Day Trading
Day Trading Explained

If you have an interest in the financial markets, the chances are you will have considered becoming a day trader. Day trading requires knowledge and fast decision-making abilities, but by honing and sticking to your day trading strategies and risk management plans it’s possible to achieve consistency in the stock, futures and forex markets.

What is Day Trading?

Day trading is the process of opening and closing short-term positions in the financial markets. These positions are never open for longer than a day, with all open positions generally closed before the close of a trading session. Successful day traders won’t just pick a random stock or forex pair and attempt to trade it on a particular day. They will utilise day trading strategies and analysis to pinpoint opportunities to make quick but frequent profits from the financial markets.

It’s possible that day traders may look to execute multiple trades on the same asset on the same day. The key for day traders is to find beneficial entry and exit points in the markets that enable them to take small, regular profits from often tiny market movements. Day trading takes a lot of focus and discipline. It’s a trading concept – making small, but multiple profits on modest price moves throughout a day. All of which can add up to a tidy sum at the end of a trading day.

Day traders will also use leverage afforded to them by brokers. Leverage enables traders to increase their overall exposure to the market by two or sometimes four times the size of their initial investment. It helps to maximise profitable day trading positions, but it also magnifies losses when open positions go against traders’ expectations.

Advantages and Disadvantages of Day Trading

Hopefully, our day trading definition has given you a basic understanding of what makes a day trader and what their activity is like in the financial markets. Now, we’ll take a deep dive into the pros and cons of being a day trader to help you decide if it’s an activity you’d like to take part in.

Pros of day trading

  • The freedom to work and trade when you want
    As a successful day trader, you can be your own boss. You can set your working hours. Furthermore, the effort and time you put in to sharpen your day trading strategies will benefit you and you only.
  • Choose from a multitude of day trading strategies
    Day trading can be conducted using several strategies. We’ll cover the likes of breakout trading, trend following and counter-trend trading later in this guide. 
  • The ability to take advantage of market overreactions and volatility
    Financial markets largely contain human traders, as well as algorithm-based trading bots. Therefore, markets tend to overreact to news releases. Day traders can take advantage of that increased volatility.

Cons of day trading

  • It requires discipline, in-depth research and analysis
    If you are wondering how to become a day trader, it takes considerable mental fortitude to stick to your trading plan and analyse new trading angles day in, day out.
  • Trading fees
    In most cases, brokers will charge commission or spreads on a per-trade basis. Therefore, day traders that place multiple trades per day will see these fees accumulate till the end of a trading session.
  • Typically requires 15-40 hours of focus weekly
    Finding day trading angles typically requires at least a couple of hours of daily research. If you are serious about becoming a full-time day trader, you’ll need to be prepared to commit at least 40 hours a week to the markets.

Day trading styles

Let’s take a look at some of the most common day trading styles and strategies that beginner and experienced financial traders use daily in the markets:

  • Scalping
    Scalping is considered the pinnacle of day trading. It’s the ability to use technical and fundamental analysis combined to exploit small price gaps in the markets. Scalpers will often open very short term positions in the markets lasting mere minutes or even seconds. 
  • Counter-trend trading
    This type of trading involves being contrarian and placing trades against the current trend or momentum in the market. Counter-trend trading relies on an asset’s value reversing its rise or fall to a more stable price point. 
  • Trend following
    Many day traders will also look to follow and ride momentum in the markets. They’ll use the trend, momentum and volume indicators to go long when prices are rising and to go short when prices are falling
  • Fundamental trading
    Some day traders will also look to incorporate fundamental analysis into their trading schedules, reacting to press releases and news reports to go long on stocks and fiat currencies when there is positive news and short stocks when news is more negative.

Day trading markets

The forex, futures and stock markets are the three most common markets for day traders. In the stock market, trading sessions typically open at 9.30am EST and close at 4pm EST. Day traders typically close all their open positions in the markets before 4pm.

The forex market is the biggest out of all potential day trading markets. It is also the most accessible, as it can be traded 24 hours a day. It’s important to choose a forex broker that allows you to trade the forex pairs you want, as some brokers will restrict day traders to only high-volume pairs, known as major pairs.

Day trading vanilla options is also possible, although this is more familiar to swing traders that are prepared to hold positions for days and weeks.

Day trading tips

We’ve put together a few key takeaways to help you along your path to becoming a successful day trader:

  1. Determine how much you are prepared to risk per trade
    Ascertain how much you are willing to risk on a trade. This means determining your maximum loss on an individual trade. This can be very useful when setting up stop-loss orders into the market to mitigate risk. 
  2. Always use risk management tools to control open positions
    Speaking of risk management, most brokers will either be compatible with state-of-the-art trading software or offer their own proprietary trading platforms. Either way, there will be the option of setting stop-loss and take profit orders. This is important to manage your risk-reward for every trade and remove the emotion from your trading. AvaTrade clients have access to our unique AvaProtect risk management tool, which covers losses on open trades for a small fee. 
  3. Do your best to manage your emotions
    Emotions are one of the main scourges of fledgeling day traders. It can be very hard to accept losses and to stick to your day trading rules and plans. However, those who can execute their trades based on logic rather than emotions like fear or greed are more likely to stay the course. 
  4. Do your homework
    Knowledge is power in the financial markets. Be sure to do your homework. Keep abreast of the latest news on your target stocks and economies to get a feel for market sentiment.

Start Your Day Trading Journey with AvaTrade

Do you feel ready to tackle the financial markets as a day trader? You can test your beginner day trading strategies with confidence right here at AvaTrade. With regulatory licenses spanning five continents across the globe and compatibility with the world’s most popular trading platforms, including MetaTrader 4 and MetaTrader 5, it’s easy to open and close your positions. Better still, with our award-winning AvaTradeGO mobile app you can take control of your day trading wherever you are in the world, providing you have reliable mobile internet access.

Register for your AvaTrade trading account today or create a demo account to start day trading stocks and learn the market dynamics risk-free.