Day trading is a popular way that people use to make money in the internet. While day trading has always been used, it gained much prominence during the Covid-19 pandemic when the prices of most financial assets like stocks and cryptocurrencies jumped.
These incredible profit opportunities have prompted many people, even those without experience or much capital to invest, to approach the discipline. It is now estimated that millions of people day trade stocks in the US every day.
Although some initial investment is usually required to see attractive profits, it is also possible to start with a small account and build your success step by step. In this article, we will look at how to start trading with $500.
In the past, it was relatively difficult for people to start day trading with about $500 or less. This changed in 2011 when Robinhood was launched.
Robinhood provides a platform where anyone in the US can trade stocks without paying a commission. Fearing the rising competition, most brokers like Interactive Brokers, Schwab, and TD Ameritrade also shifted to commission-free accounts.
These accounts make it possible for one to trade with any amount. Also, the concept of fractional shares mean that you can buy any shares with any amount. For example, with $500, you can buy half a stock of a company whose shares are trading at $1000.
However, there are two main cautions to remember.
First, if you are trading with about $500 in the US, Pattern Day Trader (PDT) rules will come in, which will limit the number of trades that you can execute.
Second, day trading with a small account has its own risks. In most periods, it means that you can lose your entire account within a short period. This is unlike people with big accounts who can recover their funds with enough time.
There are several steps that you can follow when you want to start day trading with $500. Here are the ones we recommend.
The first important step to follow when you want to start day trading is education. This is a very crucial stage that most people tend to avoid.
Instead, in most cases, they find an advert about trading, create a demo account, make few profits, and then move to a live account. This is wrong.
We recommend that you spend a few months educating yourself about trading. In this, you can use freely available resources like YouTube videos (we recommend TraderTv) and web content to learn about the market. You can also enrol to a paid online course and learn more about how the market works.
There are many important lessons that you need to learn, including:
You should also do practical trading using a demo account when learning. A demo is a free account that gives you access to the live market. You can use it to create your trading strategy and test how it works before you move to a real account.
Remember to be realistic with your demo account. In this, you should ensure that the account has a virtual balance of $500. A common mistake is where people create a demo account with thousands or millions of virtual dollars.
A common mistake among many beginners is having the wrong expectations. A common issue is where they believe that they can double their money within a few weeks.
However, this is not always the case. And the quest to double your $500 will expose you to significant risks since you can lose a similar amount.
Therefore, if you have $500, we recommend that you focus on growing these funds gradually over time. This means setting a goal of making just a few dollars every day. For example, if you make $10 per day, that will equate to $50 per week and $200 in a month, which is almost 50% return.
As mentioned, a demo account is an important tool that most brokers provide. It is an account that lets you trade virtual money without putting your funds at risk. Demo accounts are mostly used by beginner traders. Experienced traders use them to test their new strategies.
The right way to use a demo account is to set it in a way that mirrors the current situation. In this case, create one that has a virtual $500 and set the same leverage you intend to use. Also, use the same strategy that you intend to use in the live account.
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We recommend that you keep a day trading journal, which is a document that tracks your every move. A journal can be a soft or hard copy document where you list all your trades.
It can have the asset, execution price, reason for executing it, and the outcome. You can use a paper or other soft copy tools like Evernote and OneNote to journal your trades.
Doing this will help you keep track of your trading process and make you avoid repeating the same mistakes.
Risk management is essential for all types of traders and investors. It is, in particular, important for people trading with small accounts.
Some popular examples of risk management strategies are:
A stop-loss will stop your trade when it reaches a certain loss threshold while a take-profit will stop it when you make a certain profit. Leaving your positions open overnight will expose you to a significant risk of a major gap when the market opens.
As part of managing your risks, we recommend that you start with small trades. With $500, ensure that your trades make you just a few dollars each.
As We wrote above, a strategy that makes you $10 per day will be a good one. Doing the opposite will expose you to significant risks since it will increase the potential loss that you can make.
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Finally, we recommend that you adopt some easy-win trading strategies. A good example of such a strategy is trend-following, where you decide to buy an asset that is already rising or short one that is already falling.
You can also embrace scalping, where you execute several trades and exit whenever it turns profitable.
As an additional option, you should consider proprietary trading, which is one of the most popular approaches to making money. Prop trading is where you sign up to a company and then start trading with their funds (and software). DTTW™ is one of the best and biggest players in the industry.
The company makes it possible for anyone to start a trading floor managing thousands of dollars. These people are simply required to deposit $500 for the trading software known as PPRo8™.
They then get access to the TMS solution, a demo account that gives them access to many global markets. If you are successful in the demo account, you will have access to more money that you can use to trade.
In this article, we have looked at the best approach to start day trading when you have limited capital. As you have seen, it is a relatively simple process, which can be summarized as get educated and creating a strategy.
We have also explained how prop trading can simplify how you trade without allocating too much of your money.