Does buying and selling financial instruments sound easy? With the complex market, it’s much harder than it looks. This is especially true when you day trade, a strategy where you don’t hold trades overnight. Instead, you’re profiting from daily price fluctuations.
Most successful traders have a lot of experience, knowledge, and money to invest. But what if you only have $500 to start? It’s still possible to earn money and maintain your trading activities effectively. Here are five tips to help you crush your day trading goals.
1. Learn the Basics
Like any financial career, there’s a wealth of knowledge required to be a day trader. Before you start picking out stocks, invest first in learning the basics of market theory and trading strategies along with foundational technical skills.
There are plenty of cheap or free ways to learn about day trading, including webinars, videos, podcasts, and educational programs. For example, Warrior Trading offers a free introductory course. These are examples of other resources:
2. Practice with Simulations
Before you go live and risk your limited amount of money, it helps to practice the basics of trading on a simulation first. Learning how to trade isn’t the same as applying your knowledge and learning from experience. Make mistakes in a safe place. Why not experience the “hard lessons” without actually losing real money? Trading simulations through dummy accounts allow you to do this.
Examples of trading simulations you can sign up for include:
- Simulated Forex Trading
- MarketWatch Virtual Stock Exchange
- Ninja Trader – Free Trading Simulator
- Trading Sim – Day Trading Simulator
While there’s different advice on how long you should practice, some people recommend at least one year to really recognize how the market fluctuates and what gains and losses you have made.
There’s no need to rush trading with real money. Instead, give yourself time to fine-tune your trading skills. For instance, through practice, you’ll get better at identifying what type of assets to trade.
3. Select a Broker for Small Accounts
With only $500, look for a broker that doesn’t charge you excessive day trading fees and accepts $500 as the minimum initial deposit. For example, Charles Schwab and TD Ameritrade have free commissions and great software packages for active traders.
Typically, day traders with little money in an account are subject to different regulations. For example, in the U.S., if you have under $25,000, the pattern day trader (PDT) rule restricts you to only three day trades in a consecutive five-day period. Some people get around this rule by utilizing offshore brokers such as TradeZero and Capital Markets Elite that aren’t subject to U.S. securities regulations. However, with offshore brokers, you might not get the protection you need either.
4. Pick the Right Assets
You can trade various assets, including commodities, stocks, currency, cryptocurrency, and more. Although some people gravitate towards stocks, they aren’t always the best to start day trading.
Futures, for instance, come with many advantages over stocks. They provide beginner day traders with flexibility since you can trade them almost 24/7 with limited interruptions. Here’s what they also allow you to do:
- Manage and hedge risk efficiently
- Diversify your portfolio
- Keep lower costs
- Trade on leverage
Financial instruments with higher volatility can give you higher gains when trading with small amounts of money. The rapid changes allow you to buy low and sell quickly after an increase within a day. An example of highly volatile securities is currency pairs since the currency market has such a high trading volume.
Well-known currency pairs cost less per spread and are most volatile. These are a few examples of Forex currency pairs you can trade with only $500 or less:
Be aware that although futures and securities both allow having greater purchasing power or gains with less capital, they can also be riskier.
5. Have a Suitable Strategy
Since you’re only investing $500, you have to choose a strategy that supports your investment level. Here are some things to consider as part of your strategies:
- When to trade and the amount to invest
- When you’ll enter the market
- When you’ll exit a trade
- How you’ll manage risks
When and What Amount to Trade
Depending on what you’re trading, there are different suggestions of the best time to trade. For example, currency pairs are most volatile during market session overlaps. If you’re trading EUR/USD currencies, trade when both the European and U.S markets are open. The less money you have to invest means you should execute only one or two trades at a time. You can hit one trade in a more significant way instead of managing multiple small trades at once.
When to Enter the Market
Deciding when to enter the market takes consideration of market conditions. You want to identify and ride trends for a higher return. The goal is to buy low and sell high when your financial instrument hits its peak. These are a few technical indicators that help you evaluate market trends:
- Chart patterns
When to Exit a Trade
While there are multiple exit strategies and rules, an effective one to consider is using a trailing stop-loss order. With this order, you only exit the market when the price lowers to your stop point. However, if the market trend is rising, the trailing stop will adjust to the increased price so you can still catch big spikes.
Day trading comes with many risks, but it doesn’t mean you can’t manage them wisely. In general, it’s best not to risk more than 2% of your capital for each trade.
You also need to adopt the right mindset and focus on the gains you can get each day instead of trying to make money fast. Keeping your expectations realistic allows you to understand your odds and probability for loss better.
Day trading is possible with only $500. But there are several things you need to consider as you grow this initial investment. With the right learning, practice, and strategies, you can minimize day trading risks and capitalize on better odds for success.