What is day trading? Basics and how to get started

 

 

 

Day trading, once restricted to financial professionals, is now available to the general public. High-speed internet, modern computers, and online brokerage services have made it possible for anyone to participate in the financial markets. Today, many brokers have removed barriers — no large deposits are required to open an account, trading is commission-free, and fractional shares (i.e., buying shares in fractions) make it easier to access expensive stocks.

It’s not hard to understand the appeal of day trading: the freedom to work from home, the potential for quick profits, and a schedule that you can customize. Online communities like Reddit’s WallStreetBets have made the trend even more popular. Retail traders (i.e., ordinary investors) have now become a significant part of the stock market volume in both the U.S. and the U.K.

In this article, we’ll learn what day trading is, how to get started, and what its risks and opportunities are.

 

What is day trading?

Day trading is a short-term trading style that aims to profit from price fluctuations in a single day.

A day trader can make several trades in a day, but he always closes all his positions before the end of the day. This way he avoids overnight risk and does not have to pay margin interest because he does not hold any open positions at night.

In addition to day trading, you may have heard of other styles such as scalping, swing trading or long-term investing:

• Scalping: very short-term trading, where a position is closed within a few seconds or minutes.

• Swing trading: a position is held for a few days, weeks or months.

• Long-term investing: investing for a period of a year or more.

Day trading falls somewhere in between — neither too short nor too long — but is based on price movements that occur within a single day.

 

How to Become a Day Trader

Enthusiasm alone is not enough to succeed in day trading. You need the right preparation, capital, and discipline.

Here are some important things to keep in mind:

• Have enough capital:

In the US, day trading requires a minimum of $25,000 in your account, as per FINRA rules.

In the UK, there is no such rule, but always trade with an FCA regulated broker to keep your funds safe.

• Good computer system:

A computer with a fast processor and plenty of RAM is essential. If possible, use multiple monitors to view charts and data simultaneously.

• Fast internet connection:

Even a second of delay can be detrimental in day trading, so a stable and fast internet connection is essential.

• Choose a good broker:

Choose a broker that executes orders quickly, charges low fees, and provides excellent customer service.

• Direct Market Access (DMA):

Trades are executed faster through DMA brokers, which is beneficial for active day traders.

• Get educated:

Read good books to understand the market, such as Day Trading for Dummies by Ann Logg, Trading in the Zone by Mark Douglas, and Technical Analysis of the Financial Markets by John Murphy.

• Develop and test a trading strategy:

Develop a strategy that suits your personality and risk tolerance. Practice on demo accounts to gain experience without losing real money.

Platforms like MetaTrader and TradeStation allow you to test the performance of your strategy on historical data.

 

Popular Day Trading Strategies

There are several methods of day trading. Here are some common and effective strategies:

• Trend Trading:

Trades are made according to the current trend of the market. For example, if the price breaks above a resistance level, the trader may consider this a “breakout” and buy.

• Mean Reversion:

Based on the theory that prices always return to their average level. Tools like Bollinger Bands® help with this.

• News Trading:

Reacting quickly to economic news or data releases. For example, if the UK employment figures are better than expected, a trader might buy FTSE 100 futures or the iShares FTSE 100 ETF (ISF).

• Price Action Trading:

This method looks only at price movements. Patterns like Pin Bars or Inside Bars indicate the direction of the price.

• Gap Trading:

When the price jumps after the market closes (i.e., a Gap occurs), the trader determines the range of the gap in the early hours and decides to buy or sell.

Indicators like moving averages, RSI, and MACD are commonly used in day trading. Volume is also important because it indicates how strong the price movement is.

Remember, a good strategy isn't always complicated — often a strategy with simple, clear rules works best.

The best stocks for day trading are those that are highly liquid and have high volatility.

This gives traders the ability to buy and sell quickly and make more profit. Stock Screeners help find stocks that have high movement or volume.

 

Is day trading really profitable?

While it may sound tempting, the reality is that most day traders are not successful.

According to research, most people lose money, while only a few make consistent profits.

Some popular studies have found:

• A study called “Day Trading for a Living?” found that 97% of day traders in Brazil lost money within 300 days.

• A study conducted in Taiwan found that less than 1% of traders consistently made profits.

These statistics show that day trading is often like gambling. So invest only the amount you are willing to lose.

In the UK, if you make a profit from trading, it is subject to Capital Gains Tax, if your total income exceeds the annual allowance.

 

 

Is day trading legal?

Yes, day trading is legal — whether it’s in the US or the UK.

However, always choose a regulated broker. Be wary of unregulated or offshore brokers, as your money is not safe if they go bankrupt.

 

 

Day Trading Rules

The Pattern Day Trader (PDT) rule applies in the US.

If you make four or more day trades in five business days, you are required to maintain at least $25,000 in your margin account.

These rules are set by FINRA.

There is no such rule in the UK, but risk management is just as important there.

 

Conclusion

Day trading is an exciting but risky field. It is possible to make quick profits, but the potential for losses is just as great.

Discipline, constant learning, and emotional control are essential to success.

If you are planning to day trade, consider it a profession, not just a “hobby”. With the right knowledge, consistent practice, and good risk management, you can excel in this field.