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

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Day traders are professional investors who make a living by trading stocks and other assets. Thanks to an intense level of discipline and deep knowledge of market trends, they aim to profit from the minute-to-minute, hour-to-hour churn of the stock market.

With the rise of low-cost online brokerage platforms, the tools for day trading have become easily accessible to everyone. With patience and focus, regular folks can deploy and profit from the same fast-paced strategies that used to be the exclusive domain of Wall Street pros.

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What Is Day Trading?

Day trading involves frequently buying and selling securities throughout the trading day. Day traders attempt to anticipate and make money from intraday price changes in assets like stocks, bonds, commodities, and exchange-traded funds.

As the name suggests, day trading is a short-term investment strategy. The goal is to exit all your trades by the end of the day, holding no securities overnight.

Contrast this approach to long-term investing, 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 attempt to beat the market and generate quick profits.

While day trading may seem exciting and lucrative, it is effectively gambling with all of the potential upsides and risks you’d have betting through any other avenue. It requires a high level of risk tolerance and a great deal of practice to get right.

How to Start Day Trading

Commission-free online broker accounts have made day trading much easier and cost effective. In the past, you needed to call a stockbroker to make trades. Not only was this very time-consuming, but it also cost you much more per trade. In addition, amateur investors did not have easy access to market data.

Today, the best online brokerage platforms like Interactive Brokers or TradeStation allow you to execute trades quickly from home, with much lower fees. Most charge no commissions on stock and ETF trades, as well as many other types of securities. They also offer reams of detailed market data for free.

Once you have your brokerage account set up, it will give you access to buy and sell investments. It would also give you access to numerous research tools like charts, market news, scanners and stock screeners.

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

Top online brokerage platforms allow you to automate some of the process using different order types, including limits on how much of a stock you’ll buy at what price, and limits on what you’ll sell a stock for. For example, you could set up your account to buy 100 shares of XYZ stock if it ever hits $20.00 a share and to sell your 100 shares if it ever hits $25.00 a share.

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6 Common Day Trading Strategies

When you day trade, you use some strategy to identify profitable investments. Some of the popular strategies used include the following.

Trade the News

Day traders pay close attention to the news in order to profit from market volatility during major events, like before the announcement of the latest jobs report or an interest rate change from the Federal Reserve.

They attempt to predict the direction asset prices will move in response to major news events, or look for assets that have not fully repriced in response to a breaking news event.

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

Range Trading

Range traders try to identify assets that commonly trade within a set price range. The trader aims to buy when the investment’s market price is near the low end of the range and aims to sell as it gets close to the high end of the range.

Range trading requires precise timing, and executing orders inaccurately may result in significant losses. Sudden news or market events can break the price ranges, leading to abrupt or unfavorable price movements.

Scalping

Scalping is a faster version of range trading, also trying to buy and sell off small price changes to an investment. With scalping, a day trader may buy and sell hundreds of times daily for one investment, trying to earn a small profit from each tiny movement. Scalpers follow short-term price charts trying to find these trends.

Momentum Trading

Stocks and other investments are always subject to general price trends. If a stock loses money one day, it might keep losing money as other investors cash out. Meanwhile, a stock that has been going up in price may keep gaining as other investors jump on the bandwagon.

Momentum investors try to take advantage of these price trends, taking advantage of 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.

Fading

In fading, a day trader follows a contrarian mindset. The trader buys into assets that have been heavily sold or sells assets that have gone up in value. A trader using a fading strategy predicts that the herd mentality pushes prices too far in either direction.

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

Leverage

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

Past Results Do Not Guarantee Future Performance

None of these strategies are guaranteed to work perfectly, even some of the time. Just because an investment has followed an identifiable pattern in the past doesn’t mean it will continue to in the future. While past performance can help us guess at future results, it can’t guarantee them.

Advantages of Day Trading

  • Potential for quick profits. Every decision you make as a day trader is a chance to make a profit. If every trade works out, and that’s a big if, you can make money much more quickly than a normal investor. Online courses often promote this lucrative upside when promoting day trading.
  • Easy access. Modern brokerage platforms make it easy to day trade versus in the past. You can set everything up using your home computer and smartphone.
  • It’s not boring. Day trading offers a level of excitement not seen with buy-and-hold investing. There’s a rush from putting in the research, seeing an opportunity and landing a successful trade. Talking about how your 401(k) has doubled in seven years isn’t as impressive at a dinner party as sharing how you doubled your money in a single day.
  • No overnight risk. Day traders usually close out all their investment positions before the market closes each day. As a result, they are not exposed to any further losses at night. Regular investors still hold positions and could lose money if something happens overnight when they aren’t available to trade, like a breaking news report that hurts their portfolio.
  • Work for yourself. Some professional traders make a living from day trading. If you enjoy this strategy enough and make it work for you, it could become your primary profession.

Downsides of Day Trading

  • High probability of losses. Day trading is a high-risk, high-reward strategy. If your decisions don’t work out, you can lose money much more quickly than a regular investor, especially if you use leverage. A study of 1,600 day traders over the course of two years found that 97% of individuals who day traded for more than 300 days lost money. Succeeding in day trading takes more than diligence and education, but a significant amount of luck.
  • Fees and taxes. While trading costs are lower than in the past, you could still owe fees for certain types of trades, especially at high volumes. Also, you owe higher taxes than regular investors. If you sell an investment for a gain you’ve owned for less than a year, you owe a higher tax rate for short-term capital gains versus the long-term capital gains rate.
  • High stress. Markets move quickly, and seeing your balance swing up and down can be very stressful, especially if your trades aren’t working out. Day trading is a form of gambling and can become addictive, putting strain on your health and relationships.
  • Time-consuming and challenging. Day trading requires a significant time commitment. Not only do you need to spend hours tracking and making your trades, you also need to research the market and your strategies. It’s also challenging to make money as you compete against all other investors, including professionals that work for major financial institutions.
  • Requires deep pockets. Financial regulations require you to have at least $25,000 in your brokerage account to be a day trader. You may want to have even more to give yourself a buffer against losses and to have money ready for trades.

Day Trading Is Not for Everyone

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

Successful day traders apply themselves to the practice as a full-time job. If you’re simply looking for a way to get rich quick on the side through day trading, you are unlikely to succeed. And taking advice and coaching from self-defined experts on TikTok is not going to help at all.

There are much easier, less risky options to earn money by investing. If you aren’t already maxing out your retirement accounts, those are a great place to start. You’ll benefit from tax advantages now, investment growth later and your money is still accessible to you. Within your retirement accounts, consider investing in broad-based index funds for a low-risk way to still benefit from investment growth over time.

What Does It Take to Day Trade?

If you think you’d like to day trade, here’s what you need to get started:

  • A brokerage platform with research tools. Some trading platforms are more suitable for day trading than others. If you’d like a recommendation, check out the best online brokers for day traders.
  • Investment capital. The Financial Industry Regulatory Authority (FINRA) requires at least $25,000 in your brokerage account to allow day trading. Otherwise, the broker will restrict your trading ability. You may need more capital depending on how many trades you plan on making.
  • Skills and knowledge. You must understand what you’re doing with your trades. You could take a day trading course to figure out which day trading strategies you’d like to use. You could also take a business or investing class at your local community college.
  • Market news and research. Consider how you’ll research your trades. Some platforms provide ongoing market research. You may also want to sign up for newsletters or join online day trader forums to share advice.
  • Plenty of time. Decide when you’ll be able to day trade. It’s something you need to focus on when markets are open, which is during normal business hours and could conflict with a regular job.
  • The right mindset. Consider whether you can stomach short-term losses for the day trading gains. And if you’re willing to put in the work for this high-risk strategy.

Is Day Trading Profitable?

Day trading is tough. A University of Berkeley study found that 75% of day traders quit within two years. The same study found that the majority of trades, up to 80%, are unprofitable. While some day traders end up 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 do not commit your entire investment account. Test out strategies and learn without risking all your savings.

Talk with a financial advisor to plan ahead for mitigating your losses if you’re unsuccessful and minimizing the capital gains taxes if you happen to be one of the lucky few who ends up at a net gain after a year of day trading.

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