Trading guide

re 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. However, over the past 25 years, developments such as the growth of discount brokerages and online trading, coupled with instantaneous dissemination of news worldwide and very low commissions, have leveled the playing—or should we say trading—field. In recent years, the popularity of trading platforms like Robinhood and 0% commissions have made it easier than ever for retail investors to attempt to trade like the pros.



Day trading can turn out to be a lucrative career (as long as you do it properly). But it can also be a little challenging for novices—especially those who aren’t fully prepared with a well-planned strategy. 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 are active traders who execute intraday strategies to profit from a given asset's price changes.
  • Day trading employs a wide variety of techniques and strategies to capitalize on perceived market.
  • Day trading is often characterized by technical analysis and requires a high degree of self-discipline and objectivity.

The Basics of Day Trading

Day trading usually refers to the practice of purchasing and selling a security within a single trading day. It can occur in any marketplace but is most common in the foreign exchange (forex) and stock markets. Day traders are typically well educated and well funded. They use high amounts of leverage and short-term trading strategies to capitalize on small price movements that occur in highly liquid stocks or currencies.

Day traders are attuned to events that cause short-term market moves. Trading based on the news is a popular technique. Scheduled announcements such as economic statistics, corporate earnings, or interest rates are subject to market expectations and market psychology. 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 attempts to make numerous small profits on small price changes throughout the day.
  • Range trading: This strategy primarily uses support and resistance levels to determine buy and sell decisions.
  • News-based trading: This strategy typically seizes trading opportunities from the heightened volatility around news events.
  • High-frequency trading (HTF): These strategies use sophisticated algorithms to exploit small or short-term market inefficiencies.1

A Controversial Practice

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. Unfortunately, the idea that this kind of trading is some kind of get-rich-quick scheme persists. 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. Conversely, those who do day-trade insist that there are profits to be made. Day trading profitably is possible, but the success rate is inherently lower because it is inherently risky and requires considerable skill. Moreover, economists and financial practitioners alike argue that, over long durations, active trading strategies tend to underperform a more basic passive index strategy, especially after fees and taxes are taken into account.

Day trading is not for everyone and involves significant risks. Moreover, it requires an in-depth understanding of how the markets work and various strategies for profiting in the short term. Though the success stories of those who struck it rich as a day trader often get a lot of media attention, remember that this is not the case for most day traders: Many will fizzle out, and many will just barely stay afloat. Furthermore, don’t underestimate the role that luck and good timing play—though skill is certainly an element, a stroke of bad 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 typically well established in the field.2 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. Technical analysis and chart reading are both good skills for a day trader to have. But without a more in-depth understanding of the market and its unique risks, charts may prove deceiving. Do your due diligence and understand the particular ins and outs of the products you trade.

Sufficient Capital

Day traders use only risk capital they can afford to lose. This not only protects them from financial ruin but also helps eliminate emotion from their trading. A large amount of capital is often necessary to capitalize effectively on intraday price movements. Having access to adequate capital is very important because most day trading employs a high degree of leverage in margin accounts, and volatile market swings can trigger big margin calls on short notice.