Day Trade is a type of transaction performed on the stock exchange, which starts and ends on the same day. Day trade transactions can be made in stocks, futures contracts, options and have the characteristic of high leverage and bold profile.
In this updated article you will understand what day trade is,how day trade works, how to start the right way and more!
Get ready to acquire valuable information in this complete day trade guide for beginners.
Shall we get started?
What is Day Trade?
The word “trade” means “business”.
On the stock exchange and financial markets, a trade is the name given to a trade made with stocks, futures contracts, options and etc.
For example, when a trader buys 10,000 Petrobras shares (PETR4), we say that he made a buy trade.
If, some time later, he decides to sell these 10,000 Petrobras shares, this investor again made a trade, selling.
When these trades are made during the same day, for example by buying at 10:00 in the morning and selling at 10:20, we say that this trader has made a day trade.
Here is the key to understanding what day trade is:
The combination of the word day and trade meansthat a day trade is a trade that starts and ends on the same day on the stock exchange.
It’s as simple as that!
How Does Day Trade Work?
See the chart below showing the price movement of an asset traded on the stock exchange in just one trading day.
On the X axis (horizontal) we have the time scale and on the Y axis (vertical) we see the price scale.
Notice the variation that occurs in prices during this day.
The day trader is the professional specialized in day trading operations. It seeks to identify opportunities to make quick trades and with good probability of hit to then profit from this type of price variation.
Therefore, the day-trade is a very short-term speculation activity, where its strategy is to have quick gains, avoiding as much as possible the loss, using stop loss orders and other risk management strategies.
Here comes the question: how to know the time to buy or sell?
To answer this question there are several schools of analysis that are used by day traders.
We’ll look at some day trade analysis schools later.
Day Trade Analysis Schools
The best known and used worldwide is the School of Technical Analysis.
This methodology consists of trying to predict the movement of the analyzed assets (stocks, futures contracts, forex,etc.) based on the history of prices and volume traded.Taken from our article on technical analysis.
In a sense, what this school does is rely on past quotes and chart patterns to try to predict the future price.
In these studies, the fundamentals of the assets analyzed are totally disregarded.
Also known as Naked Trading, Price Action is a kind of technical analysis that does not use indicators.
It relates the drawings formed on the candlesticks of the charts to help the trader make his decision.
In our article on Price Action you can find a lot of information about it.
In his research on day trade, most likely, came across this expression: Tape Reading .
Also known as “Order Flow Analysis”, this school analyzes price movement (the flow) through the analysis of buy and sell orders in the market.
All the dynamics of price movement and orders is analyzed by this school, in order to give a “signal” to the trader to enter a particular business.
Market Profile has a different proposal.
Its difference already begins in the way of seeing the graphics, which in place of lines or candles has letters.
It is a very deep and subjective school where it shows the structure of the market through these sets of letters, called TPO.
Although it is common to find some using it as an indicator, it does not give buy and sell signals, but rather shows us the structure of the analyzed asset and is very important to filter out market noise and understand its trading logic.
How to Start in Day Trade?
The first practical step to start in the day trade is to open an account at a stock broker.
Generally, the process is very fast and with little bureaucracy.
The opening of this account in the broker works as opening an account at the bank, with the advantage of all necessary documentation being able to be sent online, without the need for physical displacement of the trader / investor.
To choose your broker it is very important that you understand some concepts involved in this choice.
Thinking about it, we prepared a specific article about it, where we will teach you how to choose the best broker for day trade.
Making a brief summary, the procedure is as follows:
- You send copies of your documents via the Internet
- Awaits approval
- Once you’ve approved your registration, you can start investing by sending money via DOC or TED from your bank.
Can I use the Broker’s Home Broker?
After opening the account and transferring the capital to the broker, the future day trader can already send buy and sell orders to the market.
To this end, virtually all brokers offer the so-called Home Broker, which is an online trading platform.
But, we are already getting ahead of you: the Home Broker offered by brokers is not suitable for professional day trading,although for early career you can even use it to “acclimatise”. However, we do not recommend the professional practice of day trading hereby.
Professional Platforms for Day Trade
You will need a professional platform for day trade to receive trading data from stock exchanges in real time, being able to read and analyze the stock or futures market with confidence and appropriate resources.
These platforms can be contracted in two ways:
- Hiring through your broker: in this case, brokers usually give a good discount on your platform monthly, at the price of you being committed to only send orders by this broker, this being the most suitable form of hiring for the beginner.
- Contracting with the platform provider: by hiring directly with the software developer, you will have the advantage of having the “multi broker” platform, that is, you can route your orders and operate by any broker.
Margin of Guarantee and Leverage
It is important that you get acquainted with two concepts that are always present in the life of the day trader
- Warranty Margin
Day traders work very leveraged and we will explain what this is.
The guarantee margin required by your broker should not be confused with the guarantee margin required by B3 (exchange).
Guarantee Margin – Stock Exchange
The guarantee margin is an amount in reais required by B3 in futures contract transactions to ensure compliance.
As its name says, it is a “guarantee” that the trader leaves.
It’s like a “shorts check” and the required amount depends on which asset you will trade (trade).
When the trader leaves an open position to buy or sell a futures contract at BM&F, a percentage of the value of this contract is required as collateral for him to hold the position.
When the trader closes his position (if he bought, closes selling and vice versa) the margin value is returned to the trader.
As the day trader opens and closes his positions on the same day, this margin will never be charged to him, since he does not leave open positions.
To get an idea, to leave only a mini dollar contract open, at a price of R$ 3.80, the trader would need to leave as collateral around R$ 5,700 (about 15% of the position value).
Guarantee Margin – Broker
For the day trader, the broker is the broker who charges the margin for trading futures contracts.
For example, there are brokers currently charging between R$ 25 and R$ 200 margin per mini-dollar contract.
That is, to operate a mini dollar contract the trader would have to leave much less than R$ 5,700 in his broker.
For stocks, there is no guarantee margin: the trader trades with his own capital or leveraged it (we will see leverage in the next topic).
The term leverage is used for the act of using a higher financial value than the one we actually own.
It is a type of loan (or financing) where we use third-party resources to multiply the profitability of an operation.
For example, if your brokers offer leverage of up to 20 times, and you have $10,000 deposited into your broker account, you can trade up to $200,000 of financial value.
So let’s assume you want to buy 10,000 petrobras shares and the price of it is R$ 20.
In this case, because of the leverage offered by your broker, you do not need to have $200,000 in the account.
As the broker gives you 20x leverage for day trade, you only need $10,000 to trade.
Therefore, the day trader works leveraged.
However, before you’re doing mirabolantes accounts of how much you can earn with little money, remember:
Leverage works for both gains and losses: let’s go to a practical example, assuming a stock of 20 reais.
Note how a difference of only 5% in operation can cause you to lose everything (when working leveraged).
The 7 Day Trade Costs
The cost of day trade operations consists of three main variables: exchange cost, brokerage and income tax.
However, there are other costs involved and in total we can even account for the 7 costs involved in the day trader profession. They are:
1) Brokerage Cost
This is the cheapest cost of the trader, the brokerage cost, charged by your broker.
With each deal done, your broker gets a part to fund your entire structure.
That’s fair enough!
It is of vital importance to charge brokerage for the maintenance of the company’s technology.
There are brokers today with zero brokerage, however, beware: the service provided can also be zero!
Brokers usually offer closed packages that improve the final costs for the client.
2) Bolsa Cost
The exchange cost varies depending on the asset operated, but it is basically calculated as a percentage of the financial value moved in your trades.
This is a cost that is charged for the scholarships and you can better know these costs directly on the B3 website.
3) IR Cost
The rate for day trade operations is 20% and there is no exemption!
The calculation of the tax due in case of profit is monthly, and payment through a DARF 6015.
We have a specific and detailed article on how to declare income tax for day trade.
4) Infrastructure Cost
For the trader to set up a complete operational setup (chair, table, PC, etc.), with comfort and without luxury,should spend around R $ 5,000.
This cost includes PC/Notebook, chair, desk, NoBreak and others.
This without considering the monthly costs of energy and internet.
We have prepared a complete article on how to choose your computer for day trade. It’s worth checking out!
5) Loss Cost
Nobody likes to lose, of course.
Our brain was not programmed to deal with losses, but, they happen, and in the day trade will be part of your day-to-day.
The loss just happens, don’t be discouraged!
Why is it a cost?
Because every day we lose it’s like we take a step back, as shown in the table below:
Above, we see the relationship between the loss and the gain required to reset the account.
6) Education Cost
Perhaps one of the trader’s main costs.
Do not think that only beginner spends on education, the professional trader also spends.
This is because it should keep constantly up to date with the market and its tools.
Books, courses, lectures: everything is part of the trader’s training.
7) Opportunity Cost
For sure, the greatest of them all!
This is the cost that involves, in addition to money, time.
Money, come and go.
Time, don’t come back!
Applying your money and time well is key!
After all, How Much Does a Day Trader Earn?
Well, you can make a lot of money and also lose a lot of money with day trade!
It all depends on the trader’s skill, experience and study.
The real question you should ask yourself is:
How much can I earn as a day trader?
There are autonomous traders who have as daily goal something above 5 digits (more than R$ 100,000).
But, can this be your reality?
Would you be willing to risk what these super traders risk and often lose?
Risking a pattern, we have to, going through the initial phase of learning, a daily goal of R$ 1,000 is something like the “minimum wage” of a professional day trader.
With screen time and the necessary talent, this daily goal can go up to R $ 2,000, then R $ 5,000 and, theoretically, the sky is the limit!
To give you a good insight into the reality of the day trade, we have prepared a series called Alerts | DTP. It’s worth checking out!
This is very important: the trader must have realistic goals.
“I’m going to make $1,000 a day”
Where did this number come from? How much will the trader have to leverage for this? How much are you risking to get to this number? Are you going to consistently get the $1, 000? How many days of loss can you have?
So, see, it’s not as simple as a number in your head and that’s it.
The trader needs to have a whole risk and performance management in order to formulate a number.
Patience and persistence
As I said earlier, persistence is necessary in the formation of a day trader.
It is not a profession like any other and it is necessary to lose before you start winning, it is part of the game!
We don’t know any trader who has started winning and who has remained consistent, the losses in the learning phase are normal!
The trader has to have the patience to win from spoon before getting a bucket of money.
Is It Possible to Live from Day Trade?
Becoming a consistent day trader is really one of the most difficult and challenging tasks there is.
Few are the ones who have all the requirements to achieve excellence and high profitability in this profession.
However, it is important that you know that yes, it is possible to live day trade!
Becoming a consistent and profitable day trader is a wonderful reality for those who manage to overcome the challenges of the learning process.
Remember: In any activity that involves high-performance, it is known that the success rate is very low.
A study conducted in March 2019 by the Getúlio Vargas Foundation reveals that about 10% of day traders make a profit.
The research generated a lot of controversy, because it was not deep in the reasons of the “why”.
Either way, it shows us that this is an “elite sport.”
In addition to all the technical issues described, day trading also requires a high emotional control and self-knowledge.
Most do not deserve the importance of the psychological factors involved in this profession and this ends up being one of the main factors of failure (of being within 90%).
The (hard) Reality of Day Trade
Our intention and commitment to this article is to convey the most realistic and objective view on the day trade, its risks and opportunities.
For the vast majority, being a day trader seems to be the “best profession in the world”.
You work from home (or from anywhere that has a good internet connection), a few hours a day, earn a lot of money and say goodbye to your boss!
Few see the “dark sides” of this activity.
However, we at Day Trader Pro have a mission and responsibility:
Always emphasize that day trading requires a high commitment, many hours of experience of the financial market, a great training and a proper mindset.
It is an activity that involves constant contact with the risks of financial loss.
There is never any certainty whether a trade will work or not, just odds.
A successful day trader is simply one who learns to identify situations where there are good probabilities of hit.
This is a personal victory and there is no exact science that can lead you to success.
There are no ready-made formulas!
To reach the level of excellence and profitability, there is a long and personal way.
Tips for Winning as a Day Trader
So to finish this article, we leave some “golden tips” so that you, who are studying and discovering the day trade, start with the correct mindset.
- Prepare for medium and long-term training.
- Seek a deep understanding of the market.
- Think about learning first,the results are consequence.
- Respect your real financial condition.
- Perfect your emotional maturity.
By following these advices above your chances of success increase considerably!
Good studies and good trades!