What is Day Trading? The Basics, Risks & How to Get Started

ByG. Dautovic
March 10, 2022

We humans are constantly searching for ways to satisfy our endless stream of needs and wants. These days, it’s very common to see people of all ages with several income streams just so they can lead the lifestyle they desire.

Advancements in technology today play a vital role in the ease with which we achieve our financial desires. One way people can earn money is through trading securities online, and today our spotlight is on day trading. 

If you’re curious about what day trading is, stick around as we demystify this term and explain how it works, the risks involved, and how to get started. The truth is that the opportunities to achieve our financial goals today are many, especially when we have the right information and understanding about how certain things work. The best part is that we can do most of this from the convenience of our homes with the aid of our mobile devices.

Gone are the days when you needed to be a certified broker or work for a financial institution or brokerage firm to trade securities online. Today, with as little as your mobile device and access to the internet, you can learn to day trade from just about anywhere.

Let’s get down to it, shall we?

Day Trading Definition

Day trading is a short-term form of online trading where a trader buys and sells financial securities - like stocks and currencies - through an online broker within a trading day. Day traders take advantage of the small price fluctuations or changes that occur, using high leverage to make profits daily. Their aim is not to bother themselves with the long-term value of securities, but instead focus on the daily movement of the market.

This form of trading is highly risky, as you can lose a considerable amount of your assets while striving for profits. However, with the proper knowledge and self-discipline, it serves as a very lucrative career for some people because of its potential gains. It’s important not to confuse day trading with investing, as day trading is not usually considered a type of investment.

This is because investing typically involves purchasing assets that have long-term prospects, while day trading provides a means to earn more. So if you plan to invest in certain securities, then you might want to consider actual investment options.

Day Trading 101: Basics for Beginners

Day trading demands a lot of technical analysis for studying market movements and trying to predict outcomes based on your analysis. It’s often promoted as a ‘get-rich-quick’ scheme, which gives many people the wrong idea of what it really entails. While you might gain a lot from day trading, it typically requires a lot of self-discipline and an understanding of the risks involved.

After all, if you just dabble blindly for the sake of it, you might end up over-leveraging and losing all your assets.

Before you decide to become a day trader, you have to be willing to learn the principles involved in this type of trading to give yourself a thorough understanding of all there is to know. You’ll also need to be disciplined, emotionally stable, patient, and objective.

The goal is not to make a million dollars in a day, but to make little profits that compound daily to give you a substantial amount in the long run.

There are several different day trading markets, ranging from futures to commodities, options, stocks, and even currencies, depending on what you decide to day trade on. 

Day Trading Tools

It goes without saying that there are several factors, tools, and strategies that make up a successful trade. Below are some of the important tools used by day traders to execute their perfect trades.

  • Brokers: There are different brokers for different securities. So depending on the security you’re trading, such as stocks, you’ll need an online broker or platform that will give you access to the market.
  • Price charts of the security: Price charts come in handy for your technical analysis of the market. These charts display the movement of the market, so they can help you study previous price movements and patterns, and also give you an idea of how the market might behave at certain times.
  • Real-time market data: One of the most crucial tools any day trader can ever ask for is current news about the market. For most securities, real-time news and events can have a tremendous impact on how well they do in the market. So, access to real-time market data and news helps the day trader leverage certain opportunities and profit from them.
  • Electronic communication networks: These are electronic systems that show favorable buy and sell prices from different market participants and also match and execute their orders with those of institutional market participants. They do this by displaying the best bid and asking for quotes that traders can see.
  • Reliable internet connection: We cannot overemphasize the need for steady access to the internet. It not only plays a major role in determining the most current happenings in the market that could influence one’s trading decisions, but also allows traders to buy and sell instantly. 

Day Trading Parameters

Also worthy of note are some parameters that day traders use while trading. These include:

  • Liquidity, which enables traders to enter and exit the market at a good strike price.
  • Trading volume, which measures the number of times securities are traded within a period. A high trading volume tells us that a lot of traders are interested in that particular security. This also indicates when the price is likely to go up or down.
  • Volatility, which measures the daily price range of the market due to price fluctuations. This provides a chance for traders to profit from the price difference within a short time.

Day Trading Strategies

As we mentioned earlier, several factors act together to make a trade successful, and one of the most important factors that play a key role is the strategy (or strategies) used in trading. There are several strategies that can be helpful in online trading, such as scalping, swing trading, and position trading.

As is the case with online trading, there are strategies that can be used to make day trading successful, all of which involve closing a trading position before the end of the day. Day traders often use one or a combination of either of the strategies below.

Scalping: This is a trading strategy where traders hold trading positions for mere seconds or minutes in a day. This type of strategy aims to make several fast trades with small profit margins and accumulate them throughout the day. Traders who make use of the scalping strategy tend to trade when there is more trading volume and volatility in the market, since they make their profits off the little price movements that occur within minutes or seconds in a day. This means they sell or buy as soon as the trade becomes profitable. They often trade major security pairs that combine high trading volume and liquidity.

News trading: This day trading strategy involves relying on the volatility that occurs as a result of real-time news or events. These types of traders seize the opportunities that come up because of recent happenings or news about the market. For instance, in December 2021, after Elon Musk tweeted about the possibility of purchasing Tesla merchandise with Dogecoin, the meme coin spiked about 10% in value within a few hours after the tweet. This news presented a profitable opportunity for day traders who use the news trading strategy.

Momentum: Traders who use this strategy often look for trendy moves in the market that are supported by high market volume. They ride with the market trend until they observe a decrease in market volume. The high market volume could be because of news or events, so the trader buys ahead of time and sells at the peak of the market or when they notice signs of a decline in the trading volume of a security.

Daily pivots: Day traders who use this strategy aim to buy at the lowest and sell at the highest price for the day. They calculate the daily pivot point for each day, which can be calculated as the average of the highest, lowest, and closing prices from the previous day. The idea is that unless an outside force influences the market, it should typically move relative to its previous limits. This gives traders an idea of the best time to enter or exit the market.

Range trading: This type of day trading relies on the support and resistance levels of the market to determine when to enter or exit the market. Traders who use this strategy often try to determine the support and resistance levels of the market. The idea is that the market will mostly come back to a support or resistance level before it either reverses or breaks through the support or resistance.

High frequency: This strategy is mostly used by banks and large financial institutions that handle major investments. It is based on automation and involves using computers or systems that make use of algorithms to analyze and scan several markets in seconds. These automated systems make it possible for institutions to execute thousands and even millions of trading orders at once, at a top speed. These systems can identify changes in markets and also detect possible upcoming trends in seconds. This gives traders a clear advantage, as they can automate the trickiest parts of their job.

Contrarian trading: Traders who use this day trading strategy believe that a trending market will definitely reverse at some point, be it an uptrend or a downtrend. This means that if the market is going on an uptrend (bullish), it will reverse at some point and go into a downtrend (bearish). They watch out for indications that suggest a reversal in the price of a security and use that information to position themselves properly in the market, or determine their entry or exit points.

Types of Assets You Can Day Trade

Several securities can be traded online, like stocks, currencies, exchange-traded funds (ETFs), gold, cryptocurrencies, and other commodities. Let’s take a look at a few of them, with examples.

Currencies

Trading currencies on the foreign exchange (forex) market is one of the oldest forms of trading, both online and offline. Most forex traders day trade currencies such as US dollars (USD), Great British pounds (GBP), euros (EUR), Japanese yen (JPY), Australian dollars (AUD), Canadian dollars (CAD), Swiss francs (CHF), New Zealand dollars (NZD), and so on.

Some of the most popular pairs that day traders trade are EUR/USD, GBP/USD, USD/CAD, and USD/JPY.

Stocks

We know that stocks or equities represent the ownership of a share or fraction of a company, and they’re traded in the stock exchange market. Day trading stocks is as common as trading currencies. According to an article by Yahoo! Finance, some of the most day-traded stocks include NextPlay Technologies, Inc. (NASDAQ:NXTP), ON Semiconductor Corporation (NASDAQ:ON), Meten Holding Group Ltd. (NASDAQ:METX), Zosano Pharma Corporation (NASDAQ:ZSAN), and Artelo Biosciences, Inc (NASDAQ:ARTL).

Cryptocurrencies

Cryptocurrencies are highly volatile, decentralized digital currencies, and they are one of the most popular assets on the market today. These currencies differ from normal currencies, as they are not backed by banks or the federal government. These currencies have gained popularity in the past decade, and we can use them as a medium of exchange to get assets or other items. There are many different cryptocurrencies, including Bitcoin (BTC), Ether/Ethereum (ETH), Cardano (ADA), Litecoin (LTC), Tether (USDT), and many others, and they can be day traded.

Exchange-Traded Funds

Exchange-traded funds can be likened to a bouquet of different securities that can be traded on the stock exchange market or through a brokerage firm. Most times, these ETFs track certain indexes, sectors, or other assets. Just like stocks, ETFs can be traded. Some examples of ETFs that are commonly day traded include VanEck Vectors Gold Miners ETF (GDX) and SPDR S&P 500 ETF (SPY).

Day Trading vs Swing Trading vs Position Trading

Just like day trading, swing trading and position trading are also types of online trading. The major difference between all forms of trading is the duration it takes to close a trade.

Day trading

Swing trading

Position trading

A day trader closes all trading positions at the end of a trading day.

Swing traders can hold trading positions for days or weeks before closing.

Position traders hold trading positions for months or even years before closing.

Short-term type of trading.

Could be a short- or long-term form of trading.

Long-term form of trading.

Poses a higher trading risk, as most day traders go through days of serious financial loss.

The trading risk is not as high, since the positions are held for longer. However, losses may still occur from time to time.

Poses the smallest trading risks amongst all, as holding a position for longer gives enough time for the trader to make more profit.

This type of trading requires the trader to watch the market frequently, all day long.

Doesn’t require as much attention as day trading, but there is a need to check the market from time to time.

A position trader can watch the market intermittently, as it doesn’t require much attention.

This involves technical analysis, as well as the trader’s awareness of the market.

Swing trading mostly involves technical analysis.

Involves a mix of both technical and fundamental analysis.

Day Trading Risks

Before you venture into anything in life, it’s always advisable to be aware of all the potential risks and benefits involved so you can make informed decisions. The same rule applies here. We can’t talk about what day trading is without highlighting the risks. This is a very risky form of trading, so a complete understanding of the risks involved is necessary.

  1. It can be draining and time-consuming: Because a day trader needs to constantly monitor the market and watch out for price movements throughout the day, this form of trading can be time-consuming, stressful, and tiring.
  2. It is expensive: It requires you to have a minimum of $25,000 in your trading account before you can start trading. Also, because of how time-consuming it is, it often means that you have to pay more to cover your cost of trading, and that can mean paying more for bills, training, commissions where applicable, and other expenses that may arise.
  3. Risk of financial loss: The possibility of suffering severe and regular losses in day trading is quite high, and it’s not uncommon for day traders to lose more than they make. Because some of the strategies involve leveraging, most times when you make more losses than wins, it means that you not only lose your money, but also end up owing your broker and incurring debt. 
  4. Solo day traders don’t have it easy: Being an individual day trader means you’re competing against professional traders who work for big organizations that have all the sophisticated tools and technologies to make their trading process easier and more profitable. It can be tough sometimes, especially when you do not have access to some of these tools or technologies.

How to Day Trade

The steps involved in starting your journey are:

  • Step 1: Ensure that you’re cut out for this type of trading and that it’s what you really want to do. Perform all your research and have a proper understanding of what it entails. If need be, you could consult your financial advisor; several online robo-advisors can also provide financial guidance at an affordable cost. You can also read guides from trade experts online.
  • Step 2: Do research to find the brokerage firm that best suits your needs, then you can open and set up your online trading account.
  • Step 3: Fund your account. Different brokerages have different minimum amounts traders need to put into their accounts before trading. So, depending on the broker you choose and the strategy you intend to use, these prices may differ. For instance, in the US, the minimum legal amount required to day trade stocks is $25,000. However, some brokers may allow you to trade with as little as $1,000 or even $100.
  • Step 4: Decide on the security you want to trade and determine the strategy that would work best for you.
  • Step 5: Get some practice with a demo account and learn day trading strategies until you feel confident enough to trade with real money in your live account. Most brokers offer demo accounts to enable traders to perfect their skills before trading.
  • Step 6: Where necessary, you could trade with limit orders to minimize your trading risks.
  • Step 7: Always stay at the top of your game and keep yourself informed about recent happenings in the market, as well as new trends and advancements.

Day Trading Best Practices

It’s not enough to simply ask “what is day trading?” You also need to know what it takes to be a great day trader. Below are a few best practises and attributes of a good day trader.

Knowledge

Be knowledgeable about the market and understand all it entails so you can make informed trading decisions. This type of trading is risky, and you don’t want to trade blindly or without a proper understanding of the market. In-depth knowledge of the fundamental and technical analysis of the market and price charts is a great way to increase your expertise in this field.

Strategy

You need to have a trading strategy based on your risk tolerance and what works best for you. Knowing how to start day trading is not enough on its own. Having a plan gives you an edge and increases your chance of making profits. There are several strategies available to help you maximize your trades and know when to enter and exit the market.

Discipline

Being a successful day trader entails a high level of discipline. You need to be disciplined so you don’t stray from your plan or trade with your emotions. Stick to your plan, stay cool, and trade with logic, setting aside fear, impatience, or doubts. You don’t have to take every trade; instead wait for the ones you feel more confident about.

Dedication

Day trading requires the utmost dedication to the craft. It is highly demanding, as you’ll constantly need to monitor the market so you can take advantage of opportunities that may arise.  

Wisdom

Make sure you have sufficient capital to kick-start your journey. Don’t trade with all your income, or with funds set aside for important projects. It’s important to trade with an amount that you don’t mind losing. Do not over-leverage, as you could lose it all.

Realism

Knowing how to be a day trader isn’t enough on its own; you also have to be realistic about your expectations. This is not a get-rich-quick scheme; it involves a lot of work, so you need to be realistic about the profits you hope to make, as well as the inevitable losses on bad day. Keep greed aside and focus on the quality of trades you take, rather than the quantity.

Conclusion

There’s no surefire way to know whether or not day trading will be good for you, as the decision depends solely on you. We’ve given you a definition of day trading, while also highlighting how it works and the risks involved.

While this type of trading can be very lucrative, it’s also highly risky, hence the need for you to have a proper understanding of what it involves before becoming a day trader. If you think this is for you, then by all means learn extensively about the market, choose the security you’d love to trade, select the most suitable broker for you, and trade with discipline, knowledge, and patience.

FAQ

What is considered day trading?

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Day trading refers to any form of trading where a trader closes all trading positions at the end of the trading day.

Is day trading illegal?

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The risks and financial implications of this form of trading may stir up controversies among various people. However, it is neither illegal nor unethical, regardless of the risks.

Why is day trading bad?

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We can’t say that day trading is bad, as it provides a means for many people to earn more money. However, there are risks involved that could be very detrimental depending on the individual. Factors such as severe financial loss, debt, stress, and increased expenses are some potential downsides of day trading.

What is day trading and how does it work?

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Day trading is a short-term form of online trading where a trader buys and sells financial securities through an online broker within a trading day. Day traders take advantage of the small price fluctuations or changes that occur on the market, using high leverage to try to make profits daily. It requires traders to understand the market and study its daily movements. Day traders close all trading positions at the end of the trading day.

About author

I have always thought of myself as a writer, but I began my career as a data operator with a large fintech firm. This position proved invaluable for learning how banks and other financial institutions operate. Daily correspondence with banking experts gave me insight into the systems and policies that power the economy. When I got the chance to translate my experience into words, I gladly joined the smart, enthusiastic Fortunly team.

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