Day trading is a fast-paced form of investing where 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 analysis, including the following:
Technical analysis: Focuses on past prices and trading patterns to predict upcoming trends.
Momentum Trading: Taking advantage of short-term trends and reversals to make quick gains.
- Unlike long-term investors, day traders care less about the fundamental value of securities and focus more on making immediate gains from market fluctuations.
How does day trading work?
Day trading is a high-risk approach to cryptocurrencies that involves buying and selling cryptocurrencies quickly within a single trading day. This frenetic form of trading works by taking advantage of 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.4 This is markedly different from traditional “buy-and-hold” investment strategies, where day traders rarely hold their positions overnight, and close all trades before the market closes. The table below highlights the key differences
The toolkit used by day traders typically 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 or scalping, to gain a competitive edge.
Risk management plays a crucial role in day trading. Successful traders often adhere to strict rules on position sizing and use stop-loss orders to limit potential losses. They typically set a maximum amount they are willing to lose on each trade—often no more than 1% to 2% of their trading capital—to ensure their account is not completely depleted by a series of losses.2
Most professional day traders work for large financial institutions, which benefit from advanced technology and significant resources. Individual day traders face even more difficult challenges, competing with these institutional players and high-frequency trading (HFT) algorithms that can execute trades in microseconds.
In practice, successful day trading requires 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 precise timing. It is a high-pressure endeavor that blends elements of analysis, psychology, and fast action—a far cry from the passive nature of long-term investment strategies.
In the United States, day traders who place four or more trades in a five-day period must maintain an account balance of at least $25,000 and may only trade on margin accounts. These rules are intended to protect inexperienced traders from taking on excessive risk.4
The appeal of day trading
The appeal of day trading lies in the potential for quick profits. However, it involves significant risk and requires a strong understanding of the markets. Successful day traders are good at:
Stay informed: Monitor market headlines, economic reports, and other factors that affect stock prices and other assets throughout the day.
Make quick decisions: You have the ability to make quick and informed decisions in a volatile market.
Use of leverage: Use borrowed money to magnify potential profits, which in turn magnifies potential losses proportionately.5
Because of these factors, day trading is not suitable for inexperienced traders or those who do not have sufficient financial resources to withstand potential losses.
Relevant regulations to know
Understanding the regulatory environment surrounding day trading is crucial. In the United States, the Financial Industry Regulatory Authority (FINRA) and the Securities and Exchange Commission (SEC) have specific rules for “pattern day traders.” These rules include:
Definition of a typical day trader: Traders who execute four or more daily trades over five business days.
Margin Requirements: Typical day traders must always have a cash balance of at least $25,000 in their brokerage account.6
These regulations ensure that only those with sufficient resources and knowledge are involved in this dangerous activity.
Day Trading Basics
Day trading is commonly found in the stock and foreign exchange (Forex) markets, where currencies are traded.
Day traders react to events that cause short-term movements in the market. News trading is one popular approach. Scheduled announcements such as the release of economic statistics, corporate earnings, or interest rate changes are driven by market expectations and market psychology. This means that the markets react when these expectations are not met or exceeded—usually with sudden, significant moves that can benefit day traders.
How to start day trading
Professional day traders have deep knowledge of the market, are well-established in the field, and can make a living from it. Here are the steps:
Learn a lot about the market and how to use fundamental and technical analysis.
Make sure you have enough capital to start meeting regulations, and more, so that you never risk more than you can afford to lose.
Develop and adhere to trading standards.
Here are more details about these steps:
1. Gain a lot of knowledge and experience in the market.
Individuals who attempt day trading without understanding the fundamentals of the market 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.2
Do your due diligence and understand the fine print of the products you are trading.
2. Make sure you have enough capital.
Wise day traders only use risk capital that they can afford to lose. This protects them from financial ruin and helps them keep emotions out of their trading decisions.
It is often necessary to have a significant amount of capital to effectively take advantage of intraday price movements, which can be in the form of pennies or fractions of a cent.
Day traders who intend to use leverage in margin accounts require sufficient cash. Volatile market volatility can trigger large margin calls on short notice.4
3. Learn discipline in trading
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 make a profit, day traders rely heavily on market volatility. A day trader may find a stock attractive if it moves a lot during the day. This can happen for a variety of reasons, including earnings reports, investor sentiment, or even general economic or company news.
Day traders also like stocks with high liquidity because it gives them the opportunity to change their position without changing the stock price. If the stock price goes up, traders may take a long position. If the price goes down, the trader may decide to short sell so that they can profit when it goes down.
Whatever technique a day trader uses, he or she is usually looking to trade stocks that move (a lot).
Who makes a living from day trading?
There are professional day traders who work alone and there are those who work for a larger institution.
Most day traders who trade for a living work for large players such as hedge funds and the 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.5
These traders typically look for easy profits from arbitrage opportunities and news events. Their resources allow them to take advantage of these less risky day trades before individual traders can react.
Individual traders often manage other people's money or simply trade their own money. Few have access to a trading desk, but they are often closely tied to the brokerage firm due to the large sums they spend on commissions and access to other resources.
But the limited scope of these resources prevents them from directly competing with institutional day traders. Instead, they are forced to take on more risk. Individual day traders typically trade using technical analysis and swing trades—along with some leverage—to make enough profits from small price movements in highly liquid stocks.7
Day Trader Tools
Day trading requires access to some of the most sophisticated financial services and instruments on the market. Day traders typically require:8
Access to the trading desk
This is usually reserved for traders who work for larger institutions or those who manage large amounts of money.
The trading desk provides these traders with immediate order execution, which is crucial. For example, when a takeover is announced, day traders looking to arbitrage the merger can place their orders before the rest of the market can profit from the price difference.
Financial media sources
News provides the most opportunities. It is essential to be the first to know when something important happens.
A typical trading room has access to all the leading news outlets, continuous coverage from news agencies, and software that constantly scans news sources for important stories.
