Day Trading Basics: What You Need to Know (2024)

Day traders are professional investors who make their money trading stocks and other assets. With an intense level of discipline and deep knowledge of market trends, they strive to capitalize on the minute-to-minute, hour-to-hour churn ofthe stock market.

With the advent of low-cost online brokerage platforms, day trading tools have become readily available to everyone. With patience and focus, everyday people can implement and benefit from the same fast-paced strategies that used to be the exclusive domain of Wall Street professionals.

What is day trading?

Day trading involves the frequent buying and selling of securities during the trading day. Day traders try to anticipate and make money from intraday price changes in assets such as stocks, bonds, commodities and exchange-traded funds.

As the name suggests, day trading is a short-term investment strategy. The goal is to close all your trades at the end of the day, without holding securities overnight.

Compare this access tolong-term investment, where you buy and hold the same position for months or even years. Instead of waiting for time and compound interest to do the work for them, day traders try to beat the market and generate quick profits.

While day trading may seem exciting and lucrative, it is actually gambling with all the potential rewards and risks you would have if you gambled any other way. It requires a high level ofrisk toleranceand lots of practice to get it right.

How to start day trading

Commission-free online brokerage accounts have made day trading much easier and more cost-effective. Previously, you had to call a stock broker to execute trades. Not only was this very time consuming, but it also cost you a lot more per piece trade. Moreover, amateur investors did not have easy access to market data.

Today,the best online brokerage platformssuch as Interactive Brokers or TradeStation allow you to quickly execute trades from home at much lower costs. Most charge no commission on stock and ETF trades, as well as many other types of securities. They also provide a lot of detailed market data for free.

Once you have created your investment account, it will give you access to buying and selling investments. It also gives you access to various research tools such as charts, market news, scanners andstock screeners.

As a day trader, you identify the markets and investments you want to focus on. Then, throughout the day, you try to buy and sell positions that will make you money, such as buying a stock right before an announcement pushes the price up and then selling when you think the price will peak.

The best online brokerage platforms allow you to automate part of the processdifferent order types, including limits on how much of a stock you buy at what price, and limits on what you sell a stock for. For example, you can set your account to buy 100 shares of XYZ stock if it ever reaches $20.00 per share. share, and to sell your 100 shares if it ever reaches $25.00 per share. stock.

6 common day trading strategies

When you day trade, you use a strategy to identify profitable investments. Some of the popular strategies used are as follows.

Buy the news

Day traders pay close attention to the news to make a profitmarket volatilityduring major events, such as before the announcement of the latest jobs report or a change in interest rates by the Federal Reserve.

They try to predict the direction in which asset prices will move in response to major news events, or look for assets that have not yet been fully priced in response to a news event.

This strategy also works when traders follow the news flow for specific asset classes or individual stocks. Trading a publicly traded company before and after the publication of a quarterly report is a common approach.

chain trade

Range traders attempt to identify assets that normally trade within a fixed price range. The trader aims to buy when the market price of the investment is near the bottom of the range, and tries to sell when it is near the top of the range.

Range trading requires precise timing and inaccurate order execution can lead to significant losses. Sudden news or market events can break price ranges, leading to abrupt or adverse price movements.

Scalperen

Scalping is a faster version of range trading, which also involves trying to buy and sell small price changes for an investment. With scalping, a day trader can buy and sell hundreds of times a day for one investment and try to make a small profit on each small move. Scalpers follow short-term price charts and try to find these trends.

Momentum trading

Shares and other investments are always subject to general price developments. If a stock loses money one day, it can continue to lose money while other investors lose money. Meanwhile, a stock that has risen in price can continue to rise as other investors jump on the bandwagon.

Momentum investors attempt to profit from these price trends by exploiting the principle that past price movements can be indicative of future trends. Momentum traders often use technical indicators and chart patterns to identify entry and exit points.

Descending

When fading, a day trader follows onecontradictory thinking. The trader buys assets that have sold off strongly or sells assets that have increased in value. A trader using a fading strategy predicts that herd mentality is pushing prices too far in either direction.

The goal is to make a profit when markets overreact to news or events. Traders assume that prices will eventually revert to the mean. But fading can be a high-risk strategy because it goes against the current trend and can lead to losses if the market does not return to equilibrium levels quickly.

Exploitation

Day traders often use leverage for their investments. This means trading with borrowed money using margin.Margin tradinghas the chance of much higher profits if your trades go well, but you can also lose money much faster. Your broker also charges interest on margin loans.

Past performance is no guarantee of future performance

None of these strategies are guaranteed to work perfectly, even sometimes. The fact that an investment has followed a recognizable pattern in the past does not mean that it will continue to do so in the future. Although past performance can help us predict future results, it cannot be guaranteed.

Benefits of day trading

• Potential for quick profits.Every decision you make as a day trader is an opportunity to make money. If every trade works, and that's a big if, you can make money much faster than a normal investor. Online courses often promote this lucrative benefit when they promote day trading.
• Easy access.Modern broker platforms make it easier to trade daily than in the past. You can configure everything via your home computer and smartphone.
• It's not boring.Day trading offers a level of excitement not seen in buy-and-hold investing. There is an urgency to do research, see an opportunity and get a successful transaction. Talking about how your 401(k) doubled in seven years isn't as impressive at a dinner party as talking about how you doubled your money in one day.
• No overnight risk.Day traders usually close all their investment positions before the market closes each day. As a result, they are not exposed to further losses during the night. Regular investors still hold positions and can lose money if something happens overnight while they are unavailable for trading, such as a news story that hurts their portfolio.
• Work for yourself.Some professional traders make their money from day trading. If you enjoy this strategy enough and make it work for you, it can become your main activity.

Disadvantages of day trading

• High chance of loss.Day trading is a high-risk, high-reward strategy. If your decisions don't work out, you can lose money much faster than a regular investor, especially if you use leverage. A two-year survey of 1,600 day traders found that 97% of people who day traded for more than 300 days lost money. Being successful in day trading requires more than dedication and education, but a significant amount of luck.
• Fees and taxes.Although trading fees are lower than in the past, you may still be charged fees for certain types of trades, especially high volume ones. You also owe higher taxes than ordinary investors. If you sell an investment with profits that you have owned for less than a year, you will owe a higher tax rateshort-term capital gainswith regard to long-term capital gains.
• Much stress.The markets move quickly and it can be very stressful to see your balance go up and down, especially if your trades don't work. Day trading is a form of gambling and can be addictive, putting a strain on your health and your relationship.
• Time-consuming and challenging.Day trading requires a significant time commitment. Not only do you have to spend hours tracking and executing your trades, you also have to research the market and your strategies. It's also challenging to make money when you're competing with all the other investors, including professionals who work for large financial institutions.
• Requires deep pockets.Financial regulations require you to have at least $25,000 in your trading account to be a day trader. You may want even more to protect yourself from losses and have money ready for transactions.

Day trading is not for everyone

The vast majority of day traders lose money. While a select few are able to generate stable profits, these are generally people who have had a career in the financial industry or have dedicated themselves to studying markets.

Successful day traders dedicate themselves to the practice full-time. If you are simply looking for a way to get rich quick through day trading, you are unlikely to succeed. And getting advice and coaching from self-proclaimed experts on TikTok won't help at all.

There are much easier, less risky ways to make money investing. If you're not already tapping into your retirement accounts, this is a good place to start. You benefit from tax benefits now, investment growth later, and your money is still available to you. Consider investing in your retirement accountsbroad index fundsfor a low-risk way to still benefit from investment growth over time.

What is needed for Day Trade?

If you think you want to trade today, here's what you'll need to get started:

• A broker platform with research tools.Some trading platforms are more suitable for day trading than others. If you want a recommendation, check it outbest online brokers for day traders.
• Investment capital.The Financial Industry Regulatory Authority (FINRA) requires a minimum of $25,000 in your trading account to enable day trading. Otherwise, the broker will limit your trading options. You may need more capital depending on the number of trades you plan to make.
• Skills and knowledge.You need to understand what you are doing with your trades. To find out which day trading strategies you would like to use, take a day trading course. You can also take a business or investment course at your local community college.
• Market news and research.Consider how you will research your transactions. Some platforms offer ongoing market research. You may also want to sign up for newsletters or join online day trader forums to share advice.
• A lot of time.Determine when you can trade. It's something you should focus on when the markets are open, which is during normal business hours and can conflict with a regular job.
• The right mentality.Consider whether you can tolerate short-term losses for today's trading profits. And whether you are willing to work for this risky strategy.

Is day trading profitable?

Day trading is hard. AStudy from the University of Berkeleyfound that 75% of day traders quit within two years. The same study found that the majority of transactions, up to 80%, are unprofitable. While some day traders are ultimately successful and make a lot of money, they are the exception rather than the norm.

If you want to try day trading, start small and don't tie up your entire investment account. Test strategies and learn without risking all your savings.

Talk to oneFinancial Advisorto plan ahead to limit your losses if you are not successful, and to minimize capital gains taxes if you are one of the lucky few who make a net profit after a year of day trading.