How To Start Day Trading With $500
Image Source: Charles Schwab
Day
trading is becoming increasingly popular, especially among beginners with small
investments. First, create an account with a reliable broker and deposit funds.
Some sites do not require a minimum deposit and are therefore available for
small amounts to start trading. Contrary to the belief that you only need
$1,000 to get started, you can actually
start with as little as $500.
Day
trading is a risky “investment” strategy and
it is important that anyone wanting to engage in it is well informed
about the risks before making any decisions. If you have some investing
experience and are confident in your
ability to make good decisions, starting
at $500 could be a good option.
Steps to Take Before
getting in Day Trading with $500
Over 70% of
inexperienced traders blow up their account after a few months. To avoid these
pitfalls, investors should evaluate themselves based on the following factors:
Education:
Beginners should stick
to the basics first. Try to understand basic technical indicators, market
theories and strategies. Never rush to learn or buy “secret trading
strategies” because most of them are scams. There
are tons of day trading resources available online that you can use with free
and cheap resources to build your base. Markets are becoming more complex day
by day and new trading instruments appear from time to time. You also need to
keep up with economic and financial news to understand its impact on
the volatility of market trends.
Set
Financial Goals:
Set realistic financial
goals and aim for a consistent success rate of over 50%. Start with modest
investments and expect a daily return of less than 1%. Aim to grow your account
from $1,000 to $2,500 per year, and understand that building significant wealth takes time.
Sharpen Your Trading Skills Through Demo Accounts:
Before
risking your capital, start experimenting with your trading strategies, market
theories and platform tools. Fiction accounts allow you to gain meaningful
experience without losing money. Most day trading platforms allow customers to create demo accounts. They
provide virtual funds and reflect real market conditions.
Trading Strategy:
Develop
a trading strategy that supports your trading plan. A good strategy should take
into account the following parameters:
Trading
Time: Day traders
need to constantly monitor the markets and identify opportunities. Day trading
becomes difficult when you are short on time.
Financing: Don't risk all your capital. Successful investors also set
their risk limit to less than 2%.
When
to enter the market:
You can use tools such as intraday candlestick charts, real-time news and
ECN/Level 2 quotes. Indicators to pay attention to include momentum,
volatility, and volume.
When
to exit the market:
Depending on the trading instrument, you can use market dynamics and daily
fluctuations to exit.
Risk
Management:
Use Stop Loss Orders, Profit Targets and guaranteed Stop Loss Orders.
Keep
excellent records: Many
experienced traders are also excellent record keepers.They want to know exactly
why and how they won or lost the case. The targets, entry and exit points of
each trade, timing, support and resistance levels, daily opening range, market
open and close, and comments on the logic of the trade should
be noted and insights gained from them.
Backtesting:
Examine your trading strategy using
historical data (backtesting) to see if it fits your game plan.
Selecting A Broker
The
good news is that many brokers have eliminated high minimum deposits. However,
opening an account with the right trading partner is crucial for success. Some
platforms target traders in a specific niche, while others target different
levels of trading skills.
A good day trading broker usually has the
following features:
● Affordable fees and commissions
● Low minimum deposit
● Wide range of features and functions
● Fast and cheap deposit options
● Regulated and secure platform
● Good speed of trade execution
● Research capabilities
The
brokers of the Electronic Communication Network (ECN) simplify day trading by
helping traders take advantage of market opportunities with low commissions and
spreads. Make sure your broker supports trading in micro lots (0.01 lots).
Intraday traders should be aware that the American Pattern Trading (PDT) rule
limits traders with $500 in capital to three-day trades on five consecutive
days.
Before
all major discount brokers cut their
commissions to zero, the only choice for such a small account was a bad broker
like Robinhood. Now you have additional options with major offerings like TD
Ameritrade and Charles Schwab. Both
brokers (along with most other major US discount brokers) offer free
commissions and advanced software packages
for active traders. As a day trader with less than $25,000 in your
account, you are subject to the Pattern Day Trader (PDT) rule, which prohibits
you from making trades for more than three days in a five day period. Due to
this restriction, traders who want to be
very active can use an offshore broker to which the PDT rule does not apply.
Financial instruments recommended for investment
Image Source: WiserAdvisor
The
most popular intraday trading includes forex,
stocks, futures, options and index funds. Before choosing a tool, you
need to understand its principles and functions.
Forex Tools:
Consider
trading EUR/USD, USD/JPY and GBP/USD.Due
to lower liquidity, long-term pairs such
as USD/CAD and exotic pairs should be avoided. Forex derivatives such as Forex
futures and options are popular among
traders.
Commodity Futures
Commodity
futures are derivative contracts that depend on the future price of a physical
asset. Physical commodities such as crude oil, gold, silver and wheat are very
liquid. They offer intraday traders the opportunity to speculate on price
movements.These contracts have a specific expiration date.
Index Futures
Index
futures are concluded between two
parties and allow investors to trade a
financial index and settle it over a specific period of time. Examples include Nasdaq, S&P 500 and Dow Jones Industrial
Average (DJIA) futures.
EFT
Exchange
Traded Funds also offer high liquidity and low costs. These are financial assets that arise from the merger
of several large companies operating on the stock exchange. EFTs offer
real-time stock trading and mutual fund
diversification. Examples include VOO,
which tracks the S&P 500 Index, and
Vanguard Total Stock Market EFT.
Contract for Difference (CFD)
Intraday
CFD focuses on highly volatile markets and involves closing positions
throughout the day. Short-term speculative traders can use CFDs to profit from
small price fluctuations in the market. Traders can monitor changes in the
stock market, indices or forex market and try to take advantage of
opportunities that arise.
Hypothetical
Scenario For Investment
Assuming
you are trading $500 worth of Forex with
a micro lot broker, then a
perfect session looks like this.
● Assume a profit interest rate of 50%.
● Four trades with a target of 8 pips and an
average stop loss of 5 pips.
● Day trading
$500 on Forex 20 days a month using a micro lot of 20.
● 20 - micro lot will hold your risk less than
$5 (1% of $500).
● Possible Loss Calculation = 20 x $0.05 x 5
pips = $5 is the risk per trade.
Evaluating the plausible financial benefits
● Four trades X 20 days = 80 total
trades per month
● 50% winning rate X 80 trades = 40
trades are winnable
● A winning trade with eight pips
translates to 8 pipe X 20 micro lots = 16$
● Losing trade with 5 pips translates
to 5 pips 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
Frequently Asked Questions:
➢ Can you trade options for just $500?
You
can change options for as little as $500, however it is crucial to keep in mind
that options buying and selling entails extensive risks and won't be
appropriate for each person. Online brokers like Robinhood and TD Ameritrade
provide commission-free alternatives trading and assist you to begin buying and
selling without a minimal deposit.
➢ Can you day trade with a small
amount of money?
Yes,
it is possible, but the amount required
to start day trading depends on the broker you use and the regulations in your
country. For example, brokers such as Robinhood, TD Ameritrade and E*Trade
offers a range of investment products with no minimum deposit requirements to
open an account.
➢ What is the minimum amount for
starting day trading?
The
minimum amount to start day trading varies depending on the platform. Many
platforms have eliminated the need for an initial minimum deposit.
➢
What
is Inside Day in Trading?
An
inside day is a day where price movement
is limited to the previous day's range.
This means that neither buyers or sellers have been able to take control
and drive prices to new extremes. Inside
Days can occur during uptrends, downtrends or sideways consolidations.
➢ What is Forex day trading?
.
A trader buys and sells currencies during the trading day. Forex day traders
tend to close all open positions before the end of the trading day to reduce daily risk. A trader places
multiple trades or places trades multiple times to try to profit from small
market movements.