Day Trading

Day trading is becoming increasingly popular, with more people picking it up due to the pandemic, according to a recent survey sponsored by robo-advisor Betterment, with 49% of day traders doing it for less than two years.
However, day trading also has its pitfalls. We don’t normally recommend it, as it is antithetical to our approach of “lazy trading.” Day trading requires focus, time, and energy. On top of that, there’s a high failure rate with over 90% of traders losing money.
Nonetheless, day trading can be a profitable way of trading the stock market if done correctly and with discipline, so we’ll explain the whole process here.

What Is Day Trading?

Sometimes called intraday trading, day trading focuses on buying and selling securities on the same business day. The goal is to capture profits by entering and exiting trading positions based on price movements, fluctuations and momentum.

For example, you might decide to buy 1,000 shares of a stock at the beginning of the day, for $30 per share, putting $30,000 on the line. When the stock price rises to $35 per share later that day, you might turn around and sell for $35,000, seeing $5,000 in gross returns (any margin costs and trading fees will reduce your net gain).

Many people engage in day trading using online tools. Additionally, it’s popular to use margin when day trading. The ability to leverage your position can potentially lead to larger profits based on small price fluctuations.

With intraday trading, you rarely hold an investment for more than a day. As a result, paying attention to trading fees is important so that your costs do not outweigh your profits. You also need to have a high risk management tolerance since it’s also possible to see big losses as well as large profits.

How to Start Day Trading

If you want to start day trading, there are some steps you can take to move forward.

• Know the market. Your first step is knowledge. Learn more about how economic and geopolitical risk events can impact short-term volatility. Additionally, it’s important to know how different industries and sectors are impacted by various events so you’re better at making decisions.
• Figure out a strategy. Decide which stock trading strategy is likely to work best for you as a new trader. Think about your risk tolerance and trading style and research different strategies that might work for you.
• Open a demo account. One of the best ways to practice day trading is to start with a demo account with a brokerage firm. This acts as a simulator and allows you to test your strategy and get a feel for how day trading works.
• Review how much money you can afford to risk. Look at your finances and risk tolerance and set limits on how much it makes sense to put into intraday trading.
• Open a brokerage account. Research brokerages to determine which will work for you. Consider features, available assets and fees, as well as various tools and technologies. Make sure the platform will allow you to automate trades if you want.
• Fund your account. You will need to fund your account with enough money to begin making profitable trades. If you want to trade on margin as a “pattern day trader,” you’ll need at least $25,000 to meet FINRA (financial industry regulatory authority) regulatory requirements.
• Begin executing your strategy. Once you’re set with a funded brokerage account, you can begin executing your strategy. Before going full-time, consider starting small since you’re likely to have a learning curve, even after practice with a demo account. This can be based on either fundamental analysis (e.g. news releases) or technical analysis (e.g. candlestick pattern trading).
• Understand tax implications. As you make trades, pay attention to tax strategy. Consider speaking with a tax professional to get an idea of what to expect, and how much to set aside for taxes.

How to Make Money Day Trading

The Betterment survey found that 58% of respondents chose to start day trading as a way to make more money in a short period of time.

For those who manage success, there are various popular day trading investment strategies that you can use to become profitable. The key to making money with trading in a single day period is to have a strategy and stick with it. You might decide to tweak your strategy or even to change strategies, but it is best to be consistent at first. Sticking to your strategy is one of the best ways to make money in the long run.

Here are three strategies that can help you get started at making money by day trading.

Successful trend following

With trend following, you identify certain trends in the pricing charts. You can see how pricing movements are settling in, so you take advantage of them. When an asset starts trending higher, you enter a buy order. Then, you pay attention to the trend. Once the price turns and starts trending lower, it is time to sell. If you buy and sell based on these trend sentiment indicators, you’re more likely to make money in the long run.

Successful range trading

Another alternative is to trade based on ranges during daily trading. You can look at chart patterns that show price and volume indicator to get a feel for how an asset moves during the day. Get a feel for when the typical lows and highs occur. When you have an idea of the range an asset often trades in, you can buy when that asset is at its low point. And, because you have an idea of when the price and volume are likely to be near their peak, you can prepare to sell the asset when it gets close to the top of its daily range.

Successful scalping

Rather than trying to use charts and other tools to determine the best times to buy and sell an asset, scalping is about taking small profits immediately. Basically, it is about using small price changes to consistently see profits. You enter a position, and then as soon as the position becomes profitable, you exit the position with the profits. While profits are generally small, they can add up, and it also increases your chances of turning a profit on each trade.

How Does Day Trading Work?

The idea behind intraday trading is that you only hold your positions for hours — or even minutes. In general, day trading doesn’t involve holding positions overnight. Here’s how it works:

• Choose an asset to target. In general, successful day traders specialize in a specific asset. Some of the more common assets include stocks, options, futures, commodities and currencies. Recently, cryptocurrency trading has become increasingly popular.
• Consider using margin. Depending on your situation, it might make sense to use margin as you trade. This is a way of borrowing money so that you can buy more shares. Leveraging your position this way can amplify your gains, helping you make more money on each trade. (Beware, though: leverage can also amplify losses.)
• Place a market order to buy. Once you identify what you want to trade, place a buy order. Purchase what you want, in the amount you want.
• Watch the price and prepare to sell. Now, it is time to watch the price action and prepare to sell. Use a strategy to determine when it is time to exit the position. Stick to your strategy, rather than trying to run profits.
• Set a stop-loss order. Your stop-loss order can prevent you from losing too much money on any one trade. One rule of thumb is to manage your position size. Do not risk no more than 1% of your account balance on one trade. For example, if you have $30,000, you do not want to risk more than $300 on each trade.
• Use trading software. Track positions, verify profitability and even execute trades automatically within set parameters using trading software. A brokerage that is compatible with your preferred trading software can be a real asset as you move forward.
• Pay attention to fees and taxes. Remember that true profits are minus fees and taxes. Know what you are paying so you can determine true profitability and ensure that day trading remains feasible for you.

How Much Do Day Traders Make?

One of the most successful and well-known day traders is Ross Cameron, the founder of Warrior Trading. According to Warrior Trading, Cameron made more than $4.5 million in profits day trading in 2020.

Almost no one will make that much, though. In fact, according to an analysis of day trading in Taiwan, only about 20% of traders made money in any six-month period. On top of that, median net profits for U.S. traders in a six-month period were about $4,200.

If you want to move forward, though, here is an example of how day traders potentially make money. Let’s say you have a target of $0.04 for a stop loss and a profit target of $0.06. If you have $35,000 in your account, and you’re sticking to the 1% rule, the most you want to risk on any trade is $350. As a result, each trade you make should be 8,750 shares. This will keep you within your limits for losses.

Now that you have the basics, let’s say you trade.

• >50 trades you make are profitable, at $0.06. So, 60 x $0.06 x 8,750 = $31,500.
• 20 trades you make are losses, at $0.04. So, 20 x $0.04 x 8,750 = $7,000.
• Your gross profit ends up being $24,500. This doesn’t including any trading commissions and other fees, or taxes.

This seems promising at first, but when you consider the success rate, your ability to truly profit is much lower.

A more realistic example might be someone who actually has a retail account of $100,000 and manages to generate 20% in gains for the year. After intense trading, $20,000 in profit can seem like a big deal. However, if you only make $20,000 in a year, you won’t be able to retire and live the luxurious lifestyle so often portrayed by online gurus peddling their courses.

However, even though there is potential for profits, it is important to note that there are risks involved with intraday trading. For retail investors with small accounts and no proper training in day trading, it can actually be quite hazardous to get involved. Make sure you receive proper training and practice before you risk your hard-earned cash as investing for beginners is risky.

Characteristics of a Successful Day Trader

As you begin trading, cultivate a few characteristics that will increase your chances of success.

Risk management

One of the most important characteristics of a successful day trader is risk management. The ability to limit your losses is vital to long-term profitability. Every day trader ends up with losing positions at some point. The key is to manage risk and limit those losses. One way of doing so is using the risk reward ratio.

As discussed earlier, Another way to manage risk is to make sure you do not risk more than 1% of your account on any one trade. You should also set stop-loss orders to trigger when the price of an asset falls to a certain point. Stick to these mitigation strategies, and you are more likely to keep the losses to a minimum while taking profits when they come.

Successful trading edge/strategy

Next, come up with a successful trading strategy. Some of the easiest strategies to master are those discussed above, including trend following, range trading and scalping.

When you come up with a strategy and stick to it, you have a system you can use to reduce the emotion involved. Your system can mean the difference between success and failure as a day trader. Find a strategy that suits your style and stick with it.

Discipline

Successful day traders have discipline. They set their loss limits and stick to them. There’s also disciplined traders when it comes to taking profits. If you set your profit-taking level at $0.06, as used in our example, you have the discipline to exit the trade at that point rather than hanging on to run your profits.

When you have a strategy, the discipline to stick to it can make or break you as a day trader. Additionally, it’s important to have the discipline to avoid risking more money than you can afford to lose. Be careful of using too much margin in an attempt to make up for earlier losses.

Timing, selection and management

As a day trader, your ability to follow good timing and manage the selection of your assets is important. Pay attention to the timing of your trades and select assets that you understand. You shouldn’t trade assets you don’t know about.

Management of your account is also important. Don’t lose track of margin and the true profitability of your trades. Keep track of fees you pay and manage your tax bill. Don’t forget to track which trades were profitable and which were losers. Staying on top of your account so you can manage and make tweaks as needed can help you succeed over time.

Access to a reliable platform/charting software

Successful day trading also requires access to a reliable platform that can help you execute trades when needed. You need to be able to enter and exit positions immediately. A reliable trading platform can help you set parameters and trade quickly. Day trading requires quick positions, and some degree of automation can help you build reliable profits more effectively.

Good charting software can also help you as you day trade. As you evaluate trends and ranges, your charting software can make a big difference. Learning how to read the software can help you determine the best times to enter and exit trades, and increase the chances that you’ll earn profits.

Pros and Cons of Day Trading Versus Swing Trading

When deciding whether to get involved with day trading or swing trading, it’s important to understand the advantages and disadvantages.

First of all, it’s important to understand the differences between day trading and swing trading.

Day trading focuses on quick trades that take place within a day. It’s rare to hold a position overnight. Swing trading, on the other hand, focuses on holding positions over days or weeks. While both types of trading rely on market volatility and taking profits from short-term market movements such as a market correction, swing trading focuses more on developing trends while day trading is more about minute-to-minute changes.

Pros of day trading

• Instant results – With day trading, you see instant results. You know how the trade has performed and you take those profits immediately. Swing trading, on the other hand, means waiting for the results as the trade develops. You are kept in suspense.
• Many opportunities in volatile markets – Day trading offers access to several opportunities to make money each day. You have many chances to take profits in volatile markets. Even if one trade is a loser, you still have the ability to make up for it with subsequent trades.
• No overnight risk – You do not have to worry about overnight funding with day trading, and you do not have to worry about what happened in the market during the night. With swing trading, you do not know where the market will be in the morning, and what it has done to your position.
• Fast-paced and exciting – For many day traders, part of the advantage is the excitement. Day trading can be fun and fulfilling as you enter and exit trades. Plus, because you have a strategy and a system, you don’t end up overthinking your moves and you can take profits as they come.

Cons of day trading

• You might need more money to start – Depending on the type of account you are using, and the margin requirements set by FINRA, you might need more money to start day trading. While there are ways to start day trading with less money, some traders need to come up with a larger amount to move forward.
• Smaller profits – In general, day trading is about taking smaller profits because you set smaller stops. Swing trading, with the chance to develop the trade through larger trends and bigger stops, has the potential to be more profitable with each trade.
• Day trading can be addictive – Once you get going with day trading, it can be addictive. You might spend a lot of time trying to make up for losses, or capturing the excitement of a “win.” As a result, you could overtrade and lose big. With swing trading, you limit your trades and it is harder to get addicted to the rush.
• One big loss can wipe out gains – Even though profits are incremental, the losses have the potential to be huge and wipe out those gains. This is especially true if you use margin. One big loss, amplified by margin, can overcome all of the small gains added up to that point.

How Much Money to Start Day Trading

Even though there are certain requirements for “pattern day traders” using margin, you don’t need $25,000 to get started. It is possible to open some brokerage accounts with as little as $100 and start day trading. With the right strategy, it is possible to grow a small amount of money to a bigger amount, until you can start making bigger trades and seeing bigger profits.

However, when you start, percentage-based, risk-adjusted returns on small amounts will be fairly small. If you use the 1% rule to limit losses, and you are starting with $500, that means that you need to focus on smaller traders where you are only risking $5 on each trade. While this is possible to do with some assets, your profits are likely to be much smaller until you start building them. As you accumulate small profits, you’ll be able to start making bigger trades and see bigger potential profits.

Realize, too, that over time your gains and losses are related to the strategy you employ and the effectiveness of your risk management. When you stick to a profitable strategy, you should be able to build on your small gains over time — as long as you have the right tools at your disposal and you invest in the assets most likely to provide you with the ability to start small.

The main problem with day trading is that it is time intensive, and the rate of success is relatively small. You can start small, but growing to substantial profits takes time and effort that could be spent elsewhere, with a better potential for success.

Should I Start Day Trading?

Once you start thinking about day trading, it is time to consider whether it is the right move for you.

If you have the risk tolerance for day trading, it could be a way to quickly make profits. However, you’re likely to be limited if you can only start with a small amount of money. You also need the available time to do your due diligence and learn how to trade effectively and take profits.

Consider trying it out for a few days and testing your strategy before you risk a lot of money. This is especially important since you’re more likely to lose money than see huge profits.

What Should You Look For in a Day Trading Platform?

As you choose a day trading platform, there are a few items to consider.

• Stability – Look for a platform that does not have a lot of downtime. You want the platform available with accurate quotes and that is reliable when you are ready to trade.
• Speed – Remember that there’s usually another entity on the other side of a trade. When an opportunity comes up, you want to be able to take advantage of it. A fast platform can help with that.
• Accurate charting – Look for a platform with charting that can help you track what is going on. Plus, robust charting will allow you to run technical analyses and review various scenarios.
• Tools and features – Review the other tools and features. Can you set up automatic trades? Does the platform integrate with your brokerage in a way that allows you to execute the strategies you prefer? Make sure the platform has the things you need to improve your chances of success.
• Support – Make sure the platform has a responsive and professional support team that can help you if there’s a problem. You want to know you’re covered if something goes wrong.

What Are the Best Day Trading Platforms?

When deciding to start day trading, there are a few platforms that stand out to us. Review the available platforms and choose what’s likely to work for you and your trading style.

IG Index

If you’re interested in forex trading, IG Index can be a good choice for day trading. Owned by IG Group, which was founded in 1974, this is one of the OGs of trading. IG Index offers a variety of choices for trading and makes it easy for advanced and beginning traders alike to begin taking profits.

eToro

Social trading is the main focus for eToro, which was founded in 2006. The idea is that you can set up to copy trades made by others. This can make day trading a little easier, as you can learn from the way experts trade. However, the copy feature only applies to cryptocurrency assets.

*This ad promotes virtual cryptocurrency investing within the EU (by eToro Europe Ltd. and eToro UK Ltd.) & USA (by eToro USA LLC); which is highly volatile, unregulated in most EU countries, no EU protections & not supervised by the EU regulatory framework. Investments are subject to market risk, including the loss of principal. 

XTB

Founded in 2002, XTB focuses on Forex and CFDs. It’s considered one of the premier brokers in Europe for these asset classes. One of the features is its powerful trading platform, xStation 5. XTB offers trading for more than 2,100 financial markets.

AvaTrade

If you are looking for a place with a wide range of automated tools, AvaTrade can be a good choice. Part of the AVA Group of companies, AvaTrade is compatible with several different platforms, including MetaTrader platforms. The main focus is Forex, and the company has been around since 2006.

FP Markets

Another broker focusing on Forex and CFDs, First Prudential offers access to many low spreads that can make it more cost-effective to engage in day trading. FP Markets was founded in 2005 and primarily uses the Metatrader 4 platform.

Forex.com

Founded in 1999, Forex.com offers traders in the United States access to Forex trading. It is also possible to day trade with metals using this website. Forex.com is known for its advanced charting and the technical indicators and drawing tools that make it easy to track what is happening.

City Index

This platform provides robust news and analysis so you can get an idea of what’s influencing the markets. City Index was founded in 1983 and offers a focus on spread betting, CFDs and forex trading. Day traders looking for these assets are more likely to find what they’re looking for with City Index, especially when trading the news.

NAGA Markets

This Fintech company offers access to several markets, including traditional markets, virtual goods and cryptocurrencies. Founded in 2015, this platform offers wallet services and the ability to make trader-to-trader transactions. On top of being able to trade on your own, it’s also possible to access social trading so you can see what others have used profitably.

Where Can I Learn to Become a Successful Day Trader?

There are various resources you can use to learn about successful intraday trading.

• Books – Read books to understand the markets, as well as how they are influenced by events. Good books can help you learn the basics and start with a solid foundation.
• Online courses – Many online courses can help you learn the basics and even practice some strategies. Watch out, though, since some online gurus do not have the receipts to back up their assertions and make money from courses, rather than actual trading.
• Work experience – You can also learn by doing. Jump in there and get to work. Just be careful about how much you risk since this can lead to losses.
• Trading communities and forums – There are several communities and forums where you can learn strategies and get answers to your questions.

No matter how you proceed, watch out for fake gurus and do your due diligence. So much information out there hypes the successes of few traders. On top of that, many Instagram accounts, TikTok videos and courses do not adequately address the failure rate. Be careful of getting information from these sources, since it can lead to big losses later. It’s up to you to make sure you’re getting information from a reliable source.

History of Day Trading

• 1867: Day trading gets its start after the invention of the telegraph makes it easy to communicate between brokers and the exchange floor.
• 1971: The addition of an electronic communication network, NASDAQ, makes it even faster to execute trades.
• 1975: The SEC abolishes fixed commissions for trades, making it possible for brokers to compete on commissions and increase accessibility to more traders.
• 1980s and onward: More electronic communications networks grow, creating networks of increasingly fast transactions.
• 1990s and early 2000s: Internet spreads and makes it easier than ever to trade.

Day Trading Strategy

As you learn more about intraday trading, there are some strategies you can use to take things to the next level.

• Trade ideas and tips – Some many newsletters and websites offer trading ideas and tips. This can be a good place to get started and learn some of the basics.
• Copy trading – If you have access to a platform that allows copy trading, you can learn from successful day traders. See what they do, and then copy how they make profits.
• Auto bots – Rather than doing the heavy lifting yourself, it’s possible to automatically get bots to trade for you. Set your parameters, or even set the bot to copy someone else’s trading moves and potentially profit.
• Trading communities – Finally, you can join a trading community and learn from more experienced traders.

No matter where you get your information, it is important to do your own due diligence. Test out strategies before risking your money, and watch out for fake gurus who don’t have a proven track record of success.

Conclusion

Day trading can be a way to make money and grow your portfolio. It offers the opportunity for quick profits and can allow you to start small and grow to bigger trades. However, it can also be considered risky. Research from Berkeley indicates that individual traders often trade to their own detriment, so it is important to have a strategy and stick to it, all while making sure you do not risk money you cannot afford to lose.

Day Trading FAQs

What is day trading stocks and how is it different from swing trading?

Day trading stocks involves buying and selling stocks within a single trading day. Day traders aim to profit from short-term price fluctuations and tend to make multiple trades throughout the day. On the other hand, swing traders hold positions over a longer time frame, typically a few days to weeks, to capitalize on larger price swings. Both trading strategies require careful analysis of trading volume and trading activity to predict market movements.

What is a maintenance margin and how does it affect my buying power with interactive brokers?

Maintenance margin is the minimum amount of equity that must be maintained in a margin account. If your account falls below this minimum, you’ll receive a margin call to deposit more funds. In the context of interactive brokers, they set their maintenance margin requirements based on various factors including the volatility of the stocks you own. If your account falls below the maintenance margin, your buying power – the amount of stock you can purchase on margin – may be limited or completely restricted until you deposit more funds.

What is the role of the Securities and Exchange Commission (SEC) in day trading?

The SEC is a U.S. government agency that oversees and regulates the securities industry to protect investors, maintain fair markets, and facilitate capital formation. They enforce rules around minimum equity requirements for day trading, among other regulations. For instance, the SEC mandates that day traders maintain a minimum equity of $25,000 in their accounts, failing which they may be prohibited from day trading.

How can I practice day trading stocks without risking my money?

Paper trading is an excellent way to practice day trading without risking real money. It involves simulated trading where you use virtual money to trade stocks. Many online stock brokers and trading platforms, like Interactive Brokers, offer paper trading accounts. It’s a good way to learn about the markets, test trading strategies, and understand the impact of trading volume and liquidity on different stocks or ETFs (Exchange Traded Funds).

What is the significance of liquidity and trading volume in day trading?

Liquidity refers to how easily a stock or ETF can be bought or sold without affecting its price. Stocks with high liquidity are ideal for day trading because they can be easily traded without significant price changes. Trading volume, or the number of shares traded in a day, also plays a crucial role in day trading. High trading volume often means better liquidity and tighter bid-ask spreads, making it easier to enter and exit positions. It also often indicates higher interest in the security, which can lead to greater price volatility and potential opportunities for profit.