“How much capital will I need to start day trading for a living?” This is a very common question that we often receive and it is somewhat difficult to answer. That is because each individual is different and has a different set of goals. Each person’s standard of living could be different and what one individual makes with day trading for a living may not be enough for another. The more money you want or need to make will depend on the amount of capital that you have at risk.

Swing Trade for Percentage, Day Trade for Dollars

The answer is that it is different for each person and it is something you must consider for yourself before you start. We can only give some practical guidelines. I personally feel that you should have enough trading capital to purchase between 500 to 1000 shares of any given stock without having to use margin. When we take a swing trade position, we look for gains in terms of percentage points. However, when I day trade, I am looking for dollars to take out of the market that day. I need a dollar figure because this is my salary for my work. It’s how I make my living so I want to make a certain amount of dollars when I day trade.

The price of the stock I’m day trading is critical because when I day trade, I normally buy either 500 or 1000 shares, depending on the price of the stock. Ideally, my target when I take a day trade position is a $1.00 move on the stock. I will let the stock run much more than that if I see the momentum is going to carry it up further. I have had stocks move up 2, 3 4 dollars or more in a single day trade. If I get the move, I will run a trailing stop behind the price to lock in the profit should the stock reverse and fall back. I use the trailing stop because I want to take advantage of any more upside movement the stock might have the rest of the session. If I were to just sell at the $1.00 target, I am really robbing myself of possible further upside in the stock and limiting my potential profit. Remember, when you are trading 1000 shares at a time, you only need a small move in the stock for a worthwhile profit.

Keep Expectations Realistic

If you trade stocks in the $30 to $60 range, this could mean that you need a minimum of $30,000 to start. 1000 shares of a $30 stock or 500 shares of a $60 stock and so on. This of course would be 100% of your capital in any one position, which is very dangerous. If you want to trade 2 or 3 positions at a time, you would need $60K to $90K to start, assuming that you trade the 500 to 1000 share blocks in this $30 – $60 price range and you do not use your margin. If you are using margin, then you could buy more shares or pick higher priced stocks. If your day trading account balance was say $120,000, you could buy 2000 shares of a $20 stock and still have $80,000 left to put to work in 2 or 3 more trades. For example, if you had bought 2000 shares of SOLF on Friday (May 16th) at the opening price of $19.00 and sold at the close, you would have had a one day profit of $7,680. It closed at $22.84 for a $3.84 gain on your trade. $3.84 X 2000 = $7,680. This is just one example and it is not that far fetched to think that you can’t catch these moves because every day there are stocks moving up and there is always a big mover in the market somewhere. We just happened to have had SOLF on our trade Bulletin and in the pre-market update as a stock to watch for a possible day trade.

In this example, we used 2000 shares but you do not need to trade that many shares. Trade what you feel is in your comfort level. Keep in mind, with lesser shares traded, you will need bigger daily moves in the stocks to make a decent living and there are times when stocks just do not move more than $1.00 in a day, especially when the market is suffering from a flat day. Just remember, if you are starting small, keep your expectations realistic. Certainly, someone trading with $30,000 to $50,000 is going to have a much more difficult time generating $1,000 per day than someone using $100,000 or more. Know your limitations with respect to your capital. Keep things in perspective and try not to expect miracles.

In the Big Leagues

When you get into the bigger leagues of day trading, you can then take on (purchase or short) a block or two of a stock, generally defined as 10,000 shares. You can trade 10K shares of a $5.00 stock for only a 10 cent move and you will have profited $1,000 in that trade. Examples of these types of stocks are CPST ($3.48) had a .15 range on Friday and FINL ($6.77) had a .30 range on Friday. You won’t capture the whole move but you can see the potential if you get a decent entry. Remember; never put all your capital in one trade. Only use 25% to 33% of your available day trading capital in each trade.

This is going to require $150,000 to $200,000 or more of trading capital plus some use of margin in limited situations and for a limited time. When you reach this level, it is easy to see how day trading can become quite profitable but also quite risky. A move of a few pennies across 10,000 shares can return quite a bit of money, quite rapidly if you scalp 3 or 4 trades a day in the stock. Just remember it goes both ways; you can quickly lose quite a bit as well. There is no right or wrong answer with regard to how much you need to start. Simply keep your objectives in perspective and be realistic based on the capital in play.

Day trading is an art, not a science. Even though artists study techniques of the masters who came before them, ultimately every artist needs to find his or her own way, his or her own style of creating art. So it is with day trading. There is no one correct way to day trade. This article asks you the questions you need to consider in order derive your own trading style.

On days you trade, how much time do you have to completely devote to trading?

Let’s face it, if you are reading this article, most likely you are not a professional day trader. Rather, you are a market enthusiast who trades occasionally and are looking for ways to hone your strategy. I will discuss specific educational tools below, but for now let’s consider how much time in the day you really have to devote to trading. This is the crucial first step toward developing your own effective trading style. If you only wish to devote an hour or two each time you trade, then holding numerous trading positions in any given trading session probably does not make sense. Know your time constraints; know how many open positions you are willing to manage simultaneously. Once you get an idea of how many trades you are willing to manage at once, then you need to hone in on your research. This brings us to the next important question.

How will you research and identify stocks for trading?

Here is where the art of day trading comes into play. There are numerous ways to identify potential winners. Most experienced traders do their own research based on a number of technical analyses. This is not hard to do, but it does require an upfront commitment to educating yourself. There are a variety of study materials available (cd-rom packages, live seminars, webinars, on-line forums, etc.) There are also a number of stock market on-line newsletters and stock research services that can help you identify stocks that are set to move. Whatever method you employ to pick your trades, whether you identify stocks to trade on your own or opt to use a fellow trader’s research, you need to use this research to derive a trading plan for each trading session you undertake. This brings us to the next question.

What elements will you incorporate into your daily trading plan?

An effective trading plan includes much more than stocks identified for trading. For each stock you identify for potential trading, you need 3 parameters which reflect your personal risk to reward ratio: a targeted entry price, a targeted exit price and a stop loss. A targeted entry price helps ensure that you don’t enter a trade without considering the current day’s momentum. A targeted exit price helps ensure that you don’t stay in a trade too long and put your profits at risk. And finally, stop losses help preserve your trading capital in the event a trade goes against you. Incorporating these 3 elements into your daily trading plan will not only add structure to your trading session, but will also help control emotional trading. This leads us to the last big question to ask yourself.

How will you handle the inevitable losing trade?

Every trader has losing trades. Your reaction to losing trades can have a big impact on your overall success as a day trader. Don’t let a losing trade affect how you manage your next trade. Be wary of trying to “win back” lost capital in subsequent trades. Manage each and every trade separately. When you lose, accept it and move on. As noted above, stop losses will help preserve your trading capital, but you also need to remember to stay within your personal trading parameters on each and every trade.

Taking the time to define your personal trading style will pay dividends in the long run. Each trader’s style is different. When you have clearly defined the time you are able to devote to trading, identified your research methods, derived your trading plan and eliminated emotional trading, you will have provided yourself with the necessary structure to carry out successful day trading.