What Is Needed to Day Trade?
Original post by Nola Moore of Demand Media
Day trading is a fast-paced, high-risk and emotionally draining endeavor. But for many, the rush of adrenaline and high reward potential more than offset the stressors. If you like the idea of riding a roller coaster as a business model, day trading may be right up your alley. It's important to plan out your day trading in advance, just as you would any new business endeavor, in order to have the best chance of success.
If you want day trading to be your primary source of income at any point in the future, it makes sense to start with a business plan. A business plan will help you think through what you need to do to be a successful trader, and how you will go about it. A business plan for a trader won't consider the exact same criteria as a typical small business, you do need to asses the costs associated with trading, your expected returns, your strengths and weaknesses, your short-, medium-, and long-term goals, and how you will go about reaching your goals. One often overlooked feature of a business plan is your exit strategy: consider the circumstances under which you'd call it quits, and write them down.
The trading plan is somewhat different from the business plan, although it grows out of that planning process and is designed to do much the same thing: provide you with a set of criteria for your trading. Decide what markets and sectors you will trade in, what securities you will trade, what a good trade looks like and what factors indicate a bad trade. Set out your rules and try them out on a trading simulator or with pen and paper using real-time data to refine your strategy.
Brokerage Margin Accounts
Day traders are classified as frequent traders by the Financial Industry Regulatory Authority, and as such are required to trade in margin accounts with a minimum balance of $25,000 in assets. This means that you must have more than $25,000 worth of cash and approved assets in order to open a brokerage account for day trading. Each brokerage firm has it's own specific requirements for day traders, and these may go above and beyond those laid out by FINRA, so review the rules at your chosen firm for complete details.
Equipment and Resources
Day traders need reliable information in order to determine when to trade, as well as a reliable way to access that information. For most people, this means a high-speed computer with a high-speed internet connection and trading software. Brokerage firms offer some software and/or online platforms with your trading account, and you can add to this with a variety of charting and information services. In addition, you can subscribe to dozens of trading magazines, forums, and market analysis feeds that provide you with information, education and strategy ideas.
IRS Mark-to-Market Election
While it is not required, the IRS does allow traders to make a mark-to-market accounting election so that their trading activities are treated as a business rather than an investment. This includes being able to write off all losses as a business expense, something that far exceeds the investors' $3,000 offset limit. To do this, you must practice mark-to-market accounting, and you must make the election when you begin trading. See IRS Publication 550 for specific instructions on the election and procedures for accounting.
- "Futures"; Trading Mistakes:Top 10; Jim Wyckoff; January 2011
- Internal Revenue Service: Publication 550 -- Investment Income and Expenses
- Trading Markets; How to Create a Business Plan for Your Trading; Austin Passamonte; November 2010
- Trading Sim; Day Trading Computer; June 2011
- FINRA: Day Trading Margin Requirements -- Know the Rules
- "Futures"; Developing a Trading Plan; Rick Thachuk; April 2009
- Van Tharp Institute: Business Planning
About the Author
Nola Moore has been writing articles since 1999. Based in Santa Monica, Calif., Moore writes and blogs about taxes, trading and trusts for a variety of publications including BankShout, CreditShout and various other websites. She holds a Bachelor of Science in retail merchandising and spent nearly a decade in trust and investment services before leaving Minnesota for the beach.