Understanding The Basics of Day Trading

Created: 23rd June 2023

Day trading involves the buying and selling of securities within a single day, sometimes even within seconds. It differs from traditional investing as it focuses on taking advantage of short-term price movements during a trading session. 

Day trading is commonly used on stock market indices, individual stocks, commodities and the foreign exchange (forex) market, where currencies are traded. 

Day traders tend to be more experienced traders and often have substantial funds at their disposal. Some of them take on additional risk by utilizing greater leverage to amplify their stakes. 

Day traders are highly attuned to events that can cause short-term market fluctuations. Trading based on news is a popular technique among them. Scheduled announcements, such as economic data releases, corporate earnings reports, or interest rate announcements, are subject to market expectations and psychology. When these expectations are not met or are exceeded, the markets react, often resulting in sudden and significant moves that can greatly benefit day traders.

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Getting Started as a Day Trader 

Professional day traders, who trade for a living rather than as a hobby, are typically well-established in the field. They possess an in-depth knowledge of the marketplace. Here are some prerequisites for becoming a successful day trader: 

  1. Knowledge and Experience in the Marketplace: Attempting to day trade without a strong grasp of the market can lead to financial losses. A good starting point is to understand technical analysis and chart reading. However, charts can be deceiving without a deep understanding of the market and its unique risks. Conduct thorough research and grasp the details of the products you trade. 

  1. Sufficient Capital: Prudent day traders only use risk capital that they can afford to lose. This safeguards them from financial ruin in the event of a string of losses and helps them make rational trading decisions. Adequate capital is often necessary to effectively capitalize on intraday price movements, which can be minuscule. Day traders planning to utilize leverage in margin accounts require ample cash as volatile market swings can trigger significant margin calls with little notice.

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Who Can Make a Living from Day Trading? 

There are two primary categories of professional day traders: those who trade for themselves independently with their own strategy and those who work for larger institutions. 

Most day traders who trade for a living are employed by major players such as hedge funds, proprietary trading desks of banks, and financial institutions. These traders enjoy advantages like direct lines to counterparties, trading desks, substantial capital and leverage, and sophisticated analytical software. They seek easy profits from arbitrage opportunities and news events, and their resources enable them to capitalize on these less risky day trades before individual traders can react. 

  • For the average investor, day trading can be intimidating due to the time commitment and intense concentration required. Day trading can be an extremely demanding full-time occupation. Constantly monitoring price fluctuations to identify fleeting market trends requires intense focus. 

  • So, it's important to evaluate whether day trading aligns with your financial goals, risk tolerance and personality before you go full-on into day trading. A worthwhile compromise may be to use day trading as just one component of your overall trading approach, perhaps only doing it for an hour or so per day.