Day Trading: The Basics and How to Get Started
There was a time years ago when the only people able to trade actively in the stock market were those working for large financial institutions, brokerages, and trading houses. The arrival of online trading, along with instantaneous dissemination of news, have leveled the playing—or should we say trading—field. The easy-to-use trading apps and 0% commissions of services like Robinhood, TD Ameritrade, and Charles Schwab have made it easier than ever for retail investors to attempt to trade like the pros.
Day trading can turn into a
lucrative career (as long as you do it properly). But it can be challenging for novices—especially those who don’t have a well-planned strategy. And be aware that even the most seasoned day traders can hit rough patches and experience losses.
So, what exactly is day trading, and how does it work?
Key Takeaways
– Day traders buy and sell stocks or other assets during the trading day in order to profit from the rapid fluctuations in prices.
– Day trading employs a wide variety of techniques and strategies to capitalize on these perceived market inefficiencies.
– Day trading is often informed by technical analysis of price movements and requires a high degree of self-discipline and objectivity.
What Is Day Trading?
The Basics of Day Trading
Day trading means buying and selling a batch of securities within a day, or even within seconds. It has nothing to do with investing in the traditional sense. It is exploiting the inevitable up-and-down price movements that occur during a trading session.
Day trading is most common in the stock markets and on the
foreign exchange (forex) where currencies are traded.
Day traders are typically well-educated in the minutia of trading and tend to be well funded. Many of them add an additional level of risk by using
leverage to increase the size of their stakes.
Day traders are attuned to events that cause short-term market moves. Trading based on the news is one popular technique. Scheduled announcements such as the release of economic statistics, corporate earnings, or
interest rate announcements are subject to market expectations and market psychology. That is, markets react when those expectations are not met or are exceeded—usually with sudden, significant moves which can greatly benefit day traders.
Day traders use numerous intraday strategies. These strategies include:
Scalping: This strategy focuses on making numerous small profits on ephemeral price changes that occur throughout the day. Range trading: This strategy uses pre-determined support and resistance levelsin prices to determine the trader’s buy and sell decisions.
– News-based trading: This strategy seizes trading opportunities from the heightened volatility that occurs around news events.
High-frequency trading(HTF): These strategies use sophisticated algorithmsto exploit small or short-term market inefficiencies.
Why Day Trading Is Controversial
The profit potential of day trading is an oft-debated topic on Wall Street. Internet day-trading scams have lured amateurs by promising enormous returns in a short period of time.
Some people day-trade without sufficient knowledge. But there are day traders who make a successful living despite—or perhaps because of—the risks.
Many professional money managers and financial advisors shy away from day trading. They argue that, in most cases, the reward does not justify the risk. Moreover, many economists and financial practitioners argue that
active trading strategies of any kind tend to underperform a more basic passive index strategy over time especially after fees and taxes are taken into account.
Profiting from day trading is possible, but the success rate is inherently lower because it is risky and requires considerable skill. And don’t underestimate the role that luck and good timing play. A stroke of bad luck can sink even the most experienced day trader.
How Does a Day Trader Get Started?
Professional day traders—those who trade for a living rather than as a hobby—are typically well established in the field. They usually have in-depth knowledge of the marketplace, too. Here are some of the prerequisites required to be a successful day trader.
Knowledge and Experience in the Marketplace
Individuals who attempt to day-trade without an understanding of market
fundamentals often lose money. A working knowledge of technical analysis and chart reading is a good start. But without a deep understanding of the market and its unique risks, charts can be deceiving.
Do your due diligence and understand the particular ins and outs of the products you trade.
Sufficient Capital
Wise day traders use only
risk capital that they can afford to lose. This protects them from financial ruin and helps eliminate emotion from their trading decisions.
A large amount of capital is often necessary to capitalize effectively on intraday price movements, which can be in pennies or fractions of a cent.
Adequate cash is required for day traders who intend to use leverage in
margin accounts. Volatile market swings can trigger big margin calls on short notice.
Day Trading Strategies
A trader needs to have an edge over the rest of the market. Day traders use any of a number of strategies, including
swing trading, arbitrage, and trading news. They refine these strategies until they produce consistent profits and limit their losses.
There also are some
basic rules of day trading that are wise to follow: Pick your trading choices wisely. Plan your entry and exit points in advance and stick to the plan. Identify patterns in the trading activities of your choices in advance.
editorial policy.
U.S. Securities and Exchange Commission. “
Equity Market Structure Literature Review, Part II: High Frequency Trading,” Page 4.
Dummies. “
A Day in the Life of a Day Trader.”
Business Insider. “
If You’re Day Trading, You Will Probably Lose Money: Here’s Why.”
Wall Street Prep. “
Sales & Trading Analyst: Day In The Life.”
U.S. Securities and Exchange Commission. “
Day Trading: Your Dollars at Risk.”
Forbes. “
Day Trading: Smart or Stupid?”
U.S. Securities and Exchange Commission. “
Margin Rules for Day Trading.”
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Day Trading: The Basics and How to Get Started
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Day Trader: Definition, Techniques, Strategies, and Risks
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Choosing the Right Day-Trading Software
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The Complete Guide to Choosing an Online Stock Broker
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Using Paper Trading to Practice Day Trading
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What Is a Limit Order in Trading, and How Does It Work?
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Stop Order: Definition, Types, and When To Place
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10 Day Trading Tips for Beginners
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How to Choose Stocks for Day Trading
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Top 10 Rules For Successful Trading
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Short Selling: Definition, Pros, Cons, and Examples
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A Guide to Day Trading on Margin
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Market Risk Definition: How to Deal With Systematic Risk
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Risk Management Techniques for Active Traders
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Risk/Reward Ratio: What It Is, How Stock Investors Use It
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Trading Psychology: Definition, Examples, Importance in Investing
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The Importance of Trading Psychology
