What Is Day Trading?

Do you want to start doing day trading today? Continue reading this article for a complete guide on becoming a successful day trader.

Years ago, the only people who could actively trade in the stock market were those who worked for large financial institutions, brokerages, and trading houses. However, developments such as the growth of discount brokerages and online trading, combined with instantaneous worldwide dissemination of news and meager commissions, have leveled the playing—or should we say trading—field over the last 25 years. In recent years, the popularity of trading platforms like Robinhood and 0 percent commissions has made it easier than ever for retail investors to try to trade like the pros.

Day trading can be a lucrative profession (as long as you do it properly). However, it can be difficult for beginners, particularly those who aren’t fully prepared with a well-planned strategy. Even the most seasoned day traders can run into trouble and lose money.

So, precisely what is day trading, and how does it work?

What is day trading?

Day trading is the practice of buying and selling a security within a single trading day. It can happen in any market, but it is most common in the forex and stock markets. Day traders are typically well-educated and financially secure. They employ high leverage levels and short-term trading strategies to profit from small price movements in highly liquid stocks or currencies.

Day traders are acutely aware of events that cause short-term market movements. Trading based on news is a popular strategy. Economic statistics, corporate earnings, and interest rates are subject to market expectations and market psychology.

When those expectations are not met or exceeded, markets react with sudden, significant moves, significantly benefiting day traders.

Day traders employ a variety of intraday strategies. Among these strategies is

  • Scalping: This strategy aims to make several small profits on minor price changes throughout the day.
  • Range trading: This strategy relies heavily on support and resistance levels to make buy and sell decisions.
  • News-based trading: This strategy typically takes advantage of trading opportunities that arise as a result of increased volatility caused by news events.
  • High-frequency trading (HFT): These strategies employ sophisticated algorithms to capitalize on minor or short-term market inefficiencies.

A controversial practice

Day trading’s profit potential is a hotly debated topic on Wall Street. Internet day-trading scams have enticed novices by promising considerable profits in a short period. Unfortunately, the misconception that this type of trading is a get-rich-quick scheme persists. Some people engage in day trading without adequate knowledge. However, someday traders make a living despite – or perhaps because of – the risks.

Day trading is avoided by many professional money managers and financial advisors. They contend that, in most cases, the reward does not outweigh the risk. On the other hand, those who day trade insist that there are profits to be made.

Profitable day trading is possible, but the success rate is lower because it is inherently risky and requires considerable skill. Furthermore, economists and financial practitioners agree that, over long periods, active trading strategies tend to underperform a more basic passive index strategy, especially when fees and taxes are factored in.

Day trading is not for everyone, and it is fraught with danger. Furthermore, it necessitates a thorough understanding of how markets operate and various strategies for profiting in the short term. Though success stories of day traders who struck it rich often receive a lot of media attention, keep in mind that this is not the case for most day traders:

Many will fail, and many will struggle to stay afloat.

Furthermore, don’t underestimate the importance of luck and timing—while skill is necessary, a bad streak of luck can sink even the most experienced day trader.

Characteristics of a day trader

Professional day traders—those who trade for a living rather than as a hobby—are usually well established in the industry. They usually have a thorough understanding of the market as well. Here are some of the requirements for becoming a successful day trader.

Knowledge and experience in the marketplace

Individuals who attempt to day trade without a thorough understanding of market fundamentals frequently lose money. A day trader should be able to perform technical analysis and read charts. However, graphs may mislead without a more in-depth understanding of the market and its unique risks. Perform your due diligence and learn the ins and outs of the products you trade.

Sufficient capital

Day traders only use risk capital to afford to lose. This not only protects them from financial ruin, but it also aids in the removal of emotion from their trading. To effectively capitalize on intraday price movements, a large amount of capital is frequently required. Access to sufficient capital is critical because most day trading uses high leverage in margin accounts, and volatile market swings can trigger significant margin calls on short notice.


A trader must have a competitive advantage over the rest of the market. Day traders employ various strategies, such as swing trading, arbitrage, and trading news. They fine-tune these strategies until they consistently generate 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


A profitable strategy is worthless if it is not accompanied by discipline. Many day traders lose money because they do not execute trades that meet their own criteria. “Plan the trade and trade the plan,” as the saying goes. Without discipline, success is impossible.

Day traders rely heavily on market volatility to make money. A stock may be appealing to a day trader if it moves a lot during the day. This could occur for various reasons, including an earnings report, investor sentiment, or general economic or company news.

Day traders also prefer highly liquid stocks because it allows them to change their position without affecting the stock’s price. Traders may enter a buy position if the price of a stock rises. If the price falls, a trader may decide to sell short in order to profit when the price drops. A day trader, regardless of technique, is usually looking to trade a stock that moves (a lot).

Day trading for living

Professional day traders are classified into two types: independently and working for a larger institution.

Most day traders who trade for a living work for prominent players such as hedge funds and bank and financial institution proprietary trading desks. These traders benefit from resources such as direct lines to counterparties, a trading desk, large amounts of capital and leverage, and expensive analytical software (among other advantages). These traders typically seek easy profits from arbitrage opportunities and news events; these resources enable them to capitalize on these less risky day trades before individual traders can react.

Individual traders frequently manage other people’s money or trade solely with their own. Few have access to a trading desk, but they frequently have strong ties to a brokerage (due to the high commissions they pay) and access to other resources. However, due to the limited scope of these resources, they cannot compete directly with institutional day traders. Instead, they are compelled to take more significant risks. Individual traders typically use technical analysis and swing trades, along with some leverage, to generate sufficient profits on such small price movements in highly liquid stocks.

Day trading necessitates access to some of the most complex financial services and instruments available. Day traders typically require the following:

Access to a trading desk.

This is generally reserved for traders who work for larger institutions or manage large sums of money. The trading or dealing desk provides these traders with instantaneous order executions, especially for large price fluctuations. For example, when a merger is announced, day traders interested in merger arbitrage can place their orders before the rest of the market can benefit from the price differential.

Multiple news sources

The majority of opportunities for day traders are provided by the news, so it is critical to be the first to know when something significant occurs. A typical trading room has access to multiple leading newswires, continuous coverage from news organizations, and software that continuously analyzes news sources for important stories.

Analytical software

  • For most day traders, trading software is an expensive necessity. Those who use technical indicators or swing trades rely on software rather than news. The following characteristics can identify this software:
  • Automatic pattern recognition: The trading program recognizes technical indicators such as flags and channels and more complex indicators like Elliott Wave patterns.
  • Genetic and neural applications: These programs use neural networks and genetic algorithms to improve trading systems and make better predictions of future price movements.
  • Broker integration: Some of these applications even interface directly with brokerages, allowing instant and even automatic trade execution. This is useful for removing emotion from trading and shortening execution times.
  • Backtesting: This allows traders to look at how a specific strategy would have performed in the past to predict how it will perform in the future more accurately. Keep in mind that past results are not always indicative of future outcomes.

When used together, these tools give traders an advantage over the rest of the market. It’s easy to see why so many inexperienced traders lose money without them. Other factors that influence a day trader’s earning potential include the market they trade, the amount of capital they have, and the amount of time they are willing to devote.

Deciding what and when to buy

Day traders attempt to profit by taking advantage of minute price movements in individual assets (stocks, currencies, futures, and options), typically leveraging large sums of capital. A typical day trader looks for three things when deciding what to focus on, say, in stock:

  1. Tight spreads, the difference between the bid and ask price of a stock, and low slippage, or the difference between the expected price of a trade and the actual price, allow you to enter and exit a stock at a good price.
  2. Volatility is simply a measure of the expected daily price range, which is the range in which a day trader operates. More volatility equals more profit or loss.
  3. Trading volume, also known as average daily trading volume, measures how many times a stock is bought and sold in a given period. A high volume level indicates a lot of interest in a stock. An increase in a stock’s volume is frequently a sign of a price increase, either up or down.

When you’ve determined what kind of stocks (or other assets) you’re looking for, you’ll need to learn how to identify entry points—that is, when you’ll invest. Tools that can assist you in this regard include

  • Real-time news services: Because news moves stocks, it’s critical to sign up for services that alert you when potentially market-moving news is released.
  • ECN/Level 2 quotes: ECNs, or electronic communication networks, are computer-based systems that display the best available bid and ask quotes from multiple market participants and then match and execute orders automatically. Level 2 is a subscription-based service that provides real-time access to the Nasdaq order book, which is made up of price quotes from market makers for each Nasdaq-listed and OTC Bulletin Board security. 3 They can give you a sense of orders being executed in real-time when used together.
  • Candlestick charts for intraday trading: Candlestick charts provide a raw analysis of price action. More on these in a moment.

Define and document the conditions under which you will accept a position. “Buy during an uptrend” is insufficiently specific. Something along these lines is much more specific and testable: “Buy when price breaks above the upper trendline of a triangle pattern on the two-minute chart, where the triangle was preceded by an uptrend (at least one higher swing high and higher swing low before the triangle formed) in the first two hours of trading.”

When you have a specific set of entry rules, scan through more charts to see if those conditions are generated every day (assuming you want to day trade every day) and produce a price move in the expected direction more often than not. If so, you have a potential entry point for a strategy. You’ll then need to assess how to exit, or sell, those trades.

Deciding when to sell

There are several ways to exit a profitable business, including trailing stops and profit targets. Profit targets are the most common exit strategy in which a profit is taken at a predetermined level. The following are some examples of common price target strategies:

  • Scalping: One of the most popular strategies is scalping. It entails selling a trade almost immediately after it becomes profitable. The price target is whatever figure corresponds to “you made money on this deal.”
  • Fading: Fading involves shorting stocks after rapid moves upward. This is based on the assumption that (1) they have been overbought, (2) early buyers are ready to start profiting, and (3) existing buyers may be scared away. Although risky, this strategy has the potential to be extremely rewarding. The price target, in this case, is the point at which buyers begin to re-enter the market.
  • Daily Pivots: Profiting from a stock’s daily volatility is the goal of this strategy. This is accomplished by attempting to buy at the day’s low and sell at the day’s high. The price target, in this case, is simply the next sign of a reversal.
  • Momentum: This trading typically entails trading on news releases or identifying strong trending moves supported by high volume. A particular type of momentum trader will buy on news releases and ride a trend until it shows signs of reversal. The other class will smooth out the price increase. The price target, in this case, is when volume begins to decline.

In many cases, you will want to exit an asset when the Level 2/ECN and volume indicate a drop in interest in the stock. The profit target should also allow more profit on winning trades than losing trades. If your stop-loss is $0.05, your target should be more than $0.05 away.Define how you will exit your trades before entering them, just as you made your entry point. The exit criteria must be sufficiently specific to be repeatable and testable.

Day trading charts and patterns

To help determine the most opportune moment to buy a stock (or whatever asset you’re trading), many traders utilize the following:

  • Candlestick patterns, including engulfing candles and dojis
  • Technical analysis, including trend lines and triangles
  • Volume—increasing or decreasing

A day trader can look for a variety of candlestick setups to find an entry point. When used correctly, the Doji reversal pattern is one of the most reliable.

  1. To begin, look for a spike in volume, which will indicate whether traders are supporting the price at this level. This can occur on either the Doji candle or the candles immediately following it.
  2. Second, look for prior price support at this level. For instance, the previous low of day (LOD) or high of day (HOD) (HOD).
  3. Finally, examine the Level 2 situation, which displays all open orders and order sizes.

If you follow these three steps, you will determine whether the Doji is likely to produce an actual turnaround. If so, you will be able to enter a position if the conditions are favorable. Traditional chart pattern analysis also provides profit targets for exits. For example, the height of a triangle at its widest point is added to the triangle’s breakout point (for an upside breakout), yielding a price at which to take profits.

How to limit losses when day trading?

A stop-loss order is used to limit losses on a security position. 4 A stop-loss can be placed below a recent low for long positions or above a recent high for short positions. Volatility can also be a factor.

For example, if a stock price is moving at a rate of $0.05 per minute, you may place a stop-loss $0.15 away from your entry to allow the price to fluctuate before moving in the expected direction.

Define how you will manage the risk of the trades. In the case of a triangle pattern, for example, if buying a breakout, a stop-loss can be placed $0.02 below a recent swing low or $0.02 below the pattern. (The $0.02 is arbitrary; the point is simply specific.)

Setting two stop-losses is one strategy.

A physical stop-loss order placed at a price level corresponds to your risk tolerance. Essentially, this is the maximum amount of money you can afford to lose. A mental stop-loss is placed at the point at which your entry criteria are violated. This means that if the trade takes an unexpected turn, you will exit your position immediately.

Whatever method you use to exit your trades, the exit criteria must be precise enough to be testable and repeatable. It’s also critical to figure out how much money you can afford to lose per day—both financially and mentally. When you reach this point, take the rest of the day off. Keep your plan and your boundaries in mind. After all, tomorrow is just another (trading) day.

You can assess whether a potential strategy fits within your risk limit once you’ve defined how you’ll enter trades and where you’ll place a stop-loss. If the strategy exposes you to too much risk, you must modify it in some way to mitigate the risk.

If the strategy is within your risk tolerance, testing will begin. Manually search through historical charts for your entries, noting whether your stop-loss or target was met. In this manner, paper trades for at least 50 to 100 trades, noting whether the strategy was profitable and whether it met your expectations.

If it does, proceed to trade the system in real-time in a demo account. Proceed with day trading the strategy with real capital if it is profitable in a simulated environment for two months or more. Start over if the strategy isn’t profitable.

Finally, keep in mind that if you trade on margin—that is, if you borrow your investment funds from a brokerage firm (and keep in mind that margin requirements for day trading are high)—you are much more vulnerable to sharp price movements. Margin helps to amplify not only profits but also losses in trading if a trade goes against you. As a result, using stop-loss orders is critical when day trading on margin.

Now that you understand some of the fundamentals of day trading let’s take a look at some of the key strategies that new day traders can employ.

What are the risks of day trading?

Day trading can be intimidating for the average investor due to the number of risks involved. The Securities and Exchange Commission (SEC) of the United States highlights some of the risks associated with day trading, which are summarized below:

  • Prepare to incur significant financial losses: Day traders should only risk money they can afford to lose because they typically suffer severe financial losses in their first months of trading and many never graduate to making profits.
  • Day trading is a high-stress, high-cost full-time job: Day trading is complicated, and spotting market trends requires intense concentration while watching dozens of ticker quotes and price fluctuations. Day traders incur high expenses, typically paying large sums to their firms for commissions, training, and other services.
  • Day traders rely heavily on borrowed funds: Day-trading strategies use borrowed money as leverage to make profits, which is why many day traders lose all of their money and end up in debt.
  • Don’t believe claims of quick riches: Be wary of “hot tips” and “expert advice” from day trading newsletters and websites. Remember that educational seminars and classes about day trading may not be objective.

Should you start day trading?

  • As previously stated, day trading as a career can be challenging and demanding.
  • To begin, you should be familiar with the trading world and have a good understanding of your risk tolerance, capital, and goals.
  • Day trading is also a time-consuming profession. If you want to perfect your strategies and make money (after you’ve practiced, of course), you’ll need to put in a lot of time. This isn’t something you can do on the side or whenever you feel like it. You must be completely committed to it.
  • If you decide that trading is a thrill for you, remember to start small. Concentrate on a few stocks rather than diving headfirst into the market and wearing yourself out. Going all in will only complicate your trading strategy and could result in large losses.
  • Finally, try to keep your cool and keep emotion out of your trades. The more you can do this, the easier it will be to stick to your plan. Keeping a level head allows you to maintain your focus while staying on the path you’ve chosen.

If you follow these simple guidelines, you may be on your way to a long-term career in day trading.

Technical analysis vs fundamental analysis

Technical analysis is essential for day traders because it allows them to identify short-term trading patterns and trends. Fundamental analysis is better suited for long-term investment because it focuses on valuation; however, the gap between an asset’s actual price and its intrinsic value as determined by fundamental analysis can last months, if not years.

In the short term, market reaction to fundamental data such as news or earnings reports is also quite unpredictable. However, day traders should monitor market reaction to such fundamental data because the resulting volatility can provide trading opportunities that can be exploited using technical analysis.

Why is it difficult to make money consistently from day trading?

Making consistent money from day trading necessitates a diverse set of skills and attributes, including knowledge, experience, discipline, mental fortitude, and trading acumen. It is difficult for beginners to implement fundamental strategies such as cutting losses or letting profits run. It is also difficult to maintain one’s trading discipline when confronted with challenges such as market volatility or significant losses.

Finally, day trading requires pitting one’s wits against millions of market pros who have access to cutting-edge technology, a wealth of experience and expertise, and very deep pockets to exploit inefficiencies in inefficient markets. That is not an easy task!

Can or should a day trading position be held overnight?

A day trader may wish to hold a trading position overnight to reduce losses on a bad trade or, less frequently, to increase profits on a good trade. However, this is generally not a good idea unless it is a well-thought-out decision rather than one made simply because a trader does not want to book a loss on a bad trade.

Higher margin requirements, additional borrowing costs, and negative news are all risks associated with overnight holding a day trading position. This means that the risk of a negative outcome for the decision to hold the position overnight may be greater than the possibility of a positive effect.

Is day trading illegal?

Though day trading is not illegal or unethical, it can be extremely dangerous. Because most day-trading strategies rely on leverage in margin accounts, day traders risk losing more than they have invested and becoming deeply in debt.

How can arbitrage be employed as a day-trading strategy?

Arbitrage is the simultaneous purchase and sale of the same security in different markets to profit from minor price differences in these markets. Because arbitrage provides a mechanism to ensure that any deviation in the price of an asset from its fair value is quickly corrected, arbitrage opportunities are rarely available for long.

Why don’t day traders hold positions overnight?

Day traders typically do not hold positions overnight for a variety of reasons, including most brokers have higher margin requirements for overnight trades, necessitating additional capital; a stock can gap down or up on overnight news, resulting in a large trading loss; and holding a loss-making position overnight in the hope that part or all of the losses can be recouped may violate the trader’s core day-trading philosophy.

What are the margin requirements for day traders?

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

What is day trading’s buying power?

Buying power is the total amount of money that an investor has available to trade securities, and it is equal to the cash in the account plus the available margin. A broker-dealer client designated as a pattern day trader may trade up to four times their maintenance margin excess as of the previous day’s close of business inequities, according to FINRA rules.


Despite the fact that day trading has become somewhat controversial, it can be a profitable way to earn a living. Day traders, both institutional and retail, play an important role in the market by keeping it efficient and liquid. Though day trading is still popular among inexperienced traders, it should be reserved primarily for those with the necessary skills and resources.

Sandra Johnson

Sandra Johnson

Sandra Johnson was a few years out of school and took a job as a life insurance agent in California, selling coverage door-to-door for Prudential. The experience taught her about the technical components of insurance and its benefits for individuals and society, as well as the misunderstandings people often have about insurance. She has over ten years’ experience in the insurance industry, having worked as both a Broker and Underwriter, assisting clients across a broad range of industries. At Insurance Noon, Sarah diligently gathers all the required information and curates up pieces to provide meaningful insurance solutions. Her personal value proposition is to demonstrate a genuine interest in always adding value for clients.Her determined approach to guiding clients has turned her into a platinum adviser to multiple insurers.

Insurance Noon is the world's leading source of insurance related content on the web, focusing on industry news, buying guides, reviews, and much more.