Day Trader Definition – 7 Answers You Need to Know
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In this post, I’m going to address the general questions I wish I had answered before I started day trading for a living. Let’s dive right into the first question of the definition of a day trader.
Day Trader Definition?
What a wide open question.
Asking someone what the definition of a day trader is like asking what does it mean to be an American. Talk to enough people, and you will get a million different answers.
To simplify the answer to this question, we can categorize day trading based on the Government’s definition. In the US, FINRA agency has defined day trading as four or more round trip trades in 5 business days.
Forget the types of securities or the amount of money you have – it just comes down to trading frequency.
#1- Is There a Minimum Number of Trades Per Day You Have to Make?
We have already answered this question, and it’s one trade per day for four days.
However, I think this question is really from someone that has decided to day trade, and they are trying to figure out how many trades make them an active trader.
There are runners that participate in 5ks, and then there are those that compete in multiple marathons per year. But don’t we classify both groups of people as runners?
So, how is day trading any different?
When I first started I thought a day trader needed to place between 40 and 100 trades per day. To me, it was all about the activity and trying to scalp or at least make small gains many times per day.
As I continued on my journey, I realized that for me large trade volume leads to over trading and commissions equating to a small fortune.
One Trade Per Day
Not what you were thinking right? I know, you can be an awesome day trader only placing one trade per day. Now how much you can make and how fast will need to change, but you are still one of us.
This approach is often best for new traders starting. This will reduce the chance of you blowing up your account, but you are still able to gain data from your trades to optimize your system.
Two to Four Trades Per Day
This is my sweet spot. After placing more trades than I would like to admit, I do best when I make two early morning trades before 9:50 and then two pullback trade setups in the 10:00 to 10:30 time frame.
If I go beyond this trade count, I get in trouble.
#2 – Do You Need Loads of Cash to Get Started?
Not like millions but you are going to need some starting capital to get going.
Day Trading Out of One Account
If you want to day trade out of one account and are trading the US markets, you will want to have $30,000.
The government requires a $25,000 account value to day trade, and you will want some cushion, so you are not at risk of falling below the requirement. If you are unable to maintain the $25k, your account will be flagged as a pattern day trader and your account could be locked by your broker for approximately three months.
Day Trading From Multiple Accounts
Another option we have discussed on the Tradingsim blog is opening more than one account.
By opening more than one account, you can place three trades in each account per week. So, if you have three accounts open you can make 9 round trip trades per week, which is more than enough to start collecting data on your trading system.
Since most brokerage firms require $2,000 to open an account, you can start with as little as $4,000 to $6,000. This is much better than having to come up with $30,000.
#3 – Are You Required to Trade Penny Stocks?
When browsing the web, there are day traders boasting about turning a few grand to millions trading penny stocks.
Does this mean you have to trade penny stocks to be successful? Absolutely not.
I day trade and do not touch penny stocks. Why? I couldn’t make consistent money every week.
The way my brain is wired, the moves were so fast and so extreme, it would bring out the greed in me. This would lead to me holding on for too long or not reacting quickly enough when profits presented themselves.
There were times I could go up 10% in less than thirty seconds. My temperament as a person doesn’t lend itself to this level of volatility.
So, again you are not required to trade these high beta stocks to get your day trader card.
#4 – Is Day Trading A Good Fit for You?
You need to determine if you are built for day trading. Just how I mentioned earlier I am not wired to trade penny stocks; you need to see if you are equipped for active trading.
Here are a few questions that can help you figure out if it’s a right fit for you.
Day Trading Assessment
- How do you feel about keeping positions open overnight?
- Do you have at least 30 minutes to one hour a day to dedicate to trading during business hours?
- What are your trading goals?
- Are you committed to day trading for at least one year?
- Why do you want to trade?
- Do you prefer shorting or going long?
- How much money do you have to get started?
- Do you enjoy actively managing your trades?
Only you can determine if you are ready to day trade. So, as you were reviewing these questions, do you feel like you are still interested in moving forward with day trading or is swing trading or long-term investing a better fit?
#5 – What Does It Mean to Be a Successful Day Trader?
When defining a day trader, what does it mean to be successful? The internet will make you feel like unless you can turn 500 dollars into $5 million you are somehow less than adequate.
Do you know what the definition of a successful trader is to me? Someone that can turn a profit every week.
That’s it. I don’t care if you make $50 bucks a week or $50,000. It’s all relative at the end of the day.
#6 – Do You Have to Short Stocks?
Shorting will give you more trade opportunities. However, it’s not a requirement to short sell stocks in order to be classified as a day trader. I personally only trade on the long side.
This again comes down to your preference, and there is no set requirement you have to even short at all.
#7 – What Do You Trade?
Here is just a quick list of what you can trade off the top of my head:
- Open Range Breakouts
- Pullback Trades
- Midday Consolidation Patterns
- Rangebound Stocks
- End of Day Movers
Do you see the problem? There are just too many choices.
If you are just starting, only focus on nailing down one strategy. You can make money mastering one. If you feel the need to add more in the future, you can always do that when you are ready.
How Can Tradingsim Help?
As you can see, the definition of a day trader is wide and vast. To this point, you will need to do a lot of exploration to figure out how you will define and crush the game.
You can test strategies and money management techniques within Tradingsim to find the right fit for you.
Remember, only you can define what it means to be a day trader.