Day trading is increasing in popularity, and smaller investments are an ideal way for beginners to get started. Before you can do any type of trading, you need to create an account with a reputable broker and deposit your funds. Many trading platforms will not require a set minimum deposit for opening an account, so you can get started with small amounts.
In this post, we discuss important factors to consider before embarking on your day-trading journey and how to avoid rookie mistakes.
What to Do Before Day Trading With $500?
Over 70% of beginner day traders blow their accounts after a few months. To avoid these pitfalls, traders must evaluate themselves with the following factors:
Education
Beginners should stick to the basics first. Strive to understand foundational technical indicators, market theories, and strategies.
Never rush to learn or buy ‘secret trading strategies’ as most of these are gimmicks. There’s a wealth of day trading material on the internet and you can take advantage of these free and cheap resources to build your fundamentals.
Markets are growing more complex daily, and new trading instruments occasionally pop up. You’ll also need to keep up with the economic and other financial news to understand their impact on market trend volatility.
Financial Goals
You won't earn hundreds of thousands of dollars or become a millionaire overnight. Aim to hit a winning rate of over 50% and start small. Profits per day may be less than 1%. Expect to grow your account by between $1000-$2500 annually.
Practice Trading with Demo Accounts
Before risking your capital, start experimenting with your trading strategies, market theory, and platform tools. Dummy accounts allow you to gain meaningful experience without losing money.
Most day trading platforms will allow customers to set up demo accounts. They provide virtual funds and mirror actual market conditions.
Trading Strategy
Develop a trading strategy that supports your investment plan. A good strategy should recognise the following parameters:
The Time to Trade: Day traders need to monitor markets and spot opportunities continuously. Day trading will be difficult if you have limited time to spare.
Funding: Don’t risk all your capital. Successful traders also set a risk limit of less than 2%.
When to Enter the Market: You can use tools such as intraday candle stick charts, real-time news, and ECN/level 2 quotes. Indicators to look out for include momentum, volatility, and volume.
When to Exit the Market: You can use market momentum and daily pivots to exit, depending on your trading instrument.
Risk Management: Use trailing stop-loss orders, profit targets, and guaranteed stop-loss.
Maintain Exemplary Records: Many expert traders are also great record-keepers. They want to know precisely why and how they won or lose a trade. Targets, entry and exit points for each trade, time, levels of support and resistance, daily opening range, market open and close, and notes on your rationale for the trade and any lessons you learned should all be noted down.
Backtesting: Expose your trading strategy to historical data (backtesting) to see whether it aligns with your game plan.
Select a Broker
The good thing is that many brokers have scraped high minimum deposits. However, opening an account with the right trading partner is paramount for success. Some platforms aim for traders in a specific niche, while others cater to different levels of trading prowess.
A good day trading broker will typically exhibit these traits:
Inexpensive fees and commissions
Low minimum deposit
Wide range of features and functionalities
Quick and cheap deposit options
Regulated and secure platform
Good execution speeds
Research capabilities
ECN (Electronic Communication Network) brokers improve day trading by helping traders capitalize on market opportunities with low fees and spreads. Ensure that your broker offers micro lot trading (0.01 lots).
Intraday traders should know that the US pattern day trader rule (PDT ) restricts investors with $500 capital to three-day trades in a consecutive five-day period.
What Financial Instruments to Invest in Day Trading?
The most popular intraday trading includes forex, trading stocks, futures trading, options, and index funds. Before settling on an instrument, you must understand its rules and qualities.
Forex Instruments
Forex trading is popular with traders who understand how market movements and global events influence forex volatility. Short-term traders invest in forex due to high liquidity, minimal capital requirements, low fees, and high volatility.
Consider trading the EUR/USD, USD/JPY, and GBP/USD pairs. Due to lower liquidity, avoid long-term pairs such as USD/CAD and exotic pairs.
Forex derivatives such as forex futures and forex options are popular among traders.
Commodity Futures
Commodity futures are derivative contracts that depend on a physical asset's future price. Physical commodities such as crude oil, gold, silver, and wheat are highly liquid. They provide intraday traders opportunities to speculate on price shifts. These futures come with an expiration timeline.
Index Futures
An index futures contracts are between two parties that allow investors to trade on a financial index and settle it at a predetermined time. Examples include the Nasdaq, S&P 500, and Dow Jones Industrial Average(DJIA) index futures. Traders speculate future price changes in the underlying equity index, e.g., stocks or a basket of stocks.
EFTs
Exchange-Traded Funds also boast high liquidity and low costs. They are a financial asset made from a combination of several large companies within the exchange. EFTs, offer real-time stock trading and the diversification of a mutual fund. Examples include the VOO, which tracks the S&P 500 index, and the Vanguard Total Stock Market EFT.
Contract For Difference (CFDs)
Intraday CFDs focus on highly volatile markets and involve closing positions within the day. Short-term speculative traders can use CFDs to profit from small price fluctuations in the market. Traders can watch out for changes in the stock market, indices, or forex and try to take advantage of opportunities.
Hypothetical Scenario
Assuming you trade forex with the $500 on a broker who offers micro lots, here’s what an excellent session would look like.
Assume a winning rate of 50%
Four trades, with a target of 8 pips and an average stop loss of 5 pips
Day trading the $500 in the forex market for 20 days per month using a micro lot of 20.
The 20-micro lot will keep the risk below $5(1% of $500).
Working out the possible loss = 20 X $0.05 X 5pips = $5 being risk per trade.
Working out the possible profits
Four trades X 20 days = 80 total trades per month
50% winning rate X 80 trades = 40 trades are winnable
A winning trade with eight pips translates to 8pips X 20 micro lots = 16$
Losing trade with 5 pips translates to 5pips X 20 micro lots = $10
Winning total trades 40 X $16 = $640
Losing trades 40 X $10 = $400
Monthly profits $640-$400 = $240
Total commissions 80 trades X 20 micro lots X $0.05(round trip)= $100
Monthly profit, including commissions $240-$100 = $140
The percentage return is 14% on a $500 account.
Conclusion: How to start day trading with $500
Even with limited capital of $500, getting into day trading is possible. However, before investing you should get the fundamentals right by learning, selecting a good broker, and devising a working trading strategies. This will increase your odds of success.
Day investors can trade many financial instruments, including forex, futures, options, and EFTs. Remember that more than 70% of retail investors lose their money. Pick your desired trading instrument and stick to your trading plan.
