Ten Steps to Getting Started as a Short-Term Trader

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by HSeldon2020

I have written posts on getting started before, but I keep seeing this specific question –

I have $1K/$2K/$5 and I want to be a trader, how do I get started?

Most new traders focus on using Options, but unfortunately they tend to jump right in. Obviously if you are already an experienced trader than this post would not be for you.

So I am going to write out -this out step-by-step – these apply whether you are starting with $1k, $5K, $25K or $100K:

1) Choose A Broker – Stay away from any mobile only broker, you want one that you can use on your laptop, has a good trading platform (I like ThinkorSwim, but Interactive BrokersTradeStationFidelity, etc are all fine, it just depends on what matters most to you, so do your research). Deposit your money and make sure you are able to trade Options and qualify for margin. You also want a broker that allows you to use a Paper Trading account in real-time – this is essential (ThinkorSwim is excellent for this capability).

2) Learn – Before you make a single real trade, you need to learn. A lot. This can take months. Most brokers offer free online courses for you to take. There are also plenty of books out there (Technical Analysis of the Financial Markets by John Murphy, How to Make Money in Stocks by William O’Neil, Options as a Strategic Investment by Lawrence McMillian, Trading in the Zone by Mark Douglas, etc.) and plenty of videos that are purely educational (i.e. not trying to sell you something). Soak up everything. This is where you want to use your Paper Trading account. As you learn how to trade, especially Options, try it out using the Paper account set to Real Time. It is also important that you not put an unrealistic amount of fake money into this account. It should be similar to the actual amount you will be starting with in your real portfolio. At this point you are just trying to get a handle on how to trade the following:

a) Stocks – fairly basic, but learn how to buy and sell stocks (going long and shorting). And while most advanced traders use mental stops, as a beginner you will be using real ones, so also learn how to set them, including OCO brackets.

b) Options – since most of you are not starting with a lot of capital, chances are you will be trading options a great deal. Make sure you learn everything you can about Option trading before you ever spend one dime of real money making an Options trade. So many new traders lose their money playing Options without really understanding the instrument. Part of studying Options include learning the Greeks (Delta, Gamma, and Theta are the ones you will mainly use). Understand how premiums work, and what IV does to the price of your Options (particularly during events like earnings or company announcements). There is also a lot of enthusiasm around the idea of “selling premium” – which while an excellent method of generating income, can also be very dangerous if you do not know what you are doing.

c) Option Spreads – correctly using Option spreads are the best way to grow an account below $25K. They are also one of the more difficult things to master. So spend a lot of time on these. The Options Playbook website is filled with information and as you will see – there are many different types of spreads. I suggest getting most familiar with Call Debit, Put Debit, Call Credit, Put Credit, Diagonals, Covered Calls, and Poor Mans Covered Calls. Using these strategies can both mitigate your risk while keeping your returns at a respectable level.

3) Analysis – Up until now you should have been getting comfortable with the basics, but probably without much direction on how to choose the right stocks, when to enter and when to exit them. This is where Technical Analysis comes in. All of short-term trading is based on Technical Analysis. Long-term investing is focused primarily on Fundamental analysis, but as a short-term trader (meaning you are holding for less than two weeks, and usually for less that two days) you really do not care what the fundamentals are behind the company you are trading. If you are holding a position for a few hours or a few days, it doesn’t really matter to you what their P/E ratio is, or how their future outlook was last reported. What does matter are the charts. You need to learn how to read the candlestick patterns, which indicators are useful (and which ones are crap), how to read the market, and of course, how to finds the right stocks. Technical Analysis works because there is widespread consensus on it. Meaning, if all traders, retail and institutions, believe that a price level is acting as support for a stock, they will act accordingly. This part of your journey is probably going to be the most difficult to master – in fact, you will continue to learn and get better at it as you go along. Every great trader never stops being a student of analysis, and neither should you.

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4) Choose a good scanner – All this knowledge is not going to help if you cannot find the right stocks. Most brokers come with decent scanners built into their platforms, and there are a number of free scanners available as well. There are also a number of scanners out there that cost money, some of them are very good, while others are of questionable quality. I have ones I recommend, but there are many out there that give you great stocks to trade every day. Keep in mind, if you are looking to Day Trade than you are scanning on a much shorter time-frame then if you were Swing Trading. By now you should have a good idea of what you want to scan for as well. Most people will tell you to look for huge jumps in volume, which is always an important factor, but that mainly applies to Momentum Tradingwhich you should be avoiding. You do want stocks that have high Relative Volume, but you also want stocks that are strong/weak to the market, have high liquidity, have a “buy” signal (whether it is a 3/8 cross on the EMA’s, or a breach of consolidation, breaking through resistance/support, there are many different scenarios that qualify here). These scanners should also help you create Watchlists and set alerts on charts so when a stock meets the criteria you have set you will get notified of it. Going through charts and placing alert lines are a huge part of being a short-term trader.

5) Choose a Journal  The three most popular are Tradersync, Tradervue and Edgewonk. Whichever one you choose, make sure at the end of each day while paper trading you upload your trades to the journals and look at your statistics. You want to focus on your win rate, profit vs. loss, and the types of trades you do well at, as well as the ones you tend to lose the most on. Categories like Type of Stock (price, market cap level, volume, etc.), Time of Day/Week, Trade size, Type of trade (Long, Short, Option Spread, etc.) are all important to note and study.

These first five steps should take you at least six months. Which means several months where you have not yet made a single trade using real money. And you will be tempted – particularly as you start seeing trades in your paper account making huge returns. Don’t do it. Until your win rate is at least over 60%, do not make a real trade.

6) Choose a Strategy – Now that you have a good understanding of how to trade, and you have a decent amount of data in your online journal to see what is working for you, it is time to choose a strategy. There are many strategies to choose from (I primarily use Relative Strength/Weakness against SPY, which may sound like RSI and/or Beta, but it is very different from those indicators, neither of which I use or put much stock in) but there is one strategy you should not use – Momentum trading. Especially Momentum trading low-float stocks. This method of trading is unfortunately what lures most traders into this field to begin with (countless YouTube videos promising you that you can get rich doing it) and it seems so easy. This type of trading is one of the most difficult strategies one can choose, and should only be done by people who are very experienced. There will be many people tell you about how much money they made or are making with momentum trades, most of which will try to convince you that they discovered some method that assures you of high level of profits. Don’t listen to them. Someone who is getting lucky for a few months is not the same as having a consistently profitable method that you can count on.

7) Decide on a Community – Many people prefer to trade alone, excel at it even. For me it was fine, but I much preferred trading in a good community. However, there are many scams out there. But if you are going to join a group, make sure you choose a service that:

a) is not focused solely or mainly on Momentum trading. Most of them are. You want a community that teaches a full 360 approach to trading.

b) has pros in it. People that actually do this for a living. And make sure they are accessible.

c) has an active live discussion. This part is essential. You want to be in a room that isn’t a free-for-all, but rather focused on trading and led by actual professionals. The ones that are mainly composed of amateurs throwing out trades all the time can actually hurt your trading.

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d) is filled with resources. Any community you choose that is worth joining will probably cost you some money, so make sure they have useful resources, including scanners, platforms and educational content.

8) Start Trading – Now that you have chosen your broker, learned the basic of trading, understand technical analysis, found a really good scanner, used to journal to help you choose which strategies you want to focus on, and decided on whether or not you want to be in a community – you are ready to trade. Start small. I can not emphasize this enough. If you have $2,000, then you are looking to perhaps do an Option Spread that costs $1.50 ($150) per contract and maybe do 2 contracts. You want to buy just one In-The-Money Call or Put (Delta of .6 or higher) on a solid stock. The key to being successful is consistency and that means hitting singles, not homeruns. If you have $2,000 in your account and make $50 in a day, that is a 2.5% return, which is excellent. Learn to be ok with slowly growing your account. As your skill level increases, so will your profits – don’t worry, in time it will come – but for now, settle for the small wins.

9) Set Goals – Trading for a living is a business. Treat it like one. Set your monthly goals. While you should not focus on your P&L while trading (meaning you do not exit a trade because you are down or up a certain amount of money, but rather because the analysis tells you to exit) you should focus on you account balance in terms of the salary you need to live off day-to-day. It is important to realize that if you reach your monthly goals on win rate, number of trades a day and profit per trade, you will also reach your monthly profit target as well. Remember the ultimate goal here is that at the end of each month you are going to be taking out the profit (this is your salary) and leaving the base behind. By the time you reach this step you should have a really good idea what type of profit you can expect from your strategy, and base amount in the account.

10) Get an Accountant – Some people can do this themselves (I am not one of those people), but you want to make sure you are using the best possible set-up to pay the least amount of taxes. Do you qualify for Day Trader status with the IRS? Are you trading out of an IRA? Are you using an LLC or S-Corp? Since this is going to be your business, make sure you have your financials in order.

So there you go.

Why do most people fail at short-term trading? Simple – they do not do any of these steps. They deposit money, try to scalp low float gappers or buy a lot of options on the hot MEME stock. Eventually after losing enough money, they quit. That is why most short-term traders lose money.

If one follows these steps, it should take roughly two years before you can expect to be consistently profitable. Even after doing the first five steps, you will lose when you start trading with real money. But if you are trading small like I suggest, it won’t blow-up your account.

I know nobody wants to hear that it will take that long to get good at this. But think of it this way – how much time, energy and money does one put into getting a job and working their way up to middle management? Years of school. More years of eating shit at a bunch of crappy jobs, working yourself to the bone to get promoted. All for what? A bigger cubicle? A VP title at a company that will fire you the moment they need to make “cuts”? To have bosses that don’t know what they are doing?

Trading for a living gives you financial freedom. The ability to make money no matter where you are, as long as there is an internet connection. No boss. Just you and the market. Having that life is worth the time and effort. And I can tell you, it is great. It is exactly as you would imagine it to be.

For the past three years I have been a professional Day Trading and I could not imagine doing anything else.

So I urge you – if you are trying to figure out how to get started – do this the right way – there are no shortcuts.

Follow these steps and start your journey.

Disclaimer: This information is only for educational purposes. Do not make any investment decisions based on the information in this article. Do you own due diligence or consult your financial professional before making any investment decision.

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