What Is Day Trading?

Definition & Examples of Day Trading

Woman analyzing trading data on computer screens
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Day trading is the buying and selling of various financial instruments with the goal of making a profit in the same day.

What Is Day Trading?

While all trading is done with a goal to profit from the difference between the buying price and selling price, day trading differs in that positions are rarely (if ever) held overnight or when the market being traded is closed.

Day trading was originally available only to professional financial institutions because only they had access to the exchanges and market data for futures, options, currencies, and stocks. Technology and the internet have opened access to these markets, allowing individuals to day trade at a cost-effective trading price.

How Day Trading Works

There are several different styles of day trading, suited to different day trader personalities. The styles range from short-term trading such as scalping where positions are only held for a few seconds or minutes, to longer-term swing and position trading where a position may be held throughout the trading day.

Most day trading systems have a lot of flexibility and can have open positions for anywhere from a few minutes to a few hours, depending upon how the trade is doing (whether or not it is in a profitable state).

There are many different financial instruments, or markets, that can be day traded, and they are offered by various exchanges throughout the world.

The main types of day trading markets are futures, options, currencies, and stock markets. Within these types, there are groups of markets based on stock indexes (such as the Dow Jones, and the DAX), currency exchange rates (such as the Euro to U.S. Dollar exchange rate), and commodities (such as gold and oil).

Day traders can have access to all of the exchanges and their markets via direct access brokers, so called because they offer direct access to the exchange, which provides faster trade execution at lower cost. 

Swing traders often look for reliably predictable patterns that can occur over several days or weeks.

Day Trading vs. Swing Trading

Day Trading vs. Swing Trading
Day Trading Swing Trading 
Trades made in the same day Trades made over days or weeks
Requires constant attention to computer monitor Allows trader to monitor less frequently 
 
Relies more on trader awareness Can rely more on technical analysis
Can be substantial trades  Usually done with a smaller position

Types of Day Trading

Most day traders will choose a single type of trade, but some traders will take different types and choose which one to trade depending upon the current condition of the market. The types are:

Trend Trades

Trades in the trending direction of the current price movement (i.e., buying if the price is moving up)

Counter-Trend Trades

Trades against the direction of the current price movement (i.e., selling if the price is moving up)

Ranging Trades

Trades that go back and forth in range between two prices, and used when the market is moving sideways

Is Day Trading for Everyone?

In addition to the style and type of day trading, there are other variances between day traders. Some day traders like to make many trades throughout the trading day, while others prefer to wait for what they consider the best conditions for their trade, and perhaps only make one trade per day. However many trades are made, the trading process that is used, and the desired goal of making a profit, are the same.

Day trading is not intended for use by the casual investor or someone who has not received some training in the fundamentals of the markets. Large amounts of money can be lost in a moment with just one faulty trade. Unsophisticated traders can get caught up in the adrenaline rush of one or two big wins. This is particularly dangerous if money is borrowed to take advantage of a trading opportunity.

Unlike the professionals who are trading other people's money, individual day traders are putting their own assets at risk.

Key Takeaways

  • Day trading is the buying and selling of financial instruments with the goal of profiting in the same day.
  • Individual investors who day trade are competing with professional money managers.
  • The practice requires close attention to computer monitors at all times.
  • Traders can gain great rewards, but also are subject to great risk.