Getting Started

You can’t hide from it. The market euphoria that we are witnessing is grabbing everyone’s attention. Day trading in particular is growing in popularity as millions of people seek to find a way to make money and achieve financial freedom. In fact, more people than ever before are expressing interest in getting involved with the stock market. This guide serves the purpose of walking you through what day trading is, what you need to do in order to make consistent income and more importantly, how to do it efficiently.

What is Day Trading?

Day Trading is an aggressive short-term form of investing strategy that involves the practice of buying and selling securities on the same day in an attempt to secure profits from fluctuations in price. Day traders typically combine different methodologies that allow them to predict the future price of a security, such as technical analysis and catalysts in the market.

Day trading can be an extremely lucrative investing strategy that you can do if you can time the market effectively on a consistent basis. However, there is much more to day trading than meets the eye, which is why most people that partake in it fail. In fact, it a well known fact that the vast majority of retail traders will not make money. To stand apart from the crowd, you must commit yourself to fully learning how day trading works and how you can utilize it, among other trading strategies as well, to maximize your return on investment potential.

How does it work?

Day trading represents a high-velocity approach to financial markets, characterized by the rapid purchase and sale of securities within a single trading session. This strategy aims to capitalize on minor price fluctuations in highly liquid assets. Traders execute and liquidate positions within short timeframes—ranging from hours to mere seconds—seeking to profit from transient market inefficiencies. This contrasts sharply with traditional buy-and-hold investing, as day traders typically avoid overnight positions, closing all trades before market closure.

Essential tools for day traders include real-time market data feeds, sophisticated charting platforms, and high-speed internet connectivity. These resources facilitate the identification of potential entry and exit points through technical analysis, sentiment analysis, and the interpretation of breaking news. Luckily, most brokers these days make all these tools available to you when you create an account with them. Many day traders specialize in specific sectors or trading methodologies, such as momentum trading or scalping, to enhance their competitive advantage.

Ultimately, successful day trading demands intense concentration, rapid decision-making, and composure under pressure. Traders must continuously monitor multiple data streams, interpret complex market signals, and execute trades with precise timing. This demanding endeavor combines analytical rigor, psychological resilience, and rapid execution—a stark departure from the passive nature of long-term investment strategies.

How do I get started?

A comfortable amount to get started day trading depends on the person, but I recommend having at least $1,000 cash in your broker account. Although I recommend traders to paper trade while they learn, having $1,000 is more than enough to take small risks on a daily basis that can help you yield profits and grow your account. When you make a brokerage account, you will be asked what type of account you want to have. Choosing the right brokerage account—cash or margin—is a crucial decision that can significantly shape your investment strategy, potential returns, and overall risk exposure. While both provide access to the financial markets, they operate on fundamentally different principles, each with its own advantages and disadvantages. Cash accounts offer simplicity and inherent discipline, limiting you to investing only the funds you currently possess. This straightforward approach aligns with the principle of investing within your means, providing a clear boundary for your trading activities. In contrast, margin accounts introduce leverage, allowing you to borrow funds from your broker to purchase securities. While this can amplify potential gains, it also magnifies risk and introduces complexities that require a more sophisticated understanding of market dynamics.

Let's delve into the key distinctions between these two account types, examining their features, benefits, and potential pitfalls. This analysis should help you determine which type best suits your financial situation, investment objectives, and risk tolerance.

A cash account is the most basic and common type of brokerage account, serving as the starting point for many individual investors. In a cash account, you can only purchase securities using the funds you have deposited. This means all transactions are fully funded by your own money. When you open a cash account, you deposit funds, which then become available for investing in various assets like stocks, bonds, mutual funds, and ETFs. The defining characteristic is that your purchasing power is limited to the available cash balance. For instance, if you have $5,000 in your cash account, you can only invest up to that amount. It's also important to understand the settlement period. When you sell a security, the proceeds aren't immediately available for reinvestment. The standard settlement period is typically T+1, meaning the funds settle one business day after the trade date.

A margin account, on the other hand, allows you to borrow funds against the value of your existing assets to purchase additional securities or even sell short. This leverage can amplify returns in both rising and falling markets. Margin can also be used to withdraw cash as a short-term loan against the account's value. However, any outstanding margin balance is subject to daily interest charges, which can be significant, based on the prime rate plus an additional markup by the brokerage firm. To illustrate how margin works, consider a scenario where you believe a stock (XYZ) will decline in value. With a margin account, you could take a short position, borrowing shares and selling them with the expectation of buying them back at a lower price later. If the price falls as predicted, you profit from the difference, minus any margin interest. Unlike cash accounts, margin accounts allow for more complex strategies like short selling and hedging. However, they also require maintaining a specific margin ratio. If your account value falls below this threshold, you'll receive a margin call, requiring you to deposit more funds or sell assets to restore the required margin level.

To further illustrate the difference, imagine you want to buy shares of XYZ Corp., currently priced at $100 per share, and you have $25,000 to invest. With a cash account, you could purchase 250 shares. With a margin account, you could also buy the initial 250 shares with your own funds, but then borrow an additional $25,000 to purchase another 250 shares. If the share price rises to $150, your profit with the cash account would be $12,500, while your profit with the margin account (before interest) would be $25,000. However, if the price drops to $50, your loss with the cash account would be $12,500, but with the margin account, your loss would be $25,000, potentially triggering a margin call.

Pattern Day Trader (PDT)

The Pattern Day Trader Rule only concerns itself with margin accounts, not cash accounts. FINRA regulations define a "pattern day trader" as someone who executes four or more "day trades" within a five-business-day period, provided these day trades constitute more than 6% of their total trading activity in their margin account during that same timeframe. It's important to note that brokerage firms may have different methods for calculating day trades, so it's best to contact your firm directly for specifics on their counting methodology.

Beyond the numerical criteria, firms are also obligated to designate an account as a pattern day trader account if they have reason to believe the client will engage in pattern day trading. For example, if the firm provided day-trading training prior to account opening, this could trigger a pattern day trader designation.

Once an account is classified as a pattern day trader account, the firm will generally maintain that classification, even if the client doesn't day trade for a subsequent five-day period. This is because the firm has a "reasonable belief" based on prior activity. If a trader decides to change their strategy and discontinue day trading, they should contact their firm to discuss reclassifying their account.

Pattern day traders are subject to specific requirements. Most importantly, they must maintain a minimum equity of $25,000 in their margin account on any day they engage in day trading. This equity, which can be a combination of cash and eligible securities, must be present before any day-trading activity begins. If the account balance drops below $25,000, the trader is prohibited from day trading until the minimum equity requirement is met.

Furthermore, pattern day traders are restricted from trading beyond their "day-trading buying power," which is typically capped at four times their maintenance margin excess at the close of the previous business day. Maintenance margin excess refers to the amount by which the equity in the margin account exceeds the required maintenance margin.

The best way to avoid violating the PDT rule is to open a cash account if you have less than $25,000 in it. Day trades settle T+1, meaning on the next business day. For example, say you take a trade on Monday. By Tuesday morning, that trade will have settled and you should have full access to your funds.

Choosing the right broker

There are many brokers in the US market. The most popular ones are Robinhood, WeBull, Charles Schwab, eTrade, Fidelity and Interactive Brokers. I can confidently testify that out of all these brokers, the best one is WeBull. They have the largest amount of tools available to you while also making trading easy and intuitive to learn. I have even partnered up with WeBull to provide you an invitation that will grant you 40 free stocks if you sign up using the following promo link: