For beginners, these days, day trading looks easier and more affordable than ever. However, simply being able to buy and sell financial instruments on your phone isn’t enough. Thousands of overconfident first-time investors learn the hard way. For traders to stay profitable, they need proper education, the necessary skills, and decent starting capital. How do you do that when you’re trying to start off with just $500? Let’s look at the steps to become a day trader and see if we can make it work.
Invest in Trading Education
Day trading seems pretty easy, but it’s a lot harder than it looks. Anyone who has ever tried their hand at it will tell you so. In fact, the stats are terrifying. Some estimates point out that 90% of traders fail to make money. Furthermore, 80% end up losing, while 10% only manage to break even.
Your goal is to make it into the other 10% that make money and do so consistently. Focusing on trading education is the key. Just think about it; lawyers and doctors spend years of learning theory, followed by decades of practice. Considering how complex markets are nowadays, trading is quickly becoming a science in itself.
The numbers are clear, over 80% of day traders quit within the first 5 years. If you want to be within the other 20%, you should remember a simple truth; learn to trade, and don’t trade to learn. Luckily, today there are tons of cheap or even free resources to help you learn market theory and trading strategies. Video webinars, educational programs, podcasts, articles, guides – all available to beginner traders online.
The abundance of available information may be confusing at first. When it comes to trading education the first thing to know is that nothing beats the basics. Focus on technical trading skills and indicators that have been around for a long time. In general, “secret trading strategies” are usually nothing more than gimmicks.
Choose the Right Assets to Day Trade
Once you know the basics of how markets work, it is time to choose the right assets to trade.
Naturally, many new investors first turn to stocks. Surprisingly, equities aren’t always the most suitable instruments to start with. Some traders prefer futures, and there’s a good reason for it.
Futures derive their value from an underlying asset like stocks, bonds, indices, commodities, currencies, or more. They have a few inherent advantages over stocks. For example, they are an efficient way to manage and hedge risk, diversify your portfolio, trade on leverage, and more. Furthermore, traders often prefer them due to their lower costs and longer trading hours. Unlike stocks, with futures, you can trade almost 24/7 with few interruptions. In a nutshell, futures provide beginner traders with some flexibility.
One of the key benefits of trading futures is that they give traders with less capital access to greater purchasing power. That’s because futures are inherently leveraged financial constructs. Of course, that also means they’re inherently riskier, but that’s also what makes them so suitable for speculation. That being said, you need proper risk management strategies when trading on margin. To avoid the pitfalls of futures trading, make sure to spend enough time building your trading skills on a solid foundation.
Practice on a Simulator
For most traders, the more time they spend on a demo account, the higher their chances to succeed when they go live. Some traders can’t wait to get going with real money and often end up disappointed that things don’t work out. Bear in mind that in most cases your emotions are your number one enemy. Trading isn’t a sprint, it’s a marathon.
Of course, you can’t trade a demo account forever, either. You’ll never fix every hypothetical flaw in your strategy. There is a point when you will have to switch to a real account. So, how will you know you’re ready to go live?
There’s no definite answer to that question. However, the win/loss ratio is a solid benchmark for judging most day trading strategies. Usually, if you have a win/loss ratio of above 1 (or a win rate of over 50%), you have decent odds of being successful. Of course, the higher the ratio, the better. If you make money on every second trade while also keeping your losses in check, you might be ready to trade with real money.
On the other hand, if your strategy can’t even do well when day trading on a simulator, then you shouldn’t expect it to do any better when you go live. Make sure to take your time to fine-tune it, and don’t rush to trade with real money.
What Can Go Wrong in Day Trading?
Every successful day trading strategy has to account for how trades can go wrong. Obviously there’s no way to be perfectly ready for every eventuality. However, at the very least you need to take account of the most common or likely disruptions.
First and foremost you need to deal with your own side of things. Make sure you have a decent PC, a stable internet connection, and preferably some type of backup. Usually, the backup’s going to be your phone. Then there’s the importance of trading psychology. The discipline to keep your emotions in check isn’t something you’ll learn from a trading course. It’s something you build up through practice.
Next, you’ll have to take a look at the markets at large. You’ll want to have at least one or two newsfeeds and an economic calendar just to make sure you can keep up with what’s going on in the market. A setup like that will allow you to react to any market-moving events that threaten your position.
Asset-Specific Price Factors
Think of the factors affecting the price of individual assets. For example, suppose you are trading oil futures (CL). You should have at least some ideas as to which various developments on the global business and geopolitical stage affect it. The list could include trade wars, export and import bans, development of renewable energy, ban on plastic usage, supply constraints and disruptions, and many other factors can affect your trades. If you are trading futures contracts on soybeans (ZS) or corn (RTY), then you will have to keep track of the weather forecasts, production reports, export and import analysis, and more.
Before you start trading, make sure to get familiar with most of the variables affecting the assets you are interested in. Next, adjust your trading strategy to respond adequately and hedge your positions against them.
Open an Account with the Right Broker
The first thing you should be looking at when choosing a broker is, of course, the minimum initial deposit requirement. Fortunately, many brokers have removed their minimum account balance requirement in recent years, and $500 is enough to open an account. However, keep in mind that any account that’ll let you hold positions overnight will be subject to much higher margin requirements. For some assets these margins can easily go over $5,000, meaning you won’t be able to take a single position unless you have that much in the account. This simply puts overnight accounts out of the league of the average trader.
Futures trading is also relatively expensive because of the high trading costs. It’s not unusual for borkers to change $2.50 per contract for the most common futures contracts. Sometimes even up to $10.00 per contract for alternative assets like Bitcoin futures. These high trading costs could easily deplete your initial $500 capital.
Fortunately, competition among brokers has really picked up in the past couple of years. Today, there are platforms that might give you reasonable trading fees and no minimum account balance requirement for futures trading. Unfortunately, this usually comes at the expense of available trading tools. Furthermore, many of these brokers are new platforms that have yet to earn the trust of the trading community.
When starting with a capital of $500, the best thing to do is shop around and find a reliable broker who doesn’t charge you exorbitant day trading fees. The supported features and the functionalities of the trading platform, in that case, are an added bonus.
Use a Day Trading Strategy that Works with a Small Account
Just remember that the fact you are starting with $500 doesn’t mean your account will inevitably fail. It simply means it might be a bit more challenging to grow it.
It should be no surprise that day trading futures with a $500 account is more difficult than with a larger one. You don’t have the same room for error, the ability to take as many contracts, or the capacity to pay high commissions. Having an account with $50,000 for example would give you a lot more opportunities to try and make a profit.
The biggest obstacle for small accounts is that they can only be used to trade markets with low margin requirements and small tick value. This means a scalping strategy might be the most suitable for a small account. The best-case scenario is finding a broker with minimal fees. Alternatively, another popular way to trade is through trend-continuation strategies. Trend-continuation, as in identifying when the price is poised to continue moving in the same direction. Usually, such scenarios unfold in the middle of a bearish or bullish trend. They’re usually marked by the completion of trend continuation patterns like flags, triangles, pennants, rectangles, or more.
Traders with an appetite for risk might also try trend reversal strategies, even with small accounts. To maximize their profit, these traders hold their positions open until the very last moment before the reversal occurs. However, for this strategy to work in practice, it requires an in-depth understanding of price action and momentum indicators. It’s also an extremely high risk, high return approach and could wipe your account in the blink of an eye. Experienced traders usually advise against starting out with a reversal strategy.
Manage Day Trading Risk the Right Way
Proper risk management is essential for making it in futures trading. This is even more important with traders who start with smaller accounts. If you have $500 to trade with, even a loss as small as $10 can feel like a major setback.
Furthermore, proper risk management doesn’t just mean loss mitigation. It also requires you to optimize your day trading costs. Just think about it; trading costs are essentially money deducted from your account, whether you are on the winning or the losing side of a trade. In that sense, the proper risk management strategy looks at trading fees simply as losses.
To grow your $500 account quicker, you should focus on building your risk management strategy around two main aspects; a reasonable win/loss ratio and proper use of stop-loss orders.
Set a Good Win/Loss Ratio
A win rate of 50% is a reasonable initial goal to pursue. However, when day trading with limited capital, you should try to aim even higher than that, especially if you have relatively high trading costs.
Ideally, you should try to hit a win rate of between 50% and 70%. In that case, you will guarantee a steady stream of returns and would be able to grow your account sustainably. A few traders allegedly manage to lose only once on every four trades (i.e., a 75% win rate.)
However, bear in mind that looking at the win rate alone isn’t a good reflection of how successful you will be. Make sure also to consider the value of your losses. If the total amount of your losses exceeds your profit, it won’t matter even if you have a 90% win rate. Often, even one or two losing trades can wipe out your hard-earned profits. Even so, make sure you don’t ignore your win/loss ratio.
The minimum win/loss ratio you should aim for is 1.5. Many traders aim at higher ratios, but in the end, everything depends on skills and experience. It’s best to keep your expectations in check and aim at reasonable returns.
Stop-loss orders are one of the most popular risk management tools. The idea of a stop-loss order is to instruct your trading software when to close your position.
While there are different types of stop-loss orders, their overall idea is similar. The order is placed at a particular price level (usually support or resistance lines, but they could also be alternative price levels identified by technical indicator signals) and ensures your peace of mind that you won’t lose more than you are willing to. Alternatively, if the market starts moving against you, the moment the price hits the stop loss level, your position will be closed, and your profit will be locked.
Stop-loss orders can also be set at a certain distance from the price. That way, you can instruct the broker to close the position once the instrument’s price changes by 10% or 15%, for example.
The main advantage of stop-loss orders is that they save you the hassle of continuously monitoring the market. You are confident that if any adverse price movements take place, your positions will be protected. Furthermore, they cost nothing to use. Think of it as free insurance on your profits.
Consider How Much You’ll Be Able to Make with Only $500
The truth is that starting with limited resources puts a cap on how much you can potentially earn. The main reason is that you can hardly trade on margin or take big positions, considering that you simply can’t afford to suffer significant financial losses.
Usually, experts suggest you avoid risking over 1% or 2% of your capital per trade. For an account with $500 capital, this translates to between $5 and $10 per trade. This will hardly allow you to earn a six-figure annual salary solely from trading, but if managed reasonably, it can help you grow your position over time.
Risk-Reward on a Small Account
We can make all types of calculations on how much you can potentially earn with a $500 day trading account, and in the end, they will all end up wrong. The reason is that there are various variables at play, including how often you trade, your broker’s commissions, what strategy you rely on, and more.
The harsh truth is that beginner traders with a capital of $500 can rarely rely on earning more than $30 per month.
You should also bear in mind that with $500, your only choice will be to trade micro or mini futures contracts. The reason is that the price of these instruments moves in ticks, and often, even a change of a couple of ticks in the more expensive instruments might equate a half or even more of your entire portfolio, making the risk exposure too significant.
While it might seem that traders with $500 in their accounts have their hands tied, the truth is there are ways to become a day trader and trade with more capital than you currently have.
Get Funded and Increase Your Chances of Success
There is an alternative to trying to slowly build up a $500 trading account. Funded trader programs like The Gauntlet and The Gauntlet Mini™ are designed as a jumping-off point for traders who are willing to put in the work to learn how to trade but don’t have the funds to really build their account. You can start one of these programs for less than $500, and they can unlock a plethora of opportunities.
Let’s take The Gauntlet Mini™, for example. For a monthly subscription fee of $150, you get access to a comprehensive educational course by professionals with years of experience. However, the program’s main feature is the evaluation that gives a funded trader offer from a prop firm on successful completion. Taking it will allow you to trade with a lot more than you otherwise could with just a $500 account. Even the largest Gauntlet Mini™ account costs just $350 per month.
The main benefit of becoming a funded trader is that you will get access to a professional trading account ranging from $25,000 to $150,000. The company offering the funding takes on all of the risks, and in return, they take 20% of the profit. You will be able to retain 80% of the earned profits while at the same time you won’t be risking your own capital.
You can learn more about the perks of becoming a funded trader in our in-depth guide.
How to Use $500 Wisely
As cliche as it sounds, usually, the most successful people are those who don’t give up. Behind every success story, you’ll find a mountain of failure and then a turning point. Persistence is the best predictor of success in the futures market. Putting in the effort to learn to trade, finding a reliable broker, and practicing until you’re ready are the critical steps to success.
Fortunately, today, there are more opportunities to learn than ever. Even if you have limited capital but are willing to put in the effort, opportunities will open up.
Earn2Trade’s funded trader programs are designed with precisely this goal. You can enroll and complete a program and get a funded trading offer for a professional account for as little as $150 and in less than a month.