Day Trading: The Basics and How to Get Started

What is Day Trading

The buying or selling of a currency within the same calendar day is known as currency day trading. In this case, all trades are completed in the same day and nothing is held overnight.

Historically, the only people allowed to trade actively in the stock market were those working for large financial institutions, brokerages, and trading houses. However, after laws were passed, enabling small investors to participate in currency day trading; the arrival of online trading as we know it today, along with instantaneous dissemination of news, have leveled the trading field.

We now have an array of easy-to-use trading apps and 0% commissions of services like Etoro, Robinhood, and Charles Schwab that have made day trading accessable for everyone.

Day trading can be a profitable business as long as you know what you are doing and you do it properly. But it can be challenging for beginners—especially those who don't educate themselves in the art of trading and adapt a trading strategy of their own. And be aware that even the most experienced day traders can hit rough patches and experience huge losses, especially, if they deviate away from their trading strategy.

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

KEY TAKEAWAYS

Day traders buy and sell stocks or other assets during the trading day in order to profit from the rapid fluctuations in prices.
Day trading employs a wide variety of techniques and strategies to capitalise on these perceived market fluctuations.
Day trading is often supported with technical analysis of price movements, fundamental analysis of stcok market news and requires a high degree of self-discipline and objectivity to implement a trading strategy and stick to it.

The Basics of Day Trading

Day trading means buying and selling a batch of securities within a day, or even within seconds. It has nothing to do with investing in the traditional sense. It is exploiting the inevitable up-and-down price movements that occur during a trading session.

Day trading is most common in the stock markets and on the foreign exchange (forex) where currencies are traded.

Day traders are typically well-educated in every detail of trading and tend to be well funded. Many of them add an additional level of risk by using leverage to increase the size of their stakes.

Day traders are attuned to news events that cause short-term market moves. Trading based on the news is one popular technique. Scheduled announcements such as the release of economic statistics, corporate earnings, or interest rate announcements are subject to market expectations and market sentiment. That is, 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 focuses on making numerous small profits on temporary price changes that occur throughout the day.
Range Trading: This strategy uses pre-determined support and resistance levels in prices to determine the trader's buy and sell decisions.
News-based trading: This strategy seizes trading opportunities from the heightened volatility that occurs around news events.
High Frequency Trading: (HTF): These strategies use sophisticated algorithms to exploit small or short-term market inefficiencies.

Why Day Trading Is Controversial

The profit potential of day trading is an often-debated topic on Wall Street. Internet day-trading scams have lured amateurs by promising enormous returns in a short period of time.

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. Moreover, many economists and financial practitioners argue that active trading strategies of any kind tend to underperform a more basic passive index strategy over time especially after fees and taxes are taken into account.

Profiting from day trading is possible, but the success rate is inherently lower because it is risky and requires considerable skill. And don’t underestimate the role that luck and good timing play. A stroke of bad luck can sink even the most experienced day trader.

Types of Day Traders

The professional day traders are divided into two primary categories, those who work alone and those who work for a larger institution. Most of the traders work for a larger institution as they are given access to greater resources. Large amounts of capital and leverage, expensive analytical software, and a direct line to a dealing desk are some of the facilities given to the trader who work with big companies. On the other hand, individual traders mostly manage other people’s accounts or just trade their own. As these people have limited resource access, it prevents them from competing directly with institutional day traders.

How Does a Day Trader Get Started?

Professional day traders—those who trade for a living rather than as a hobby—are typically well established in the field. 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. A working knowledge of technical analysis and chart reading is a good start. But without a deep understanding of the market and its unique risks, charts can be deceiving.

Sufficient Capital

Wise day traders use only risk capital that they can afford to lose. This protects them from financial ruin and helps eliminate emotion from their trading decisions.

A large amount of capital is often necessary to capitalise effectively on intraday price movements, which can be in pennies or fractions of a cent.

Adequate cash is required for day traders who intend to use leverage in margin accounts. Volatile market swings can trigger big margin calls on short notice.

Risks of Day Trading

For the average investor, day trading can be a daunting proposition because of the number of risks involved.

Be prepared to suffer severe financial losses: Day traders typically suffer severe financial losses in their first months of trading, and many never make a profit.
Day trading is an extremely stressful full-time job: Watching dozens of ticker quotes and price fluctuations to spot fleeting market trends demands great concentration.
Day traders depend heavily on borrowing money: Day-trading strategies use the leverage of borrowed money to make profits. Many day traders not only lose all of their own money, they wind up in debt.
Don’t believe claims of easy profits: Watch out for adverts with traders in front of Ferarri's or 10 million dollar mansions or claims that traders can make you thousands of profits a day. Its simply not true.

Should You Start Day Trading?

If you're determined to start day trading, be prepared to commit to the following steps:

Make sure you come in with some knowledge of the trading world and a good idea of your risk tolerance, capital, and goals.
Be prepared to put in the time to practice and perfect your strategies.
Start small. Focus on a few stocks rather than wearing yourself thin.
Stay cool and try to keep emotion out of your trades. Don't deviate from your plan.
Open a demo account and practise practise practise.

The Bottom Line

Day traders can earn big profits or pile up big losses. It's an extremely risky business to be in.

Day traders, both institutional and individual, would argue that they play an important role in the marketplace by keeping the markets efficient and liquid.

Though day trading will always be intriguing to individual investors, anyone considering it needs to acquire the knowledge, the resources, and the cash that it takes to have a chance at succeeding.