Part-time to Pro7 MIN READ

What is day trading? — The basics explained

Social media, influencers and trading gurus might portray day trading as alpha and omega, the only way to trade the financial markets. It is arguably the most known term and popular form of trading. Most enthusiasts have a misconception about day trading and what it involves. One word sums up this form of trading; trading psychology.

In this guide, we aim to clear up the confusion and shed light on why day trading is so popular among traders.

In this article

    Key takeaways

    • During the trading day, day traders buy and sell financial assets to profit from minor price variations.
    • To benefit from day trading, day traders adopt various approaches and strategies.
    • Technical analysis of price movements is frequently used to guide day traders, which involves a high level of self-discipline and risk management.
    • Day traders must be careful, focused, objective, and emotionally detached in making trading decisions.
    • Day traders often consider liquidity, volatility, and volume when determining the financial assets to trade.
    • Day traders employ candlestick chart patterns, trendlines, triangles, volume, and other technical indicators to determine entry and exits.

    What is day trading?

    Day trading is buying and selling financial products inside a single trading day, closing positions at the end of each day irrespective of price. Day traders will frequently buy and sell the same asset multiple times on the same day.

    Intraday trading is not for part-time traders since it requires time, effort, devotion, and a specialised attitude. Day trading involves quick decisions and requires more attention than swing trading, trend trading, or position trading. It is often seen as the polar opposite of traditional investment methods where ‘buy and hold’ is the name of the game and where you aim to enter and exit at price swing points over a bigger timeframe.

    How does day trading work?

    Day traders take advantage of the inevitable ups and downs in price that occur throughout a trading session. Day trading is most frequently carried out in stock and forex markets. Professional day traders are often well-educated in trading and well-funded. Many of them enhance the risk by employing margin and leverage to boost their returns. On the other hand, they also increase their risk when using leverage.

    Day trading strategies

    Day traders are acutely aware of factors that drive short-term market movements. One prominent strategy is trading based on news. Scheduled releases, such as economic statistics, corporate earnings, or interest rate announcements, are influenced by market expectations and psychology. That is, markets can respond when expectations are not met or are exceeded, with fast, big changes that favour day traders considerably.

    Day traders employ a variety of day trading strategies. Among these strategies are

    • Scalping: a technique that focuses on executing many small trades on price swings throughout the day.
    • Range trading: This approach determines the trader's buy and sell decisions using pre-determined price support and resistance levels that make a range.
    • News-based trading: This technique capitalises on the increased volatility that happens around news events.
    • High-frequency trading (HTF): These tactics employ sophisticated algorithms to capitalise on minor or short-term market fluctuations.

    What can be day traded?

    One may day trade most  financial markets, but here are the most popular ones:


    Forex day trading is the most popular because the enormous volume of FX trading appeals to many day traders. There are often many short-term trading opportunities when trading a currency pair and an unrivalled amount of liquidity. 

    Other methods of trading foreign exchange are more suited to technical analysis. Furthermore, there is no central market for FX. This means that traders can conduct trades 24/5. They are an excellent starting point for new or ambitious full-time traders.


    Day trading in stocks provides unique chances not available with a standard 'buy and hold' approach. Speculating on stock prices, for example, through CFDs or spread betting, also allows traders to profit from dropping prices just as easily as increasing prices.

    Margin or leverage can also be used to minimise the amount of money necessary to open a big position. This will maximise your profits but also expose you to greater risks. As a result, you may speculate on the most recent news release, product launch, financial report, and technical indications.


    Bitcoin and Ether are the two most popular cryptocurrencies with traders. Over the past few years, cryptocurrencies have attracted many new trading enthusiasts, partly due to their novelty, but also because of their exceptional volatility. In addition, trading cryptocurrencies has become much more straightforward than it used to be.


    Popular commodities include energy markets, industrial and precious metals. You can trade everything from gold to crude oil and copper, which are all materials vital to the global economy. 


    Stock indices group together the biggest and most important companies in the world. This makes it easy for traders to gain exposure to a wide basket of different businesses with just the click of a mouse. Likewise, it’s just as easy to speculate on falling prices as rising ones. Major stock indices include the US 500, the UK 100, and the Germany 40, but there are many others also available. 

    Things to understand about day trading

    Factors that affect day trading

    There are a few crucial considerations, as day trading is much more time-consuming than the traditional buy-and-hold approach. Because the emphasis in investing is on long-term market movements, everyday fluctuations have minimal influence on the overall picture. However, for day trading, the emphasis is on the factors that might influence intraday market movement.

    Here are some major factors:

    • A market's liquidity refers to how readily and rapidly positions can be entered and closed. Because day traders are likely to execute many trades during the day, high liquidity is critical.
    • The volatility of an asset, or how quickly the price fluctuates, is an essential factor for day traders to consider. If substantial volatility is forecast during the day, the moves might provide numerous possibilities for short-term gains.
    • The trading volume of an asset is the number of times it is bought or sold in a certain period. A large trading volume indicates a lot of interest and is beneficial for determining entry and exit locations.

    Choosing the method of day trading

    The first step in becoming a day trader is deciding which products you want to trade. Day trading using derivatives is popular. Spread betting and CFD trading are the most popular options among retail traders.

    There is no requirement to possess the underlying asset while trading using these products. Instead, day traders typically use derivative products which are traded on margin. This means they use leverage, which magnifies both the potential profits and losses. But you can open and close trades quickly and speculate on whether a market's price is rising or declining.

    Creating a trading plan

    Every trader should plan exactly what they hope to achieve and be realistic about the goals they set for themselves. You may be disappointed if you anticipate making a lot of money immediately because day trading can have a steep learning curve.

    It is also critical to determine how you will develop a system for entering and exiting trades and whether this will be based on fundamental or technical research. If you opt for fundamental research, your day trades will almost certainly concentrate on macroeconomic data announcements, corporate reports, and breaking news. If you want to employ technical analysis, you will likely concentrate on chart patterns, historical data, and technical indicators.

    Risk management

    Developing a risk management plan is a critical stage in trading preparation. Traders can minimise possible losses to prevent the worst-case situation with the help of stop losses. Stops and limits are critical risk management tools in every trader's armoury.

    It's commonly said that an experienced trader closes a losing trade quickly but leaves profitable trades to run, and this is true for day trading as much as any other style. A trader does not always have to be correct, but they must immediately recognise when things are going wrong and take action to minimise losses. 

    The risk-to-reward ratio is not a static concept. Different market conditions and strategies have different risk-to-reward ratios. However, the goal remains the same, to win more and lose less. 

    For example, many day traders are comfortable with a win-to-lose probability of under 40%, but aim for a risk-to-reward ratio of at least 1:2. So for a set of 10 trades ($10 risk per trade), if they win only four trades, they still make $20 ($80 total profit-$60 six losses). It’s to be noted that in this example, the figures are only for illustration and may vary for everyone.

    As a rule of thumb, it's said that you should only risk 1-2 % of your total account on a single trade. 

    Monitoring trades

    While day trading, you can go long and short on the same day. If you believe a market will rise, you will buy the asset, but if you believe a market will fall, you will choose to sell it.

    It's critical to stay updated on upcoming market events or breaking news that might affect the prices of the markets you're interested in. You can look at an economic calendar at the start of each trading day so that you can trade potential market movements.

    One of the most critical practices at this time is to keep a  journal to record all trades throughout the day and a record of wins and losses.


    Many day traders lose money because they fail to generate trade ideas that satisfy their own trading strategy or plan. With trading, as in any other field, success is impossible without discipline.

    To profit, day traders rely mainly on market volatility. A day trader may find a stock interesting if it moves a lot during the day. That might happen for various reasons, including an earnings report, investor mood, or even broad economic or corporate news.

    Day traders also appreciate highly liquid equities since that allows them to adjust their position without influencing the price of the stock.  This liquidity will mean that they can open and exit their positions in one go without the price moving against them. Ultimately it all comes down to the strategy and execution of that strategy with discipline. 

    Regardless of the day trader's technique, they're usually looking to trade an asset that moves a lot.

    Realistic profits

    We see people opening trades on small timeframes intraday. But sometime after entering, and once the price goes in their favour, they will jump to a higher timeframe to justify keeping the trade open for longer. This runs the risk of the price reversing, so their unrealised profits evaporate and the market goes on to hit their stop loss. 

    Why is day trading controversial?

    The profitability of day trading is a frequently disputed issue on Wall Street. Online day-trading scams have attracted beginners by promising huge profits quickly.

    Some people engage in day trading without adequate understanding. However, other day traders succeed despite – or perhaps because of – the dangers.

    Profiting via day trading is possible. But success isn’t guaranteed due to the risk and expertise required. And don't underestimate the importance of chance and timing. 

    Why is day trading more difficult than passive investing?

    Day traders are prone to take more risks than swing or position traders. In day trading, institutional traders and banks compete with retail day traders. Professionals are aware of the downsides and techniques. They have high-tech trading equipment, data subscriptions, and personal relationships. They're well-equipped to succeed. 

    Day trading can be tough for retail traders due to psychological biases. Day traders often fall prey to FOMO (the fear of missing out) and open a position too early without a proper signal. Or, they habitually close winners too soon and hold losers too long. 

    What are the benefits of day trading?

    Traders use day trading to reduce the danger of slippage or to save money on overnight swaps. Day trading requires a significant amount of time and commitment. Hence it is not typically employed by part-time traders. Stocks, indices, and FX are popular day trading markets.

    Before beginning to day trade, it is critical to analyse a market's liquidity, volatility, and trading volume. You can utilise a variety of day trading tactics, such as trend trading, scalping, swing trading, mean reversion, and money flows. 

    Do you know the difference between swing trading vs day trading?

    People also ask

    What do I need to get started with day trading?

    You will need a solid trading plan and take a disciplined approach to start day trading. Once they are in place, you will need to create an account and deposit cash - it is critical to have enough funds to fulfil the margin requirements of any positions you open. If you aren't ready to trade on live markets, you can always register for a demo account to practise day trading.

    Is it possible to make money day trading?

    Yes, day traders can make money. Their profit amount varies greatly based on their strategy, available resources, and risk management plan. However, there is a high level of danger associated with day trading, which is why we emphasise the need to educate yourself before trading financial markets.

    When is the ideal time to trade during the day?

    The busiest times for financial markets tend to be when they open and close. This is when trading volumes are highest as traders work to establish prices and trends.  Later in the day, the market usually settles down and becomes less volatile. Day traders earn money by buying low and selling high. Therefore the less volatile the market, the less appealing it is to day traders. Of course, every market day is different, and mitigating conditions may also contribute to volatility throughout the trading day.

    How much money can you make with day trading?

    Day traders might win or lose a considerable amount of money at any given time. There are no assurances of profit when investing in the financial markets, especially in the fast-paced world of day trading.

    Is it better to use technical or fundamental analysis for day trading?

    For day trading, technical analysis may be better suited. This is because it can assist a trader in identifying the short-term trading patterns and trends required for day trading. Because it focuses on valuation, fundamental analysis is more suited for long-term investing. Market reaction to basic data such as news or earnings releases is typically very short-lived in the near term.

    It is also unpredictable as in some situations good economic news can be bad for some markets, and vice versa. Data releases and other economic news can act as a catalyst for sharp price movements, but there’s no guarantee over the direction of the move.

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