it for the light of wallet.
Go into a day trading experience with your eyes open and plenty of cash to wall you off from excessive risk, in the stock market, futures market, and Forex market.
Make no mistake, you'll be up to your eyeballs in trading risk as a day trader, and you'll need the money, for better or for worse.