Day trading is for experienced investors who can make quick decisions about fast-moving securities

A man with his hand on his chin while looking at investing charts on his computer screen.
Day trading is all about taking advantage of quick movements in the market and profiting off of buying and selling securities. AndreyPopov/Getty Images
  • Day trading is the practice of making several trades of a security within a single day.
  • Day traders hope to use market volatility to make money on small gains by trading stocks.
  • While there’s significant money to be made with day trading, there’s also significant risk.
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There’s more than one way to make money with securities – and day trading is one such way. With increased access to investment tools and apps, reduced fees for trades, and data relating to securities, many people are becoming more interested in how small moves in the market can deliver profits.

But day trading isn’t for the inexperienced investor. To be successful, you need the right mix of education, experience, and capital – not to mention the discipline to execute a cultivated strategy. Here’s a closer look at what day trading is and what you need to know before taking the leap into these often perilous waters.

What is day trading?

Day trading is when you buy and sell the same security multiple times within the same day. The hope is that in making these trades, you can capitalize on any increases the securities might have gained during the day. Technically, anyone can day trade, though you’ll find this type of investing done by financial services companies as well as individuals.

There’s a lot of risk with day trading, which is why it’s not for everyone. Profit margins are often razor-thin, and you can lose a significant amount of money in a short period of time. You also can expect to devote a significant amount of time researching, planning, and making trades.

“Day trading is a full-time job,” says Vinny Yu, co-founder of JAVLIN Invest. “So if you’re thinking it’s quick and easy money, think again. Day trading requires discipline, patience, and emotional stability.”

Like most kinds of investing, day trading is subject to regulatory oversight by the Financial Industry Regulatory Authority (FINRA) and the Securities Exchange Commission. This is because day trading involves the purchase and sale of securities. More specific rules apply to day trading when investors buy on margin and make at least four day trades within the span of five days. Those who engage in this kind of activity are known as pattern-day traders.

How does day trading work?

Much of a day trader’s day is spent researching and watching the markets. The goal is to find opportunities to buy securities at a low price and then sell them at a profit – and repeat that to hopefully turn a profit within a single day. This is where a strong education in finance and investment – as well as experience working within the market – is an asset.

“Investors can access equity markets more cheaply and easily than ever before,” says David Keller, chief market strategist at StockCharts.com. “But that easier access also comes with increased risk. Investors should educate themselves on the concepts of risk versus reward, particularly how to manage risk on individual stocks as well as at the portfolio level through asset allocation. By learning about market history using charts and technical analysis, day traders can better appreciate how repeatable patterns in price action can be identified and quantified.”

Because day trading can be so risky, investors who day trade have a lot to consider. “In addition to reading charts and monitoring news, a good day trader can also recognize opportunities from reading the tape,” says Yu. “The goal of a day trader is obviously to make money, but equally as important is to hang on to that money and not lose it.”

Day traders employ a variety of strategies to accomplish their mission:

  • Breakout trading: Many traders believe stocks trade within a range of values. When a value goes above or below that range, a day trader may decide to buy or sell.
  • Pullback trading: This strategy looks for opportunities within a long-term trend to capitalize on declines in price. Since most stocks trend upward in value, dips in the market can offer the opportunity to buy shares at a decreased price and then sell when the value goes up again.
  • Scalping: Scalping is when you make several trades in a day that result in small profits. Day traders hold onto these securities for seconds-to-minutes since trading happens so quickly with this strategy. Trading in large volumes is key for success with this method.
  • Range trading: This strategy is much like breakout trading. Instead of waiting for stocks to go above or below the estimated range, day traders will buy and sell when prices come near the limits of the range.
  • News-based trading: Day traders follow the news to look for conditions that could impact the price of stocks. They have to continually monitor news outlets to look for information they can use to make predictions about how stocks will fare, and then base buying and selling actions on that information.
  • High-frequency trading: This strategy uses automated algorithms to trade securities in large amounts as fast as possible. Special computer systems are needed for this kind of day trading, which is why it’s usually done by institutional investors.

What are the rules of day trading?

A lot of the rules day traders work by have to do with trading discipline and commitment, as well as having the emotional wherewithal to deal with constant market volatility. It takes time to learn what works and what doesn’t with day trading and to develop a methodology that results in the kind of profits you’re looking to achieve.

“In my experience, the most successful traders exercise good discipline in their decision-making by focusing on the weight of the evidence,” says Keller. “It’s good to consider different perspectives, but at the end of the day, your decision process is up to you. Develop a well-articulated checklist for entering and exiting positions, apply that checklist consistently, and find success.”

If you’re a pattern day trader who uses a margin account, you will have additional rules from FINRA to follow. These include:

  • You must keep a minimum of $US25,000 ($AU33,523) of equity in each account used for day trading at all times.
  • If the balance falls below that amount on a day you want to trade, you won’t be allowed to make the transaction.
  • You’re also only allowed to trade up to four times the amount above the $US25,000 ($AU33,523) minimum in your account from the previous trading day.
  • Cross-guarantees are not allowed to count toward the $US25,000 ($AU33,523) minimum.
  • Any funds used to meet the $US25,000 ($AU33,523) minimum have to remain in the account for two business days after any day they are required for trading.

Pros and cons of day trading

There are many risks to day trading, and many who step into this area of investing are unsuccessful. Because you’re counting on market volatility to increase the value of stock buys with day trading, you always run the risk of losing money. The best you can do is make educated guesses about what will happen in the market, and that can always lead to losses instead of gains.

Robert Johnson, professor of finance with Heider College of Business at Creighton University, describes day trading as the practice of placing “numerous bets on short-term price moves in securities. [Day traders] are properly classified as speculators and not investors.”

“The deck is stacked against the day trader and is stacked in favor of the long-term investor,” says Johnson. “Over the long-term, investing in the stock market is a positive-sum game. That is, over the long run the value of stocks, both individually and collectively, generally rises. On the other hand, over the short-term, investing in any asset class is a zero-sum game.”

Yu says that loss management is important for being successful with day trading. He says preserving capital is paramount in not letting small losses turn into large ones.

“If successful, day traders can make a lot of money in a relatively quick amount of time,” Yu adds. “You can also work as much or as little as you want. Some traders can make money by just trading the open and then [taking] the rest of the day off.”

Is day trading right for me?

Only you can determine if day trading is right for you. Certainly, you’ll want to gather as much information and tools as possible that can help you be successful. These may include:

  • A thorough education in finance, investing, and world markets
  • Access to real-time market news, data, and the Electronic Communication Network (ECN), which provides the best-available stock quotes at any given time
  • Securities price charts, analyses, and other technical data that can help you make informed decisions
  • A brokerage account that will allow you to make the volume of trades you need to achieve goals
  • Enough capital to make the kind of trades needed to turn a profit

You can get started day trading with a few hundred dollars, but the returns on trades of that size would be small. Making larger trades can result in larger gains and more in profit.

Some other considerations include:

  • How much time can you commit to day trading? As Yu stated, the research, monitoring, and trading activity can be a full-time job. However, you may be able to get to a position where you can hit your goals within a few hours. It all depends on your situation and the market.
  • What kind of risks are you comfortable taking? If you’re a conservative investor, day trading is most definitely not for you. A long-term strategy would work best for your goals. If you are comfortable with potential losses and feel that risk is worth what you could make in profits, then day trading might be something to look into. Again, it all depends on you.

The financial takeaway

Day trading is all about taking advantage of quick movements in the market and profiting off of buying and selling securities. It can take a lot of time and money to be successful in this endeavor, and anyone considering getting into day trading should do so with caution. This is an area of investment that is subject to extreme wins and losses.

If you do want to try your hand at day trading, make sure you thoroughly understand the risks you could be taking and the markets you will be navigating, as well as have a plan to manage your capital through both good times and bad. Seeking out as much information as possible about day trading is also always a good idea.

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