What Is Day Trading

A long time ago, only people working at big banks and stock trading companies could actively buy and sell stocks. Now, with online trading and news spreading instantly, anyone can join in. User-friendly trading apps and platforms like Robinhood and Charles Schwab, which offer commission-free trading, have made it super easy for everyday investors to jump in.

Warning: as everything where you can get rich, day trading is hard and only 10% of people get profitable long-term.

Day trading can earn you money if you do it right, but there are no guarantees. It’s often tough for beginners and can lead to losses for those new to investing. The best way to tilt the odds in your favor is to master technical strategies and understand key market concepts.

So, what is day trading, and how does it function?

• Day traders buy and sell stocks or other assets during the trading day to profit from the rapid fluctuations in prices.
• Day trading employs various techniques and strategies to capitalize on these perceived market inefficiencies.
• Day trading is often informed by technical analysis of price moves and requires a high degree of self-discipline and objectivity.

What Is Day Trading?

Day trading is an energetic approach to investing where people buy and sell assets all within the same day. The aim is to capitalize on quick price changes in stocks, options, futures, currencies, and other investments. Day traders often blend different strategies and types of analysis, including the following:

• Technical Analysis: Focuses on past prices and trading patterns to predict coming trends.
• Momentum trading: Capitalizes on short-term trends and reversals to capture quick gains.

Day traders focus more on quick profits from price swings in the market rather than the long-term value of stocks, unlike investors who typically hold onto their assets for a while.

Day Trading - How It Works

Day trading is an exciting way to navigate the financial markets by quickly buying and selling stocks during a single day. This fast-paced trading style takes advantage of tiny price shifts in popular stocks or other financial assets. Traders jump in and out of positions within hours, minutes, or even seconds, seeking to earn money from brief market changes and price swings. Unlike traditional investing, which often involves buying and holding assets over a long time, day traders finish all their trades before the market closes, never keeping positions overnight. The table below shows key differences:

Day traders rely on tools like live market data, advanced charting software, and fast internet. With these resources, traders can spot the best times to buy or sell based on technical indicators, feelings in the market, and the latest news. Many focus on particular industries or trading techniques, such as following trends or making quick trades, to sharpen their advantage.

Managing risk is essential in day trading. Successful traders stick to clear rules regarding how much to invest in each trade and use stop-loss orders to control their losses. They decide on a maximum loss they’re willing to take on each trade—usually around 1% to 2% of their total trading money—so that even if they hit several losses in a row, they won’t wipe out their entire account.

Successful day trading requires sharp focus, quick thinking, and the ability to stay composed during stressful moments. Traders need to keep an eye on various information sources, make sense of complicated market signals, and execute trades at just the right moment. It's a demanding job that combines analysis, mental strength, and fast-paced action—completely different from the chill approach of long-term investing.

In the United States, pattern day traders—those who make four or more trades in a single week—are required to keep at least $25,000 in their accounts and must use margin accounts for trading. These regulations are in place to safeguard less experienced traders from excessive risk. Some online trading platform will help you stay on the right side of the regulations.

The Appeal of Day Trading

The excitement of day trading comes from the chance to make fast money. But it's important to remember that it carries high risks and demands a solid understanding of the market. Successful day traders excel in the following areas:

• Stay informed
• Make quick decisions but not too quick decisions.
• Use leverage but use it with care.

Essential Rules to Understand

Understanding the rules for day trading is essential. In the United States, the Financial Industry Regulatory Authority (FINRA) and the Securities and Exchange Commission (SEC) establish clear guidelines for "pattern day traders." These guidelines encompass the following:

• Pattern day trader: definition: Traders who execute four or more day trades within five business days.
• Margin requirements: Pattern day traders need to keep at least $25,000 in cash in their brokerage account at all times.

Regulations are here to protect you, not to hinder your journey to get rich.

Getting Started

Professional day traders have a solid understanding of the market, are experienced in their craft, and can earn a living through it. Here’s how to get started:

1. Gain substantial knowledge about the market and learn to apply both fundamental and technical analysis effectively.
2. Ensure you have sufficient capital to fulfill regulations and, importantly, to safeguard against losses beyond what you can handle.
3. Establish clear trading criteria and adhere to them consistently.

Build a Strong Understanding of Markets

Many people who try day trading without knowing how the market works often end up losing money. Getting a grip on chart reading and technical analysis is a decent start, but without truly understanding the market's specific challenges, those charts can lead you astray. Make sure to do thorough research and familiarize yourself with the exact details of the products you are trading.

Get Initial Capital

Wise day traders only use money they can afford to lose. This way, they avoid serious financial loss and reduce emotional reactions in their trading choices.

Having enough funds is often key to taking advantage of small daily price changes, which can be just a few cents or even less.

To be a successful day trader using borrowed funds, it's essential to have enough cash on hand. Sudden market shifts can lead to unexpected demands for additional funds in your trading account.

Get Disciplined

Many day traders often experience losses because they do not stick to their own trading guidelines. The key principle is simple: “Create a strategy and follow it.” Without self-control, achieving success is unlikely.

To make a profit, day traders depend on market fluctuations. A day trader might be drawn to a stock that shows significant movement throughout the day. This volatility can be caused by several factors, such as earnings announcements, market sentiment, or updates regarding the economy or specific companies.

Day traders prefer stocks with high liquidity since it allows them to adjust their positions without causing price changes. If a stock's price rises, traders might decide to buy it. Conversely, if the price declines, they might opt to short sell, enabling them to gain when the price drops.

Regardless of their strategy, day traders typically seek out stocks that demonstrate notable movement.

Who Is Day Trading For?

There are professional day traders who work alone and those who work for a larger institution.

Most day traders who trade for a living work for large players like hedge funds and the proprietary trading desks of banks and financial institutions. These traders have an advantage because they have access to resources such as direct lines to counterparties, a trading desk, large amounts of capital and leverage, and expensive analytical software.5

These traders are typically looking for easy profits from arbitrage opportunities and news events. Their resources allow them to capitalize on these less risky day trades before individual traders can react.

Individual traders often manage other people’s money or simply trade with their own. Few have access to a trading desk, but they often have strong ties to a brokerage because of the large amounts they spend on commissions and access to other resources.

However, the limited scope of these resources prevents them from competing directly with institutional day traders. Instead, they are forced to take more risks. Individual traders typically day trade using technical analysis and swing trades—combined with some leverage—to generate adequate profits on small price movements in highly liquid stocks.

Day Trader's Tools

Day trading requires knowledge of advanced financial services and instruments available in the market. Traders who engage in day trading typically need the following:

Financial News

News opens up most of the chances. Being the first to catch wind of significant events is crucial.

A typical trading room has access to leading news sources, ongoing updates from news channels, and tools that continuously monitor various platforms for key stories.

Analytical Software

Trading software is essential for most day traders, often costing a lot of money. For those who rely on technical indicators or swing trades, this software matters more than the latest headlines. Typically, trading software includes:

• Automatic pattern recognition.
• Market Indicator analytics.
• Broker integration.
• Backtesting.

Strategies

A trader must have an advantage in the market. Day traders utilize various strategies, such as swing trading, arbitrage, and news-based trading. They continuously improve these approaches until they achieve steady gains and minimize losses.

It's also important to follow some fundamental day trading principles: Choose your trades carefully. Determine your entry and exit points beforehand and commit to your strategy. Recognize patterns in the trading behavior of your selected options in advance.

Day traders implement numerous strategies within their trading day.

Scalping: This approach aims to earn multiple small gains from quick price shifts that happen throughout the day. Arbitrage is a form of scalping that looks to benefit from fixing perceived price errors in the market.

Range/swing trading: This method relies on established support and resistance points in the market to guide traders in their buying and selling choices.

News-based trading: This approach takes advantage of trading opportunities that arise from the increased ups and downs in the market during news announcements. One example of this type of trading is assessing whether an announced merger or acquisition will actually happen.

Day Trading Strategy Breakdown
Type	Risk	Reward
Swing Trading	High	High
Arbitrage	Low	Medium
Trading News	Medium	Medium

Risk Management

For many investors, day trading can feel overwhelming due to its inherent risks.

• Be prepared to suffer severe financial losses.
• Day trading is a highly stressful full-time job. Although many traders focus on first 2-3 hours of trading days when the volatility is highest.

What Can You Expect to Earn?

Day trading has caught the attention of many, promising fast cash and freedom from traditional jobs. However, the truth about day trading profits is often quite different from these high expectations. While stories of traders making millions are popular, they are only a tiny percentage of all day trading results. The big question is: How much does the average day trader really earn?

Instead of thinking of day traders as genius investors who easily make money, the reality is that most of them struggle to see any profit. Research typically shows that fewer than 15% of day traders succeed over the medium to long term.

These surprising numbers challenge the idea that day trading is a foolproof way to get rich, indicating that most day traders are more likely to lose money than earn a steady income. Studies reveal that the income of day traders fluctuates wildly. While top traders in the 99th percentile can make six or seven figures a year, the majority of day traders often don't even make minimum wage when factoring in their time and the risk they take. One study emphasizes that many "individuals face significant losses from day trading. Frequent and heavy traders are especially prone to these losses."

Several reasons contribute to these disappointing results, including high trading costs, impulsive choices made under stress, and the unpredictable nature of market shifts. Additionally, the rise of high-frequency trading algorithms has made it even tougher for individual traders to compete in many markets.

Even with these obstacles, day trading still draws in newcomers, largely driven by success stories on social media and the low fees of trading platforms. However, experts warn that to achieve lasting profits in day trading demands extraordinary skill, strong discipline, and a dash of luck. For most people, sticking with long-term, diverse investment plans offers a more dependable route to financial growth.

Is Day Trading for You?

To kick off your journey in day trading, get ready to tackle these essential steps:

• First, arm yourself with a solid understanding of trading basics, along with a clear sense of your risk appetite, available funds, and aspirations.
• Dedicate time to honing your strategies through practice.
• Start with a few select stocks instead of spreading yourself too thin. Going all in can muddle your approach and lead to significant setbacks.
• Stay composed and keep your emotions in check during trades. Stick to your game plan.

By adhering to these straightforward tips, you could be on the path to building a successful day trading career.

Other Trading Options

While day trading has certainly attracted new followers since trading fees dropped over the last twenty years, it's also provided a boost for options traders. Their strategies often work well alongside, and can even serve as alternatives to, those of day traders. Both approaches focus on making money from quick market shifts, but they operate quite differently.

Day trading is all about buying and selling stocks within the same trading day, aiming to profit from short-term price changes. On the other hand, options trading involves agreements that allow you to buy or sell an asset at a set price within a specific time frame. This creates a clear distinction in how these two trading methods operate.

A major difference is the potential for using leverage and the associated risks. Day traders often rely on margin accounts to increase their buying capacity, which can lead to larger gains but also bigger losses. Options traders gain leverage through the nature of the options themselves. A small movement in the underlying asset can lead to a significant change in the value of the option, presenting opportunities for large profits but also the chance for considerable losses.

The complexity of these strategies is another factor that sets them apart. Day trading might seem simple in theory (buy low, sell high), but doing it successfully demands sharp focus and quick decision-making. In contrast, options trading has a steeper learning curve. Traders need to grasp concepts like implied volatility, time decay, and the Greeks (delta, gamma, theta, etc.) to successfully navigate the options landscape. Despite this challenge, a much larger number of investors have taken up options trading in the last ten years.

Of course, day trading and options trading can go hand in hand. Many investors mix both methods, such as trading options within the same day or using options to protect their day trading positions. However, this requires a solid understanding of both styles and a high level of skill.

Controversy

The potential to make money from day trading is a hot topic on Wall Street. Many online scams have tricked newcomers by claiming huge profits in a short time. Some folks jump into day trading without enough knowledge, while others manage to earn a living, likely because they can handle the risks involved.

Most professional money managers and financial advisors tend to avoid day trading, insisting that the risks usually outweigh the rewards. Moreover, many economists argue that active trading strategies often perform worse than simple passive index strategies over time, especially when fees and taxes are considered.

Although it's possible to profit from day trading, the odds are stacked against you because it's risky and demands a lot of skill. Don’t forget that luck and timing can be just as important. A single bad decision can bring down even the most seasoned day trader.

What are Your Chances of Becoming Profitable?

Day trading can bring in profits, but it's not guaranteed. Many people trying their hand at day trading end up losing cash and giving up. To succeed in this fast-paced world, you need to really understand how the market works, be quick to analyze data, and stick to strict rules about managing risks. How much money you can make depends on factors like your skill level, your trading strategy, and how much capital you're willing to invest.

While some traders do find ways to earn decent money, it’s important to realize that day trading is risky and can lead to big losses. You also have to consider transaction fees, taxes, and the mental stress that comes with trading often.

The number of day traders who actually make a profit is quite small. Research and reports from brokers indicate that only a handful of traders manage to make consistent gains over the long haul. Estimates suggest that only about 10% to 15% of day traders are successful after a while.

This low success rate comes from the steep risks involved, the need for advanced skills and experience, and the fierce competition in the financial world. Many newcomers to day trading experience significant losses early on, with only a few sticking around long enough to learn the ropes and become successful.

Why Is Day Trading Hard?

Day trading is tough due to its quick pace and the intricate world of finance. It demands that traders make lightning-fast choices using up-to-the-minute information, which can feel like a whirlwind, particularly when markets are unstable. Traders need strong skills in reading charts and recognizing trends, as well as grasping how economic changes impact price movements. Additionally, staying emotionally grounded is vital; day traders must steer clear of common traps such as excessive trading or allowing their feelings to dictate their choices.

First Rule - Close Positions on the Same Day

The first rule of day trading is simple: never keep a position after the market closes for the day. Whether you’re winning or losing, you should always sell. Many day traders avoid holding on to losing trades overnight, hoping to recover losses later. This is important because brokers often require more capital for overnight trades, which can increase risk. Overnight news can cause stock prices to shift dramatically, leading to larger losses for shareholders.

Pattern day trading involves buying and selling the same security within a single trading day. According to FINRA, a "pattern day trader" is anyone who executes four or more day trades in five business days, provided those trades make up more than 6% of their account activity during that time.

If you want to be a pattern day trader, you must keep at least $25,000 in cash and securities in your account. This threshold gives you access to increased leverage, allowing you to trade up to four times your maintenance margin. While this lets you take on larger trades, it also means you face greater risks.

Are You Game?

Day traders can earn big profits or pile up significant losses. Indeed, with the evidence showing that most day traders lose money over time, it's an extremely risky career choice. Day traders, both institutional and individual, would argue that they play an essential role in the marketplace by keeping the markets efficient and liquid. Though day trading will always be intriguing to individual investors, anyone considering it needs to acquire the knowledge, the resources, and the cash that it takes to have a chance at succeeding.