Professional day traders—those who trade for a living rather than as a hobby—are typically well established in the field.2 They usually have in-depth knowledge of the marketplace, too. Here are some of the prerequisites required to be a successful day trader.
Knowledge and experience in the marketplace
Individuals who attempt to day-trade without an understanding of market fundamentals often lose money. Technical analysis and chart reading are both good skills for a day trader to have. But without a more in-depth understanding of the market and its unique risks, charts may prove deceiving. Do your due diligence and understand the particular ins and outs of the products you trade.
Day traders use only risk capital they can afford to lose. This not only protects them from financial ruin but also helps eliminate emotion from their trading. A large amount of capital is often necessary to capitalize effectively on intraday price movements. Having access to adequate capital is very important because most day trading employs a high degree of leverage in margin accounts, and volatile market swings can trigger big margin calls on short notice.
A trader needs an edge over the rest of the market. Day traders use several different strategies, including swing trading, arbitrage, and trading news. They refine these strategies until they produce consistent profits and effectively limit losses.
A profitable strategy is useless without discipline. Many day traders end up losing money because they fail to make trades that meet their own criteria. As the saying goes, “Plan the trade and trade the plan.” Success is impossible without discipline.
To profit, day traders rely heavily on market volatility. A day trader may find a stock attractive if it moves a lot during the day. That could happen for a number of different reasons, including an earnings report, investor sentiment, or even general economic or company news.
Day traders also like stocks that are highly liquid because that gives them the chance to change their position without altering the price of the stock. If a stock price moves higher, traders may take a buy position. If the price moves down, a trader may decide to sell short so they can profit when it falls.
Regardless of what technique a day trader uses, they’re usually looking to trade a stock that moves (a lot).