An Introduction to Day Trading

Years ago, the only persons who could actively trade in the stock market were those employed by huge financial institutions, brokerage firms, and trading houses. However, changes such as the advent of cheap brokerages and internet trading, as well as rapid worldwide distribution of news and very low commissions, have leveled the playing—or should we say trading—field over the last 25 years. The rise in popularity of trading platforms like Robinhood, as well as zero commissions, has made it easier than ever for individual investors to try their hand at trading like the experts.

Day trading can be a rewarding profession (as long as you do it properly). However, it can be difficult for beginners, especially if they aren’t properly equipped with a well-thought-out strategy. Even the most experienced day traders might run into problems and lose money. So, what is day trading, exactly, and how does it work?

Important Points to Remember

Day traders are active investors who use intraday tactics to profit on price fluctuations in a certain asset.
To profit from perceived market inefficiencies, day traders use a range of approaches and strategies.
Technical analysis is frequently used in day trading, which necessitates a high level of self-discipline and objectivity.

The Fundamentals of Day Trading

The activity of buying and selling a security in a single trading day is known as day trading. While it can happen in any market, the foreign exchange (forex) and stock markets are the most common. The majority of day traders are well-educated and well-funded. They take advantage of tiny price swings in highly liquid stocks or currencies by using high leverage and short-term trading tactics.

Day traders employ a variety of intraday methods. These are some of the strategies:

  • Scalping is a trading method that aims to make a series of modest profits based on minor price changes throughout the day.
  • Support and resistance levels are typically used in range trading to establish buy and sell decisions.
    News-based trading: This approach takes advantage of the increased volatility that occurs in the aftermath of major news events.
  • High-frequency trading (HFT) exploits minor or short-term market inefficiencies using sophisticated algorithms.

A Contentious Practice

On Wall Street, the profit potential of day trading is a hot topic. Day trading scams on the internet have enticed novices by promising huge profits in a short amount of time. Regrettably, the notion that this type of trading is a “get-rich-quick” scam prevails. Some people engage in day trading without having the necessary knowledge. Day traders, on the other hand, make a living despite—or possibly because of—the risks.

Day trading is avoided by many experienced money managers and financial consultants. They contend that the gain does not always outweigh the danger. Those who day trade, on the other hand, argue that profits can be made. It is possible to make money day trading, but the success rate is lower because it is inherently dangerous and needs substantial skill. Furthermore, economists and financial practitioners claim that active trading tactics underperform a more basic passive index strategy over lengthy periods of time, especially if fees and taxes are factored in.

Day trading is not for everyone, and it carries a lot of risk. Furthermore, it necessitates a thorough understanding of how markets operate as well as a variety of short-term profit methods. While the success tales of day traders who made it big in the market get a lot of press, keep in mind that this is not the situation for most day traders: many will fail, and many will barely make it. Furthermore, don’t overlook the importance of luck and timing—while expertise is important, even the most seasoned day trader can be sunk by a stroke of bad luck.

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A Day Trader’s Characteristics

Professional day traders, or individuals who trade for a living rather than for fun, are usually well-known in the industry. They usually have a thorough understanding of the market as well. The following are some of the requirements for being a successful day trader.

In-depth market knowledge and experience

Those who attempt to day trade without first learning the fundamentals of the market frequently lose money. A day trader should be able to perform technical analysis and understand charts. Charts, on the other hand, might be deceiving if you don’t have a thorough understanding of the market you’re in and the unique hazards that present in that market. Make sure you’ve done your homework and know everything there is to know about the products you’re dealing with.

Capital sufficiency

Day traders only invest money they can afford to lose. This not only protects them from financial disaster, but it also helps them trade without emotion. To profit efficiently from intraday market swings, a considerable amount of capital is frequently required. Because most day trading involves a high degree of leverage in margin accounts, and dramatic market movements can trigger large margin calls on short notice, having appropriate funds is critical.


A trader requires a competitive advantage over the rest of the market. Swing trading, arbitrage, and trading news are just a few of the methods used by day traders. These tactics are fine-tuned until they consistently provide profits while effectively limiting losses.

Strategy Breakdown
Type Risk Reward
Swing Trading High High
Arbitrage Low Medium
Trading News Medium Medium
Mergers/Acquisitions Medium High

Without discipline, a profitable approach is pointless. Because they fail to create transactions that satisfy their own criteria, many day traders lose a lot of money. “Plan the trade and trade the plan,” as they say. Without discipline, success is impossible.

Day traders rely largely on market volatility to make money. If a stock moves a lot during the day, it may be appealing to a day trader. This could occur as a result of a variety of factors, such as an earnings report, investor attitude, or even broad economic or corporate news.

Day traders also like highly liquid equities since they allow them to change their positions without affecting the stock’s price. Traders may acquire a buy position if the price of a stock rises. If the price decreases, a trader may elect to short-sell in order to profit from the drop.

A day trader, regardless of technique, is usually looking to trade a stock that moves (a lot).

Working as a Day Trader

Professional day traders are divided into two groups: those who work alone and those who work for a larger institution. The majority of day traders who make a living do so for large players such as hedge funds and bank and financial institution proprietary trading desks. These traders benefit from resources like as direct links to counterparties, a trading desk, substantial amounts of cash and leverage, and sophisticated analytical software (among other advantages). These traders are usually aiming for quick profits from arbitrage chances and news events; these resources enable them to take advantage of these less risky day trades before individual traders react.

Individual traders frequently handle or trade with other people’s money. Few of them have access to a trading desk, but they frequently have close relationships to a brokerage (because to the high commissions they pay) and access to other resources. The limited scope of these resources, however, prevents them from immediately competing with institutional day traders. Rather, they are compelled to take more risks. Individual traders generally use technical analysis and swing trades, along with some leverage, to profit from such minor price swings in highly liquid stocks.

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Day trading necessitates access to some of the market’s most complicated financial services and products. The following are typical requirements for day traders:

Having access to a trading desk is a big plus.

Traders who work for larger institutions or who manage large sums of money are frequently given this designation. Instantaneous order executions are provided by the trading or dealing desk to these traders, which is especially critical when abrupt price swings occur. When a merger is announced, for example, day traders interested in merger arbitrage can place their orders before the rest of the market can benefit from the price discrepancy.

Various News Sources

The majority of opportunities for day traders come from news, so being the first to know when something noteworthy happens is critical. A typical trading room has access to numerous main newswires, ongoing coverage from news organizations, and software that monitors news sources for important stories.

Software for Data Analysis

For most day traders, trading software is an expensive need. Those who use technical indicators or swing trades rely on software more than they do on news. The following characteristics can be applied to this software:

Automatic pattern recognition refers to the trading program’s ability to recognize technical indicators such as flags and channels, as well as more complicated indications such as Elliott Wave patterns.
Programs that employ neural networks and genetic algorithms to perfect trading systems in order to create more accurate predictions of future price movements are known as genetic and neural applications.
Broker integration: Some of these apps connect directly to the brokerage, allowing for near-instantaneous and even automatic trade execution. This aids in the removal of emotion from trading and the improvement of execution times.
Backtesting: This allows traders to examine how a strategy performed in the past in order to forecast how it will perform in the future more accurately. It’s important to remember that past success isn’t always indicative of future outcomes.

These instruments, when used together, provide traders an advantage over the competition. It’s easy to see why so many inexperienced traders lose money without them. Other factors that affect a day trader’s earning potential include the market they trade in, the amount of capital they have, and the amount of time they are willing to invest.

The Dangers of Day Trading

Day trading can be intimidating for the typical investor due to the numerous dangers involved. The Securities and Exchange Commission of the United States has identified some of the hazards associated with day trading, which are summarized below:

Prepare to lose a lot of money: Because day traders often lose a lot of money in their first few months of trading, and many of them never make a profit, they should only risk money they can afford to lose.
Day trading is a full-time career that is both stressful and costly: Day trading is highly challenging and requires a high level of focus to recognize market patterns while watching dozens of ticker quotes and price swings. Day traders also have a lot of expenses because they have to pay a lot of money to their firms for commissions, training, and computers.
Day traders are mainly reliant on borrowed funds: Day trading tactics rely on leverage to earn money, which is why many day traders not only lose all of their money but also end up in debt.
Don’t be fooled by promises of easy money: Be wary of “hot ideas” and “professional advise” from day trading newsletters and websites, and keep in mind that educational seminars and workshops on the subject may not be neutral.

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Should You Get Involved in Day Trading?

As previously said, day trading as a job can be extremely challenging and demanding. To begin, you must have some background in trading and a clear understanding of your risk tolerance, capital, and objectives.

Day trading is a time-consuming profession as well. You’ll need to put in a lot of time if you want to refine your strategies—after you’ve practiced, of course—and generate money. This isn’t something you can do on the side or whenever the mood strikes. You must be completely committed to it.
If you decide that trading is for you, keep in mind that you should start modestly. Rather than diving headfirst into the market and wearing yourself out, concentrate on a few stocks. Going all-in on a trade will only complicate your strategy and maybe result in significant losses.
Finally, maintain your composure and avoid trading with emotion. You’ll be able to keep to your strategy more easily if you can do it. Maintaining a level head assists you to stay concentrate while remaining on the road you’ve chosen.

If you follow these easy recommendations, you can be on your way to a long-term career in day trading.

Is it Illegal to Day Trade?

While day trading is neither illegal nor unethical, it is extremely dangerous. Because most day trading tactics use leverage in margin accounts, day traders risk losing more money than they put in and ending up in substantial debt.

What is the Best Way to Use Arbitrage as a Day Trading Strategy?

Arbitrage is defined as the simultaneous buying and sale of the same security in different markets in order to profit from minor price discrepancies between the marketplaces. Arbitrage possibilities are rare because they give a mechanism to ensure that any departure in the price of an item from its fair value is quickly addressed.

Why don’t day traders leave their positions open overnight?

Day traders rarely hold positions overnight for a variety of reasons: most brokers have higher margin requirements for overnight trades, necessitating additional capital; a stock can gap up or down on overnight news, resulting in a large trading loss; and holding a loss-making position overnight in the hope of recouping part or all of the losses may violate the trader’s core day trading philosophy.

What Margin Requirements Do Day Traders Have?

The minimum equity requirement for a pattern day trader client of a broker-dealer is $25,000, which must be deposited into the client’s account prior to any day trading operations and maintained at all times, according to FINRA guidelines.

What is Buying Power in Day Trading?

The total amount an investor has available to trade securities is referred to as buying power, and it equals cash in the account plus available margin. A broker-dealer client identified as a pattern day trader is allowed to trade up to four times their maintenance margin excess as of the previous day’s close of business for stocks, according to FINRA rules.

Final Thoughts

Day trading is a feasible technique to make money, despite the fact that it has become rather contentious. Day traders, both institutional and individual, are critical to the market’s efficiency and liquidity. While day trading is still popular among beginner traders, it should be reserved for those who have the necessary skills and resources.

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