There was a time years ago when the only people able to trade actively in the stock market were those working for large financial institutions, brokerages, and trading houses. The arrival of online trading, with the instantaneous dissemination of news, has leveled the playing field. Easy-to-use trading apps and the 0% commissions of services like Robinhood and Charles Schwab have made it easier than ever for retail investors to trade.
Day trading can be lucrative as long as you do it properly (though there is never a guarantee). However, it’s typically challenging for novices and often a losing way for newer investors to trade. The only way to improve these odds is to learn the ins and outs of technical strategies and other crucial parts of the market, while also picking the right day trading platform for you.
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 to profit from the rapid fluctuations in prices.
- Day trading employs various techniques and strategies to capitalize on these perceived market inefficiencies.
- Day trading is often informed by technical analysis of price moves and requires a high degree of self-discipline and objectivity.
What Is Day Trading?
Day trading is a fast-paced form of investing in which individuals buy and sell securities within the same day. The goal is to profit from short-term price movements in stocks, options, futures, currencies, and other assets. Day traders typically combine strategies and forms of analyses, including the following:
- Technical analysis: Focuses on past prices and trading patterns to predict coming trends.
- Momentum trading: Capitalizes on short-term trends and reversals to capture quick gains.
Unlike long-term investors, day traders are less concerned with the fundamental value of the securities and more focused on capturing immediate gains from market fluctuations.
How Does Day Trading Work
Day trading, a high-stakes approach to the financial markets, involves the rapid buying and selling of securities within a single trading day. This frenetic form of trading works by capitalizing on small price movements in highly liquid stocks or other financial instruments. Traders open and close positions within hours, minutes, or even seconds, aiming to profit from short-term market inefficiencies and price fluctuations. This differs markedly from traditional “buy and hold” investment strategies, as day traders rarely maintain overnight positions, closing out all trades before the market shutters. The table below highlights the major differences:
The typical day trader’s tool kit includes real-time market data feeds, sophisticated charting platforms, and high-speed internet connections. These tools enable traders to identify potential entry and exit points based on technical analysis, market sentiment, and breaking news. Many day traders specialize in specific sectors or trading strategies, such as momentum trading or scalping, to gain a competitive edge.
Managing risk plays a crucial role in day trading. Successful traders often adhere to strict rules about position sizing and employ stop-loss orders to limit potential losses. They typically set a maximum amount they’re willing to lose per trade—often no more than 1% to 2% of their trading capital—to ensure that a string of losses doesn’t deplete their entire account.
Most professional day traders work for large financial institutions, benefiting from sophisticated technology and significant resources. Individual day traders face steeper challenges, competing against these institutional players and high-frequency trading (HFT) algorithms that can execute trades in microseconds.
In practice, successful day trading demands intense focus, quick decision-making, and the ability to remain calm under pressure. Traders must constantly monitor multiple data streams, interpret complex market signals, and execute trades with precision timing. It’s a high-stress endeavor that blends elements of analysis, psychology, and rapid-fire action—a far cry from the passive nature of long-term investing strategies.
In the U.S., pattern day traders—those who execute four or more day trades within five business days—must maintain a minimum account balance of $25,000 and can only trade in margin accounts. These rules aim to protect inexperienced traders from too much risk.
The Attraction of Day Trading
The appeal of day trading lies in its potential for quick profits. However, it comes with severe risks and requires a significant understanding of the markets. Successful day traders do the following well:
- Stay informed: Monitor market headlines, economic reports, and other factors influencing stock and other asset prices throughout the day.
- Make quick decisions: Have the ability to make fast, informed decisions in a volatile market.
- Employ leverage: Use borrowed funds to amplify potential profits, which proportionately magnifies potential losses.
Because of these factors, day trading is not for inexperienced traders or those without the finances to absorb potential losses.
Relevant Regulations To Know
Understanding the regulatory environment around day trading is crucial. In the U.S., the Financial Industry Regulatory Authority (FINRA) and the Securities and Exchange Commission (SEC) have specific rules for “pattern day traders.” These include the following:
- Pattern day trader definition: Traders who execute four or more day trades within five business days.
- Margin requirements: Pattern day traders must always have a cash balance of at least $25,000 in their brokerage account.
These regulations ensure that only those with enough resources and knowledge participate in this high-stakes activity.
The Basics of Day Trading
Day trading is most commonly found in stock and foreign exchange (forex) markets, where currencies are traded.
Day traders are attuned to events that cause short-term market moves. Trading based on the news is one popular technique. Scheduled announcements like releasing economic statistics, corporate earnings, or interest rate changes are subject to market expectations and market psychology. That is, markets react when those expectations are unmet or exceeded—usually with sudden, significant moves that can benefit day traders.
How To Start Day Trading
Professional day traders have an in-depth knowledge of the marketplace, are well-established, and can make a living from it. Here are the steps:
- Learn a good deal about the market and how to use fundamental and technical analysis.
- Ensure you have enough capital to begin to meet regulations and, beyond that, so you’re never putting more on the line than you can afford to lose.
- Develop criteria for trading and stick with them.
Here are more details on these steps:
1. Gain Lots of Market Knowledge and Experience
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.
Do your due diligence and understand the particular ins and outs of the products you trade.
2. Make Sure You Have Enough 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 capitalize 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.
3. Learn Trading Discipline
Many day traders end up losing money because they fail to make trades that meet their own criteria. As the saying goes, “Plan the trade and trade the plan.” Success is impossible without discipline.
To profit, day traders rely heavily on market volatility. A day trader may find a stock attractive if it moves a lot during the day. That could happen for different reasons, including an earnings report, investor sentiment, or even general economic or company news.
Day traders also like stocks that are highly liquid because that gives them the chance to change their position without altering the price of the stock. If a stock price moves higher, traders may take a buy position. If the price moves down, a trader may decide to sell short so they can profit when it falls.
Whatever technique a day trader uses, they’re usually looking to trade a stock that moves (a lot).
Who Makes a Living by Day Trading?
There are professional day traders who work alone and those who work for a larger institution.
Most day traders who trade for a living work for large players like hedge funds and the proprietary trading desks of banks and financial institutions. These traders have an advantage because they have access to resources such as direct lines to counterparties, a trading desk, large amounts of capital and leverage, and expensive analytical software.
These traders are typically looking for easy profits from arbitrage opportunities and news events. Their resources allow them to capitalize on these less risky day trades before individual traders can react.
Individual traders often manage other people’s money or simply trade with their own. Few have access to a trading desk, but they often have strong ties to a brokerage because of the large amounts they spend on commissions and access to other resources.
However, the limited scope of these resources prevents them from competing directly with institutional day traders. Instead, they are forced to take more risks. Individual traders typically day trade using technical analysis and swing trades—combined with some leverage—to generate adequate profits on small price movements in highly liquid stocks.
Tools of the Day Trader
Day trading demands access to some of the most complex financial services and instruments in the marketplace. Day traders typically require the following:
Access to a Trading Desk
This is usually reserved for traders who work for larger institutions or those who manage large amounts of money.
The trading or dealing desk provides these traders with instantaneous order execution, which is crucial. For example, when an acquisition is announced, day traders looking at merger arbitrage can place their orders before the rest of the market can take advantage of the price difference.
Financial Media Sources
News provides most of the opportunities. It’s imperative to be the first to know when something significant happens.
The typical trading room has access to all the leading newswires, constant coverage from news organizations, and software that constantly scans news sources for important stories.
Analytical Software
Trading software is an expensive necessity for most day traders. Those who rely on technical indicators or swing trades rely more on software than news. This software may be characterized by the following:
- Automatic pattern recognition: This trading program identifies technical indicators like flags and channels or more complex ones like Elliott Wave patterns.
- Genetic and neural applications: These programs use neural networks and genetic algorithms to perfect trading systems and make predictions of future price movements more accurately.
- Broker integration: Some of these applications even interface directly with the brokerage, allowing for instantaneous and even automatic execution of trades. This eliminates emotion from trading and improves execution times.
- Backtesting: This allows traders to look at how a particular strategy would have performed to predict more accurately how it will do in the future. Keep in mind that past performance is not always indicative of future results.
Combined, these tools can give traders an edge over the rest of the marketplace.
Day Trading Strategies
A trader needs to have an edge over the rest of the market. Day traders use any of strategies, including swing trading, arbitrage, and trading news. They refine these strategies until they produce consistent profits and limit their losses.
There are also some basic rules of day trading that are wise to follow: Pick your trading choices wisely. Plan your entry and exit points in advance and stick to the plan. Identify patterns in the trading activities of your choices in advance.
Day traders use many intraday strategies. These strategies include the following:
Scalping: This strategy focuses on making many small profits on temporary price changes that occur throughout the day. Arbitrage is a type of scalping that seeks to profit from correcting perceived mispricings in the market.
Range/swing trading: This strategy uses preset support and resistance levels in prices to determine the trader’s buy and sell decisions.
News-based trading: This strategy seizes trading prospects from the heightened volatility that occurs around news events or headlines as they come out. One type of news-based trading involves whether a merger or acquisition that has been announced will go through or not.
HFT: These strategies use sophisticated algorithms to exploit small or short-term market inefficiencies.
| Day Trading Strategy Breakdown | ||
|---|---|---|
| Type | Risk | Reward |
| Swing Trading | High | High |
| Arbitrage | Low | Medium |
| Trading News | Medium | Medium |
| Mergers/Acquisitions | Medium | High |
| HFT | Medium | High |
Risks of Day Trading
For the average investor, day trading can be daunting because of the risks involved. The SEC highlights some of the risks of day trading, which are summarized below:
- Be prepared to suffer severe financial losses: Day traders typically suffer severe losses in their first months of trading, and many never profit.
- Day trading is a highly 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 days, traders not only lose all their own money but also wind up in debt.
Don’t Believe Claims of Easy Profits
Watch out for hot tips and expert advice from newsletters and websites catering to day traders, and remember that educational seminars and classes about day trading may not be objective.
How Much Does the Average Day Trader Make?
Day trading has inspired many with promises of quick riches and financial independence. Yet, the reality of day trading profits often diverges sharply from these rosy expectations. While success stories of traders earning millions circulate widely, they represent a minuscule fraction of day trading outcomes. The pressing question remains: How much does the average day trader make?
Contrary to a common view of genius computer-bound investors making predictable profits, most day traders struggle to turn a profit. Robust academic studies typically put the number of those who profit in the medium-to-long term at less than 15% of day traders.
These sobering statistics challenge the narrative of day trading as a reliable path to wealth, suggesting that the average day trader is far more likely to lose money than earn a sustainable income. Studies also show that day traders’ earnings are marked by extreme variability. While the top performers in the 99th percentile might earn six or seven-figure annual incomes, most day traders fail to match even minimum wage earnings when accounting for time invested and capital risked. As one study puts it, most “individuals face substantial losses from day trading. And individual day traders who trade more frequently and heavily are more likely to suffer such losses.”
Factors contributing to these dismal outcomes include high transaction costs, emotional decision-making under pressure, and the inherent unpredictability of short-term market movements. Moreover, the rise of HFT algorithms has made it increasingly difficult for individual traders to compete effectively in many markets.
Despite these challenges, day trading continues to attract newcomers, fueled by social media success stories and the low cost of trading platforms. However, experts caution that sustainable profitability in day trading requires exceptional skill, discipline, and much luck. For most individuals, long-term, diversified investment strategies remain a more reliable path to financial growth.
Should You Start Day Trading?
If you’re determined to start day trading, be prepared to commit to the following steps:
- Ensure 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. Going all out will complicate your trading strategy and can mean big losses.
- Stay cool, and try to keep emotion out of your trades. Don’t deviate from your plan.
If you follow these simple guidelines, you may be headed for a sustainable career in day trading.
Day Trading Example
A day trade is the same as any stock trade except that both the purchase of a stock and its sale occur within the same day and sometimes within seconds of each other.
For example, say a day trader has completed a technical analysis of a company called Intuitive Sciences Inc. (ISI). The analysis indicates that this stock, listed in the Nasdaq 100, shows a pattern of price rise by at least 0.6% on most when the Nasdaq is up more than 0.4%. The trader has reason to believe this will be one of those days.
The trader buys 1,000 shares of ISI when the market opens, then waits until ISI reaches a particular price point, probably up 0.6%. The trader then immediately sells the entire holding in ISI.
This is a day trade. Obviously, the merits of ISI as an investment have nothing to do with the day trader’s actions. It’s just a trend to be exploited.
What if ISI had bucked the trend and lost 0.8%? The trader will sell anyway and take the loss.
US Retail Investing Has More Than Tripled Since 2012
According to Nasdaq data on retail flows, retail investors in 2023 poured up to $1.6 billion each day, compared with less than $450 million daily in 2012.
Day Trading vs. Options Trading
While day trading has undoubtedly picked up new adherents since the drop in trading fees over the last two decades, it’s also been a boon for options traders, whose strategies often complement but are also an alternative for the types of retail traders given to day trading. While both strategies aim to capitalize on short-term market movements, they differ significantly in their mechanics and risks.
As we’ve explored, day trading involves buying and selling securities within a single trading day, aiming to capitalize on short-term price fluctuations. Options trading, meanwhile, deals with contracts that give the holder the right, but not the obligation, to buy or sell an underlying asset at a preset price within a specific time frame. This creates a stark contrast in how these two trading styles operate:
One key distinction lies in the potential for leverage and risk. Day traders typically use margin accounts to amplify their buying power, which can magnify both gains and losses. Options traders, meanwhile, can achieve leverage through the nature of options contracts themselves. A small move in the underlying asset can result in a significant percentage change in the option’s value, offering the potential for outsized returns—but also substantial losses.
Complexity is a factor that often separates these two approaches. While day trading can be conceptually straightforward (buy low, sell high), successful execution requires intense focus and rapid decisions. Options trading, by contrast, involves a steeper learning curve. Traders must understand concepts like implied volatility, time decay, and the Greeks (delta, gamma, theta, etc.) to navigate the options market effectively. That hasn’t stopped a far greater number of investors to take up options trading in the last decade:
Of course, day trading and options trading aren’t mutually exclusive. Many investors combine elements of both, such as day trading options or using options to hedge day trading positions. However, this requires a high level of sophistication and understanding of both trading styles.
Why Day Trading is Controversial
The profit potential of day trading is an oft-debated topic on Wall Street. Internet day-trading scams have lured amateurs by promising enormous returns in a short period.
Some people day-trade without sufficient knowledge. But some day traders 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. Don’t underestimate the role that luck and good timing play. A stroke of bad luck can sink even the most experienced day trader.
Is Day Trading Profitable?
Day trading can be profitable, but it’s far from guaranteed. Many day traders end up losing money before calling it quits. Success in day trading requires a deep understanding of market dynamics, the ability to analyze and act on market data quickly, and strict discipline in risk management. The profitability of day trading depends on several factors, including the trader’s skill, strategy, and the amount of capital they can invest.
While some traders do achieve significant profits, it’s important to note that the high-risk nature of day trading also means it’s possible to incur substantial losses. In addition, profitability can be affected by transaction costs, taxes, and the psychological pressure associated with this type of trading.
What Percentage of Day Traders Are Profitable?
The percentage of day traders who achieve profitability is relatively low. Various studies and broker reports suggest that a small fraction of day traders consistently make profits over the long term. Estimates vary, but it’s commonly accepted that only around 10% to 15% of day traders are successful over time.
This low success rate is attributed to the high risks, the need for substantial skill and experience, and the intense competition in the financial markets. Many aspiring day traders face significant losses in their early trading careers, and only a few persist and learn the skills necessary to become profitable.
Why Is Day Trading So Hard?
Day trading is challenging because of its fast-paced nature and the complexity of the financial markets. It requires traders to make quick decisions based on real-time information, which can be overwhelming, especially in volatile market conditions. Traders must be adept at technical analysis, interpreting charts and patterns, and understanding how economic events influence market movements. Moreover, emotional control is crucial; day traders must avoid common pitfalls like overtrading or letting emotions drive their decisions.
What Is the First Rule of Day Trading?
The so-called first rule of day trading is never to hold onto a position when the market closes for the day. Win or lose, sell out. Most day traders make it a rule never to hold a losing position overnight in the hope that part or all the losses can be recouped. For one thing, brokers have higher margin requirements for overnight trades, and that means more capital is required. There’s a good reason for that. A stock can go down or up on overnight news, inflicting a bigger trading loss on the owners of shares.
How Does Pattern Day Trading Work?
Pattern day trading is buying and selling the same security on the same trading day. FINRA defines a “pattern day trader” as any investor who executes four or more day trades within five business days once the number of day trades is more than 6% of the trades in the margin account for that period.
Pattern day traders must maintain a minimum account balance of $25,000 in cash and eligible securities. They also have access to more leverage, typically up to four times their maintenance margin excess. This means they can trade larger positions but also face more significant risks.
The Bottom Line
Day traders can earn big profits or pile up significant losses. Indeed, with the evidence showing that most day traders lose money over time, it’s an extremely risky career choice. Day traders, both institutional and individual, would argue that they play an essential 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.