Contrary to what you’ve probably heard, you don’t need a fortune in capital to start day trading. It’s possible to learn how to start day trading with $1,000 if you know how to adjust your strategies and expectations.
Invest time in learning about the stock market before you set out on this exciting money-making strategy.
What is Day Trading?
Let’s start at the beginning. Maybe you don’t know what day trading is, but you’re curious about whether it’s a way that you could make money.
A day trader is someone who buys and sells securities inside one trading day. Day traders make their money with the profits they make in the process.
These profits come from price changes that occur between the time of buying and selling.
When day trading, your goal is to sell a security when the price is higher than when you bought it. In traditional investment strategies, you might wait years to exit an investment with a gain. In day trading, you do it in a single day.
Forex is the Right Arena
As a day trader with limited capital, you won’t work within the US stock market. That investing arena has a $25,000 minimum for day trading.
Forex is where you want to go.
You can do day trading there with your $1,000 in capital.
Forex is a currency exchange market.
Traders engage in an activity called foreign exchange when they’re on Forex. This exchange involves converting currencies. For example, you might convert the U.S. dollar to the Euro. Trillions of dollars worth of money are traded on Forex every day.
The advent of the Internet was monumental for investors wanting to engage in currency trading. It made the process much easier and more accessible. Before that, vast amounts of capital were necessary to take part in foreign exchange trading. It certainly wasn’t the right place for regular people.
The situation today is diametrically different. Foreign exchange is no longer the preserve of the elite.
Instead, it’s the perfect place for small day traders, otherwise known as retail investors. You can find online brokers that specialize in this area. Take time to learn about the currency exchange market before you get started.
You Need the Right Brokerage
Find a brokerage that takes day traders with limited capital.
Find out whether your $1,000 will be enough in the very beginning.
You should also look for a brokerage that has the most beneficial terms and practices. As a small day trader, you won’t do well if you work with a trader that makes money from commission.
You will probably be trading small amounts at a time, and you would have to pay commission on each individual trade. That’s going to make it hard to make a profit.
You should find a trader with spread-based fees, instead.
You’ll also have to work with a brokerage with a required minimum deposit of $1,000 or less.
Strategy for Small Day Traders
You’ll need to use specific strategies if you want to do day trading with limited capital. There are several factors to consider when building a plan.
These include the money amounts you invest in each of your trades when you enter trades, when you exit trades, and risk-management techniques.
What are Currency Pairs?
As the currency is one of the best areas for small-day traders, you will have to know about currency pairs.
Currency pairs are simply sets of currencies that you can trade between.
For example, EUR/USD is the currency pair for trading between the Euro and U.S. dollar. Other important currency pairs on Forex include USD/JPY, GBP/USD, USD/CAD, NZD/USD, and AUD/USD.
Currency is a great area because of its volatility.
That sounds counterintuitive, but it’s because more potential price changes during the day give you more opportunity for profit.
What are Margin Calls and Leverage?
Generally speaking, the less capital you have, the more risk-management you should practice. Know all the rules and practices of your broker.
Do everything you can to avoid margin calls.
A margin call happens when an asset’s price dips too low.
It’s called a margin call because when this happens, it means there isn’t enough capital in your margin to cover the loss for your broker. Wait, but why would your broker have a loss? It’s your money, isn’t it?
It’s because, to day trade with a small amount of money, you will have to rely on something called leverage.
Leverage is a certain amount of money that your broker makes available to help you buy more investments.
If you lose so much money on an investment that your margin doesn’t cover it, you get a margin call.
Find out the margin requirements of prospective brokers. Also, ascertain their rules and practices around leverage and margin calls. Keep in mind that you will have to deal with different rules for different kinds of assets.
Remember Risk Management
An important risk management tool is the stop-loss order.
When you have a stop-loss order in place, it means that if your losses get to a certain level, you will automatically be exited from the investment.
Given you’re a small trader, make sure risk on each trade never exceeds one or two percent of the value of your account. Leverage is a critical factor to consider when figuring out risk and risk management.
Ready to Get Started as a Part-Time Day Trader?
Certainly, you cannot expect to do day trading full-time with so little capital. However, you can certainly make this investment strategy into an income stream. And if you leave the profits in your investment account after several years, you should have a substantial amount of capital.
With Forex, you can day-trade many currency pairs any day of the week and any time you want, making it ideal for part-time day traders.
Depending on how much day trading you do as you start, you might find it isn’t an income source. But at least you’ll be learning. And then you can go bigger later.