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What is Day Trading?
What is Day Trading?

What is Day Trading?

Day trading is an exciting way to make money and become financially independent. You can day trade almost any market, though Forex, stocks, index futures and cryptocurrencies are most common. 

Day trading has grown in popularity since the Internet gave more people access to markets, and advances in technology has put advanced trading platforms and tools in the hands of retail traders. 

Before these developments, the ability to trade actively on a short-term basis was only available to those working for large trading firms and on trading floors. However, day trading is now possible for anyone with an internet connection, a reasonably good computer and as little as $500.

In this guide to day trading, we look at what day trading is, what it entails, the pros and cons of day trading and some of the best day trading strategies to use.

Day Trading Definition 

Day trading is the buying and selling of securities in positions that are almost always opened and closed on the same day. All liquid markets can be day traded, including Forex, stocks, commodities, index futures and other derivatives.

How to day trade

A trading strategy should include some, if not all of the following elements:

  • Filter: It’s important to only trade a particular strategy when the right market conditions are in place. A filter is a set of rules that may relate to volume, volatility, time of day and the position of certain indicators which tells you when to begin looking for setups.
  • A setup is a second set of rules and conditions that must occur before a trade is entered. When all of these conditions are in place, you will be looking for a trigger. 
  • The trigger defines the exact moment you will enter a trade. This is the last event that needs to occur in order to confirm a trade. In many cases, a trigger will involve the price or an indicator crossing a specific level and closing above or below that level.
  • Position size: For each strategy, there should be a specific way to calculate the size of the trade you will enter. 
  • An initial stop loss is a price level at which you will close a losing trade to avoid further losses. By knowing your positions size and the stop loss level before you enter a trade, you will know your maximum risk for the trade.
  • A price target is the level at which you will close or partially close a trade. This will usually be the price level with the highest probability of being reached and generating a profit.
  • A trade management plan includes techniques like trailing stops, scaling, and the time at which you will close an open position before the market closes.

Day traders must also consistently monitor their performance so that they can build on their strengths and work on weaknesses.

Characteristics of a day trader

  • Discipline is possibly the most important trait and applies to several aspects of a trader’s routine. Firstly, you will need the discipline to do the necessary preparation before the market opens and after the market closes. You will also need the discipline to live a healthy life and get enough exercise and sleep. Day trader’s need to be functioning at their best every day, and this requires the right lifestyle.
    Discipline is also required to stick with a trading plan, cut losing trades when a stop loss is breached, and hold onto winning trades when that’s what the strategy requires. You will also need the discipline to avoid impulse trades or taking excessive risk.

  • The ability to focus for long periods of time is also a required trait for day traders. Day traders need to watch charts and watch lists for most of the day, which is not something everyone can do. Day trading is suited to those who can focus and think on their feet. If you aren’t able to focus all day, there are other types of trading like swing trading, position trading and trend following that you may be better suited to.

  • Patience is required to wait for profitable trading opportunities, rather than chasing every stock that seems to be moving. Unlike most careers, with trading, doing more work doesn’t necessarily lead to more profits. Sometimes the hard work is the waiting, and that requires patience.

  • Curiosity is often overlooked but is essential if you are going to find and maintain a trading edge. Traders who succeed over the long term are those who find new patterns before other traders do. This requires a genuine interest in the market and in trading psychology. You will need to develop a habit of continuous learning in order to keep learning new strategies.

  • Grit, fortitude and mental toughness are also required. As a day trader, you will go through periods where nothing seems to work. This is when you will really be tested. As a trader, your P&L will probably cycle through periods where you win and periods when you will lose. During those winning periods, you will need to capitalise on the opportunities to maximise your profits. And during the losing streaks you will have to maintain focus and limit your losses. 

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