Day trading can be a great way to establish a tax-free second income or even to earn enough cash each month for you to finally pack in the drudgery of your day job. However, jumping into the markets blind is a sure-fire way to get financially burned. Without doing the proper groundwork, educating yourself and putting in place effective strategies it can be next to impossible to reliably grow your initial investment.

Here are five simple steps you can take to make sure that you get your trading career off on the right foot.

Identifying Your Market

You really are spoilt for choice when it comes to choosing a market to start day trading on. There are just so many different options to choose from, with financial futures, Forex (foreign exchange) and the stock market being the most popular. However, each of these markets behave very differently and often have their own unique set of requirements.

This is where most newcomers to day trading quickly come unstuck as they get overwhelmed by the sheer level of choice that is splayed out in front of them. They spread themselves too thinly over multiple markets, they tire themselves out flicking between all the different charts or and timeframes and they get confused so they misapply a strategy that was working great for them the other day in a different market to one that operates completely differently. There is no need to overcomplicate what can already be a very technical and nuanced field of study; when you are just starting out focus all your time and attention on one single market so that you get extremely familiar with its behavioural patterns.

While no single market is objectively better than another one, choosing which one you want to trade in fundamentally comes down to two simple things – what asset do you want to trade with and what can you afford (your capital requirements).

Creating Your Strategy

OK, so you’ve chosen your market. Good job! Your next step is to establish a strategy for trading on it. For a beginner day trader, adopting a singular strategy that works well is so much better than having multiple strategies on the go that are much less reliable. Don’t worry, once you’ve really gotten to know this one strategy you can start testing out others further down the line (it’ll become too monotonous if you don’t!) but right now, really get to grips with just the one. Make sure it works and learn the method inside and out.

Start to create your strategy by watching live charts of an asset move in real time. While studying the moves ask yourself when you would enter into this trade and how would you get out of it. See whether you’d win or lose on the transaction and consider how much you would be willing to risk on it; what size position would you take? What is the probability that the trade would be profitable? Once you’ve taken all of these factors into account start looking at what tendencies the strategy shows after making the trade 100 times.

There are many different trading strategies to consider; everything from swing trading and scalping to trading on volume and arbitrage trading. However, it is so much easier (and often far less costly!) to learn tried-and-tested trading strategies from an experienced trainer. At Trading College, our educational courses and even one-to-one mentorship coaching programmes can help you skip the initial trial and error approach as we give you all the tools you need to put a strategy into practice as well as the use of our signature software, the Pro-Trading System, that will be incredibly useful at supporting your day trading goals.

Deciding Your Trading Hours

OK, market – check! Strategy – check! What next? Well, there are a couple of other decisions that need you need to make before getting started. The first of these to consider is what time(s) of day will you be making your trades?

Some day traders will choose to trade for a whole session, perhaps from 9:30am to 4:00pm EST to tackle the US stock market or maybe from 6:00am to 5:00pm GMT to make the most of the Forex market. However, if the prospect of sleepless nights or bleary-eyed mornings doesn’t sound like your cup of tea please don’t be disheartened. Many day traders find it very effective to choose a session length lasting only a couple of hours which, when starting out, can be very helpful as it doesn’t mean making a full-time commitment to trading and will do wonders for building up your consistency.

If you fancy making the stock market your primary trading arena, then the best time for making your trades is the first one to two hours after it opens and the last hour before it closes. In this instance you’d want to become familiar trading between 9:30am and 11:30am EST (which is 1:30pm to 3:30pm GMT) as this is the most volatile time of day. Volatility is very desirable as it means that the biggest price moves are taking place and there is therefore much more potential for profit.

If trading the futures market is more your game then, much like stocks, an ideal time to start day trading is when it opens for the day. Remember though that, since active futures often trade around the clock, the main trading day starts a little earlier so focus your efforts between 8:30am to 11:00am EST (12:30pm to 3:00pm GMT).

For earlier risers, the Forex market (foreign currencies) is at its most volatile between the hours of 6:00am to 5:00pm GMT and trades 24-hours a day during the week. As you can imagine holding down a day job and keeping track of FX from dawn til dusk is not going to be possible so instead try a quick trading session whilst eating your toast first-thing or check in during your lunch break (the biggest price moves typically occur between 12:00pm and 3:00pm).

Managing Your Risk

There are two types of risks involved with day trading, trade risk and daily risk. Both of these factors will affect your strategy but their impact on how you trade differs greatly.

Ok, so trade risk comes down to a simple matter of how much you are willing to risk on each trade. On a trading day, to minimise your losses (especially during your initial first few months) it’s extremely important to set your risk levels before you start trading with your money. A solid recommendation is that you put no more than 1% of your capital at risk on each trade. This meaning picking an entry point and then setting a stop loss; this mechanism will get you out of a trade if it turns against you and prevents your whole investment from vanishing.

Secondly, managing your daily risk is effectively all about pacing yourself. You do not want a single bad day to ruin your whole week or month. Instead, make sure that you set a daily loss limit for yourself; assuming that you’ve set a trade risk of 1% then setting a loss limit of 3% of your capital would mean that you would need to lose three trades or more (with no wins) to hit your maximum daily loss.

Try Before You Buy

Your early success in day trading hinges on remembering to not get ahead of yourself; don’t jump into day trading until your strategy is totally airtight and you’re able to adapt trades as and when the market changes.

To do this we recommend that you use a demo account before you risk real, head-earned savings. A demo account will provide you with the historical trading market performances that you can trade against; this allows you to hone your strategy and methodically work out all its kinks.

Although a demo account can’t exactly recreate the pressure of putting real money on the line, it can be very helpful in developing your trading confidence. You can get you into the trading mindset, start monitoring market conditions, familiarise yourself with trading charts and most importantly make sure that your strategies are performing optimally.

Even when practicing it can still be tempting to try out new things and change your strategy or market but it’s incredibly important that you stay focused throughout this time. Make sure that you only trade during your chosen hours, you stay in the market you initially picked and that you keep using your one strategy until you can do it with your eyes closed.

Practice Makes Perfect

It’s important not to jump into day trading until your strategy is well and truly airtight and you’re able to adapt to trades and the market changes.

To do this, use a demo account before you risk real money. A demo account will provide you with historical trading market performances that you can trade against, honing your strategy and methodically working out all the kinks. While a demo account can’t quite mimic the pressures of having real money on the line, it can help you develop your trading confidence, get you into the mindset of monitoring market conditions, familiarising yourself with trading software, and making sure your strategies are performing at their best.

When you’re practicing, although it may be tempting to try new things and change your strategy or move to a different market, it’s important that you stay focused on your single strategy, make sure you only trade during the hours you decided to trade, and keep in the market you picked so that you can build consistency and reliability.

Learn to Trade Online

If you’re looking to start day trading then we wholeheartedly recommend that you sign up for our next Learn To Trade Online 2 day mini-course. It’s totally FREE and is an excellent introduction to this highly complicated subject. We look forward to seeing you there!