Day Trader – The Day Trader buys and sells within the same day in retail FX trading . Some day traders are very active, trading many times a day and some only make a couple of trades a day. Day trading generally suits high volume and liquid markets such as FX, Futures and Stocks.
Pattern day trader is a term defined by FINRA to describe a stock market trader who executes 4 (or more) day trades in 5 business days in a margin account, provided the number of day trades are more than six percent of the customer’s total trading activity for that same five-day period.
One of the most important considerations will be how to go about the business of day trading.
Prop Trading Vs Own Account
What can a prop firm give you that you cannot attain on your own? Salary, more money, no personal risk, better tools, better strategic or technical edge, associates and friends, social status?
Professional Prop Trading
To get a salaried position with absolutely no personal liability for anything at all you will need a track record or a higher degree in engineering from the right university. Or family friends in banking
At professional firms you are actually entrusted with real funds to trade in a real market with actual counter parties. These firms typically trade futures exchanges as well as spot FX conducted via interbank systems such as IBIS.
Professional trading costs money even apart from market losses, at some firms you can get funding providing you bear some of the costs out of your own pocket as a sign of goodwill.
These costs will be leveraged in various ways but will require a cash injection from your side. Expect to see this cost billed as training or monthly seat costs or admin charges.
Retail Prop trading
There are prop trading firms in the FX retail industry that offer an alternative to spread betting accounts. These firms offer the same platforms as those used by spread betting brokers, therefore no actual losses or profits are accrued from your trading activity and instead you are paid for pips. If you make money the firm will pay you a percentage of what would have made had you been trading in the real market.
Typically these firms charge a monthly or one off fee in return for access to their platform and the ability to trade without personal liability for losses whilst retaining the chance of a payout if successful.
Own Account Trading
With the own account route there are the obvious benefits as well as the drawbacks. The drawbacks are mainly personal risk of loss. However as some of the prop options require you to pay something out of your own pocket we can consider the possibility of a fixed personal loss as a cost itself.
Depending on your budget and commitment there are 2 main options for own account trading.
Professional Own Account
A professional trading set up means that you will be actually trading in a real market and directly against real traders. This is called peer to peer trading and is conducted on futures exchanges and interbank FX systems.
You will require an account with a broker or a bank. Futures generally require much less funding due to the high leverage available. Leverage will be in the order of 1/20 for futures accounts with interbank typically about 1/10 depending on your bank or broker.
With a professional trading account you deposit some money, known as margin and your losses and profits are marked against this account. You would then pay commissions every time you trade and depending on the trading system you choose your costs would then be for the system and for news and analysis.
A professional would require £100,000 to be adequately funded and prepared for a career in trading.
Retail Own Account
For the retail trader there are lots of cheaper alternatives to the broker account. Spreadbetting and CFD firms provide platforms that allow you to bet on the market without having to actually trade in the real market. Essentially, you are betting against the firm that the market will move in a certain direction. If you win the bet then the company pays you, if you lose they keep your money.
The trading platforms provided will look similar to real trading systems used by Professionals but will be a simulation of the real market.
Time Investment to become successful
Wherever you decide to trade, it is important to understand that building up the right skills and knowledge of actually trading takes time. Reading books and articles online is fast and easy, learning technical analysis and about market fundamentals can be done by anyone in a few weeks.
However, the most important part of trading that dictates success is your behavior and how you actually act in the markets. How you handle loss and profits, how to avoid overtrading, how to master fear and greed are the hidden factors that separate real traders from gamblers.
These skills and behaviours will eventually be learnt by anyone who survives in the market long enough. Unfortunately that time period could be years with astronomically high losses in the meantime.
Traditionally the difference between Pro and retail traders is that pro traders have a mentor or senior trader at a bank that shows them the right way to do things and so reduces the time and cost investment.
For the retail trader though, trial and error and learning on the job means picking up bad habits, sustaining total losses and then having to quit.
It is therefore the wise retail trader who sets aside some funds for the best education he can find, especially of the behavioural type.
Realistically set aside 6 months to learn the trade if done properly.
Capital Investment to become successful
The money required to become successful should factor in education, a margin account, running costs as well as a margin account.
Before making the decision to begin, invest in educating yourself. Be wary of the free education offered by brokers and concentrate on searching out true knowledge from those with real experience. This may be at a pro firm and it may be by hiring a mentor.
It will tend not to be found in the articles and ‘guides to trading’ offered free on Broker sites.
Invest in yourself not on gimmicks
Get real education, read books, observe, speak to those who have actually made it, never to those like yourself who are also looking for the answers.
Consider the fact that 90% of beginners run out of money before turning a profit and then ask yourself why you deserve to be the exception. Chances are that the answer will not be following the same path and educating yourself with free articles found on websites who are after your commissions or fees for trading.
Avoid gimmicks and systems and get rich quick offers. Do not copy other traders or follow rumours. Focus on improving your own ability to react and behave in the same way professionals do.
Remember to factor in the possibility of losses as part of your education. Once you have made it through the learning period what can we expect to return?
Its generally accepted that beginners should not risk more than 1% per day of their account on a trade. This simple money management rule helps to preserve ones capital.
If risking 1% per day, then the target should be between 10% and 30% a month.
Therefore on a trading account size of £100,000 we should never lose more than £20,000 a month and should expect to make realistically between £10,000 and £30,000 per month.
The Day Trader – Part 2 Conclusions
It takes 6 months before you expect any return. Invest in the correct education. Avoid the easy money path taken by majority of beginners, be different, take more care with your decisions.
Find out all the options that are open to you depending on your time and budget commitments. Be realistic about costs and the time required to become successful.
And remember if 90% of beginners lose due to lack of preparation that leaves a lot of money to share amongst those who crack it. Why not invest wisely in yourself and join the 10% of winners.
In Part 3 we will look at trading styles of successfully day traders