What Is Day Trading?

Definition and Examples of Day Trading

Woman analyzing trading data on computer screens

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When you think of day trading, you may imagine someone sitting alert in front of multiple computer monitors, wearing a headset, and making high stakes, rapid-fire trades. And in part, you may be right. Day trading is the buying and selling of financial assets with the goal of making a profit in the same day.

Here we'll cover the basics of day trading and clear up a few murky areas to help you learn more about this niche practice.

What Is Day Trading?

All trading is done with a goal to make money by selling assets at a lower price than you paid for them, and the standard way to make a profit like this is by watching prices over time, looking for patterns or signs to predict prices in the future, and selling when it seems smart. Day trading differs because rather than watch pricing trends for a long span of time, choices and trades are made very quickly. Day traders rarely (if ever) hold assets overnight, or when the market being traded is closed.

Day trading was first available only to professional financial institutions. This is because they were the only actors who had access to the exchanges and market data for futures, options, currencies, and stocks. But thanks to the internet and advances in technology, these markets are now open to anyone who wishes to day trade at a cost-effective trading price.

How Day Trading Works

There are many types of day trading, each with features suited to different trader styles. They range from short-term trading, such as scalping where assets are only held for a few seconds or minutes, to longer-term swing and position trading where an asset may be held throughout the trading day.

Even though it may seem like they buy and sell on the fly, swing traders often look for patterns that can occur over many days or weeks.

Most day trading systems have a great deal of flexibility and can keep open positions for anywhere from a few minutes to a few hours. The span of time they stay open for depends on how the trade is doing, and whether it is in the right state to make a profit.

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. Going through a broker is the fastest way to engage in trading at the lowest cost. 

Day Trading vs. Swing Trading

Day Trading Swing Trading 
Trades are made in the same day Trades are made over days or weeks
Assets need constant watch Trader can watch assets less often
Relies mostly on how aware a trader is of the market Relies mostly on technical analysis
Can be large trades  Mostly done with smaller trades

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 based on the current state of the market. The types include:

  • 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.

If you are a casual investor, or just starting to learn about the market, day trading might not be for you. Most day traders have had quite a bit of training or practice before they decide to go this route. One of the reasons to be cautious is that large amounts of money can be lost in a moment with just one faulty trade. Traders without proper training can get caught up in the rush of one or two big wins. This is particularly risky if a trader borrows money to take advantage of a trading opportunity.

Unlike the brokers 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 assets with the goal of making a profit in the same day.
  • Individual investors who day trade compete with professional money managers.
  • Most day traders keep a close watch on their assets at all times; it takes time and labor.
  • Traders can gain great rewards, but also are subject to great risk.