Day trading as a business. Some tips before getting started
This lesson will cover the following
- Business risk and risk of personality
- What you would need to do before making your first trades
Day trading as a business
We already differentiated day trading from gambling, but it is useful to mention that if a trader does not strictly follow his/her strategy and does not pay close attention to how it is performing, then his/her trading becomes sheer gambling. Some may view the changing colors of price movement on the monitor as being a part of a game. Thus, they may begin making entries in the market without any consideration of risk and reward. Or we can say that they eventually end up using financial markets as a “global casino”. In doing so, their trading strategies will probably have the same bad odds as those of slot machines in any casino.
If one intends to start day trading as his/her business activity, he/she needs to think how best to run this business. Now he/she will be faced with two types of risk – business risk and risk of personality.
The timing of one’s cash flow is what defines the business risk. It is possible that not every trading month may be a successful one, but regardless of that a trader will need to pay its bills and taxes. Having money in cash will be handy during “bad months”. If a trader saves a portion of his/her profits during successful trading months and forms a cash reserve, no matter what happens to his/her trading account, this reserve may be used to cover any operating expenditures.
Risk of personality
This risk involves the cases when trading turns into obsession, clouding almost everything else in one’s life. As trading the markets is related with stress, the major difference between successful and unsuccessful traders has much to do with psychology. For more discussion on the topic of trading psychology, visit our Forex Trading guide.
Some tips before starting to trade
As technology costs plunged considerably during the past ten years, this made it possible for anyone to start trading from the comfort of his/her home. At times, of course, one may trade on a laptop when visiting his/her favorite cafeteria or on a terrace with a marvelous view during his/her stay in a luxury hotel, but more commonly, he/she needs to ensure that all the preparations for trading at home have been made.
Choosing a broker
First, one needs to open an account at a brokerage firm. In case he/she intends to trade in the stock market, then an appropriate choice will be a full-service broker, that belongs to the London Stock Exchange, New York Stock Exchange, NASDAQ or other major exchanges worldwide. In case one follows multiple trading strategies, then usually he/she needs different brokerage accounts. For instance, in order to trade both soft futures (coffee, sugar, cotton) and stocks of technological companies, one may require an account at a futures brokerage firm, belonging to the Chicago Board of Trade and another account at a stock brokerage firm, which provides fast execution of orders. For more discussion on the types of Forex brokers and their services, you can visit our Forex Trading guide.
Choosing a trading platform
After opening an account at a brokerage firm, the next step is to choose an appropriate platform, through which one can place orders. Trading platforms can be web-based and software-based.
In the case with a web-based platform, one can visit firm’s website and log in in order to trade. Thus, one can place orders from any computer with an access to the Internet at any location. These platforms may be designed to operate on particular web browsers.
In the case with a software-based platform, one needs to download and install the broker’s proprietary system on his/her computer. These platforms provide a richer variety of features and analytic tools, but, however, one can place orders only from the computer, on which the software has been installed. For more discussion on the topic of trading platforms, you can visit our Forex Trading guide.
What preparations do you need at home?
First, you need a reliable computer. Some traders usually use at least two – a trading computer and a spare one, in case of emergency. Almost all personal computers currently on the market are powerful enough in order to ensure day trading activities. As for the monitor, a 24-inch or larger IPS LED screen would suffice. Some traders prefer to use two monitors – one for the price charts and one for additional information – news, video streaming, additional price quotes etc.
Second, day trading requires Internet connection with as much bandwidth as possible (for instance, at least 1.8/256 DSL line, or 1 800 kilobits per second data download and 256 kilobits per second data upload). Firewall and anti-virus software are also a mandatory investment. Some software products may protect the PC at the expense of slow data feed, which can turn out to be a problem in terms of order execution.
You should also keep additional supplies at hand, such as additional mouse, keyboard, laptop batteries, in case of emergency. In addition, you should also consider buying an uninterruptible power supply (UPS) backup for your computer, so that if the power is down, your trading session will not be ruined. Last but not least, you should ensure that your computer is backed up on a regular basis. The majority of backup systems can be set up to work automatically, but avoid doing this during trading sessions, because any distraction from trading may turn out to be costly.