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Learning how to become a day trader can be a rewarding experience for many people. While it can be difficult for beginners to earn a livable income day trading, many experienced traders can earn a significant income holding financial instruments for a short period of time. The following guide provides simple tips and tricks on how to become a day trader.
Understanding Day Trading
When figuring out how to become a day trader, it’s important to understand the differences between short and long-term investing. When investing for a long time period, many people will choose financial instruments like stocks, bonds and options. While these investments can be a great way to preserve one’s capital and earn a return, they often will limit one’s earning potential in a short time period. However, they can also be an effective way to reduce the risk of a serious financial loss.
Day traders often use leverage-based tools to trade stocks, commodities, derivatives and options. While it’s possible to earn a significant amount in a short time period using leverage, it’s also possible to experience a very large financial loss.
Leverage allows one to multiply a potential profit or loss by several orders of magnitude. This is possible through the use of margin trading.
With a margin investment account, an individual can borrow a set amount of money to conduct a financial transaction. The amount of leverage one uses is based on his or her initial investment. For example, imagine that an investor has 1000 dollars that he or she wants to invest in stock. If stock XYZ costs 50 dollars a share, he or she will only be able to buy 20 shares. With a margin account, an individual can buy up to 40 shares with her initial investment of 1000 dollars. However, the investor will have to pay interest on the 1000 dollars that she borrowed to cover the additional 20 shares.
Margin trading can be a great way to magnify a profit or loss in a short time. For example, let’s say that stock XYZ increases from 50 dollars to 55 dollars. With a normal investment account, a portfolio with 20 shares of XYZ would increase by 100 dollars. With a margin account, an individual would see a price increase of 200 dollars. However, he or she would be forced to pay interest on the loan to cover the additional 20 shares of XYZ.
Some types of investments allow one to use a higher degree of leverage. For example, foreign exchange trading allows one to leverage a transaction up to 40 times its initial value. This would allow a 1000 dollar investment to have the same profit and loss potential as a 40,000 dollar transaction.
How To Become A Day Trader Who Succeeds
When investing, it’s important to make sure that one conducts proper research–it’s key in learning how to become a day trader with lasting success. Most day traders use technical analysis to forecast market conditions. While fundamental analysis looks at a company’s history and financial status, technical analysis attempts to forecast the price of a stock based on its historical prices. In many cases, technical analysis can yield better results for a day trader in a short time period. In addition, technical analysis can be applied to a wide variety of financial instruments.
While it’s easy to learn how to become a day trader, it can take years to become a great investor.
Related information: How To Become A Stockbroker
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