There was once a time when the only people who were able to trade actively in the stock market were those working for large financial institutions, brokerages, and trading houses. But, with the rise of the internet and online trading houses, brokers have made it easier for the average individual investor to get in on the game.

Day trading can turn out to be a very lucrative career, as long as you do it properly. But it can also be a little challenging for novices—especially for those who aren’t fully prepared with a well-planned strategy. Even the most seasoned day traders can hit rough patches and experience losses. So, what exactly is day trading and how does it work?

Key Takeaways

  • Day traders are active traders who execute intraday strategies to profit off price changes for a given asset.
  • Day trading employs a wide variety of techniques and strategies to capitalize on perceived market inefficiencies.
  • Day trading is often characterized by technical analysis and requires a high degree of self-discipline and objectivity.

The Basics of Day Trading

Day trading is defined as the purchase and sale of a security within a single trading day. It can occur in any marketplace but is most common in the foreign exchange (forex) and stock markets. Day traders are typically well-educated and well-funded. They use high amounts of leverage and short-term trading strategies to capitalize on small price movements in highly liquid stocks or currencies.

Day traders are attuned to events that cause short-term market moves. Trading the news is a popular technique. Scheduled announcements such as economic statistics, corporate earnings or interest rates are subject to market expectations and market psychology. Markets react when those expectations are not met or are exceeded, usually with sudden, significant moves, which can benefit day traders.

Day traders use numerous intraday strategies. These strategies include:

  • Scalping, which attempts to make numerous small profits on small prices changes throughout the day
  • Range trading, which primarily uses support and resistance levels to determine their buy and sell decisions
  • News-based trading, which typically seizes trading opportunities from the heightened volatility around news events
  • High-frequency trading (HFT) strategies that use sophisticated algorithms to exploit small or short-term market inefficiencies