Day Trading: The Basics and How to Get Started

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Day Trading: The Basics and How to Get Started

Years ago, the only individuals who could actively trade in the stock market were those who worked for huge financial institutions, brokerages, and trading houses. The advent of internet trade, as well as immediate news distribution, has leveled the playing—or should we say trading—field. The user-friendly trading applications and 0% fees offered by firms such as Robinhood, TD Ameritrade, and Charles Schwab have made it simpler than ever for individual investors to try their hand at trading like the experts.

Day trading may be a successful vocation (as long as you do it properly).However, it might be difficult for beginners, particularly those who do not have a well-planned approach. Also, even the most experienced day traders may run into trouble and lose money.

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

Key Takeaways

  • During the trading day, day traders purchase and sell stocks or other assets in order to benefit from price variations.
  • To benefit on these perceived market inefficiencies, day traders adopt a broad range of approaches and strategies.
  • Technical analysis of price movements is often used to guide day trading, which involves a high level of self-discipline and impartiality.

The Basics of Day Trading

Day trading is purchasing and selling a large number of securities in a single day, or even seconds. It has nothing to do with conventional investment. It takes advantage of the inevitable ups and downs in price that occur throughout a trading session.

Day trading is most frequent in stock markets and in foreign exchange (forex) markets, where currencies are exchanged.

Day traders are often well-educated in the nuances of trading and well-funded. Many of them enhance the risk by employing debt to boost the amount of their investments.

Day traders are acutely aware of factors that drive short-term market movements. One prominent strategy is trading based on news. Scheduled releases, such as economic data, business profits, or interest rate announcements, are influenced by market expectations and psychology. That is, markets respond when expectations are not fulfilled or surpassed, frequently with fast, big changes that favor day traders considerably.

Day traders use a variety of intraday methods. Among these tactics are:

  • Scalping is a technique that focuses on generating a lot of modest gains on transitory price swings that happen throughout the day.
  • Range trading: This approach determines the trader’s buy and sell choices by using pre-determined price support and resistance levels.
  • News-based trading: This technique capitalizes on the increased volatility that happens around news events.
  • High-frequency trading (HTF): These tactics target modest or short-term market inefficiencies using sophisticated algorithms.

Why Day Trading Is Controversial

The profitability of day trading is a frequently disputed issue on Wall Street. Internet day-trading scams have attracted novices by promising huge profits in a short period of time.

Some individuals engage in day trading without enough understanding. However, some day traders succeed despite – or maybe because of – the dangers.

Day trading is avoided by many experienced money managers and financial consultants. They contend that the gain does not always outweigh the danger. Furthermore, many economists and financial practitioners claim that active trading techniques of any type tend to outperform a more basic passive index approach over time, particularly when fees and taxes are included in.

Profiting via day trading is conceivable, but the success rate is intrinsically lower due to the risk and expertise required. And don’t underestimate the importance of chance and timing. Even the most expert day trader may be destroyed by a stroke of bad luck.

How Does a Day Trader Get Started?

Professional day traders—those who trade for a living rather than for fun—are usually highly established in the industry. They typically have extensive understanding of the industry as well. Here are some of the requirements for being a good day trader.

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Knowledge and Experience in the Marketplace

Individuals who try to day trade without knowing market fundamentals often lose money. A basic understanding of technical analysis and chart reading is a fantastic place to start. However, without a thorough grasp of the market and its specific hazards, charts may be misleading.

Perform your due research and grasp the specifics of the things you trade.

Sufficient Capital

Day traders that are wise employ only risk funds that they can afford to lose. This keeps businesses from becoming bankrupt and helps them remove emotion from their trading judgments.

To properly profit on intraday price changes, which might be in pennies or fractions of a penny, a substantial amount of cash is sometimes required.

Day traders who wish to employ leverage in margin accounts must have enough cash on hand. Volatile market fluctuations might prompt large margin calls with little warning.

Day Trading Strategies

A trader must have a competitive advantage over the rest of the market. Day traders use a variety of methods, such as swing trading, arbitrage, and trading news. They fine-tune these techniques until they generate regular profits while limiting their losses.

There are also some fundamental day trading guidelines that should be followed: Make sound trading decisions. Plan your access and departure locations ahead of time and stick to them. Identify trends in your selections’ trading behavior in advance.

Strategy Breakdown
Swing TradingHighHigh
Trading NewsMediumMedium


Many day traders lose money because they do not execute transactions that satisfy their own criteria. “Plan the trade and trade the plan,” as the phrase goes. Without discipline, success is impossible.

Day traders depend largely on market volatility to benefit. A stock that swings a lot throughout the day may appeal to a day trader. This might occur for a variety of reasons, including an earnings release, investor mood, or broader economic or corporate news.

Day traders also like highly liquid equities since they allow them to adjust their position without affecting the stock’s price. Traders may enter a buy position if the price of a stock rises. If the price declines, a trader may elect to sell short in order to profit when the price lowers.

A day trader, regardless of strategy, is typically trying to trade a stock that moves (a lot).

Who Makes a Living by Day Trading?

Professional day traders are classified into two types: those who operate alone and/or those who work for a bigger organization.

The majority of day traders who trade for a livelihood work for big players such as hedge funds and bank and financial institution proprietary trading desks. These traders benefit from advantages like as direct links to counterparties, a trading desk, substantial quantities of cash and leverage, and sophisticated analytical tools.

Typically, these traders are searching for quick returns on arbitrage chances and news events. Their resources enable them to profit from these less hazardous day transactions before individual traders can.

The Solo Day Traders

Individual traders often handle or trade with other people’s money. Few have access to a trading desk, but they often have significant relationships to a brokerage owing to huge commissions and access to other resources.

However, because to the restricted scope of these resources, they are unable to compete directly with institutional day traders. Instead, they are compelled to take more risks. Individual traders often use technical analysis and swing trades, along with some leverage, to achieve sufficient returns on minor price swings in highly liquid equities.

Day trading requires access to some of the most complicated financial services and instruments available. Day traders usually need all of the following:

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Access to a Trading Desk

This is often reserved for traders working for bigger institutions or those in charge of huge sums of money.

The trading or dealing desk ensures that these traders’ orders are executed promptly, which is critical. For example, when a merger is announced, day traders interested in merger arbitrage may place their orders before the rest of the market and benefit from the price discrepancy.

Multiple News Sources

The majority of the possibilities are provided by news. It is critical to be the first to learn when something major occurs.

A typical trading room includes access to all of the major newswires, continuous coverage from news organizations, and software that continuously checks news sources for key stories.

Analytical Software

For most day traders, trading software is a costly need. Those who use technical indicators or swing trades depend on software rather than news. This program is distinguished by the following features:

  • This trading tool recognizes technical indicators such as flags and channels, as well as more complicated indicators such as Elliott Wave patterns.
  • These programs employ neural networks and genetic algorithms to improve trading systems and produce more accurate forecasts of future price changes.
  • Broker integration: Some of these programs even connect directly to brokerages, allowing for fast and even automated transaction execution. This reduces trading emotion and improves execution speeds.
  • Backtesting: This enables traders to look at how a certain strategy worked in the past to better forecast how it will perform in the future. Remember that previous success is not necessarily predictive of future outcomes.

When used together, these instruments provide traders an advantage over the rest of the market.

Risks of Day Trading

Day trading may be intimidating for the typical investor due to the quantity of risks involved. The Securities and Exchange Commission (SEC) of the United States emphasizes some of the dangers associated with day trading, which are outlined below:

  • Prepare to incur significant financial losses: Day traders generally incur significant financial losses in their initial months of trading, and many never earn a profit.
  • Day trading is a full-time career that is incredibly stressful: Observing hundreds of ticker quotes and price swings in order to discover transitory market patterns takes intense attention.
  • Day traders rely significantly on borrowed funds: Day-trading techniques benefit by using borrowed money as leverage. Many day traders not only lose all of their money, but they also get into debt.
  • Don’t trust boasts of quick riches: Be wary of hot tips and expert advise from day trading newsletters and websites, and keep in mind that educational seminars and lectures regarding day trading may not be impartial.

Should You Start Day Trading?

If you are determined to begin day trading, you must be willing to commit to the following steps:

  • Make sure you’re familiar with the trading industry and have a solid sense of your risk tolerance, money, and ambitions.
  • Prepare to devote time to practicing and perfecting your techniques.
  • Begin small. Concentrate on a few stocks rather than spreading yourself too much. Going all in will complicate your trading approach and might result in large losses.
  • Maintain your composure and strive to keep emotions out of your deals. Don’t stray from your strategy.

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

Day Trading Example

A day trade is the same as any other stock deal, except that the buy and sale of a stock occur on the same day, and frequently within seconds of each other.

For example, say a day trader has completed a technical analysis of a company called Intuitive Sciences Inc. (ISI) (ISI).The analysis indicates that this stock, which is listed in the Nasdaq 100, shows a pattern of rising in price by at least 0.6% on most of the days when the NASDAQ is up more than 0.4%. The trader has reason to believe that this is going to be one of those days.

  The TSX Venture Exchange (TSX-V)

The trader purchases 1,000 shares of ISI when the market opens, then waits until ISI hits a certain price threshold, which is likely to be up 0.6%. The trader then sells his whole position in ISI.

This is a one-day transaction. Obviously, the advantages of ISI as an investment have nothing to do with the conduct of the day trader. A trend is being capitalized on.

What if ISI had deviated from the trend and lost 0.8%? The trader will sell anyhow and accept a loss.

How Do I Get Started Day Trading?

A good day trader is well-versed in technical analysis. Identifying trading opportunities by analyzing and graphing price and volume movement patterns in a stock (or any other investment).The long-term trend depicts how the stock has performed in the past and predicts how it will perform in the near future.

Nowadays, technical analysis is seldom done on paper and pencil. There are software programs available to assist in the creation of charts and graphs for this purpose.

Before making a single deal, the day trader must also have a strategy in place. Which stocks to trade and what price points are appropriate for purchasing and selling must all be determined ahead of time. A skilled day trader makes no allowance for impulsive purchases.

Finally, even a single day trader need a trading desk that is fully equipped with the news services, real-time data, and brokerage services required to carry out the strategy.

If you want to trade on margin, you’ll also need a large sum of money on deposit with the broker. This is not suggested for a beginning since there is a big chance of the trader becoming bankrupt and deep in debt.

It is much preferable to begin with whatever amount of money you can afford to lose.

What Is the First Rule of Day Trading?

The first rule of day trading is to never keep a position after the market has closed for the day. Sell out whether you win or lose.

Most day traders make it a habit never to maintain a losing position overnight in the aim of recouping some or all of their losses.

For starters, brokers have greater margin requirements for overnight trading, which means more cash is needed.

There’s a reason behind this. Overnight news may cause a stock to fall or rise, resulting in a larger trading loss for shareholders.

What Are the Margin Requirements for Day Traders?

What Is Day Trading’s Buying Power?

Buying power refers to an investor’s total capital available to trade securities, which equals cash in the account plus available margin.

A broker-dealer customer identified as a pattern day trader may trade up to four times their maintenance margin excess as of the previous day’s market closing, according to FINRA guidelines.

The Bottom Line

Day traders may make large gains or incur large losses. It’s a highly dangerous job path.

Day traders, both institutional and individual, would claim that they contribute significantly to market efficiency and liquidity.

Though day trading will always be appealing to individual investors, anybody contemplating it must first obtain the necessary expertise, resources, and capital.

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