Day traders are active traders. They adopt intraday strategies to make profits off a particular asset’s price changes. Day traders employ vast strategies and techniques to get the most out of the perceived market inefficiencies.
Day traders account for 22% of stock traders. However, day trading accounts only for 5% of institutional trading. Even if heavy day traders earn significant profits, their profits are often not enough to cover the transaction costs.
Read on to understand what day trading entails, the characteristics of a day trader, the strategies that a day trader uses, the controversy in day trading, and why a large percentage of day traders end up losing money.
IMPORTANT SIDENOTE: I surveyed 1500+ traders to understand how social trading impacted their trading outcomes. The results shocked my belief system! Read my latest article: ‘Exploring Social Trading: Community, Profit, and Collaboration’ for my in-depth findings through the data collected from this survey!
Table of Contents
What Day Trading Entails?
Day trading involves buying and selling a security on the same trading day. Even if day trading can occur in any market place, it is mainly common in the stock, cryptocurrency, and forex (foreign exchange) market. Day traders combine short-term trading strategies with high amounts of leverage to get the most out of small price movements, mainly for highly liquid currencies and stocks.
Trading based on news is a common technique among day traders. The traders are attuned to events and occurrences that lead to short-term market moves. Scheduled announcements like interest rates, corporate earnings, and economic statistics are subject to market psychology and market expectations. When expectations are not met, investors make sudden but significant moves that could greatly benefit day traders.
Here is a video on day trading for beginners:
Characteristics of a Day Trader
Some day traders trade for a living instead of a hobby and are well established in the trading field. Professional day traders have an in-depth understanding of the marketplace. Some of the characteristics of successful day traders include:
Experience and Understanding of the Marketplace
Most individuals who engage in day trading without ample experience end up losing money. A day trader needs to have chart reading and technical analysis skills to succeed in day trading. If a trader does not understand the market they are in and the assets that exist therein, charts could be deceiving. Traders must do their due diligence to understand everything about the products they trade.
Ample Capital
Day traders use risk capital, which is capital that they can afford to lose. By doing this, they shield themselves against potential financial ruin in case they lose their investment. By trading only a small amount of their capital, day traders can also eliminate emotion from their trading activities. However, to capitalize effectively on the day price movements, a large amount of capital is necessary.
Well-Calculated Strategies
Day traders use a combination of techniques and strategies to get an end in the market. Some of the strategies that day traders employ are arbitrage, swing trading, and news trading. The traders refine these strategies until they make the desired consistent profits and minimize their losses. The swing trading strategy has a high risk but a high reward. Arbitrage has low risk and medium returns. Trading news has a medium risk and returns.
Discipline
It would be useless for a day trader to lay down strategies but lack the discipline to abide by the strategies. Many day traders often make losses because they fail to trade within their criteria. Success in day trading is impossible without discipline. As the famous saying goes, a trader should plan the trade and trade the best outcome plan.
Day traders mainly rely on market volatility to make profits. If a particular stock moves a lot during the day, it will be attractive for a day trader. Stocks may move because of a wide range of factors, including investor sentiment, earnings report, company, and general economic news.
Day traders often lean towards liquid stocks because this allows them to change their position without the need to alter the stock’s price. If a stock moves down, day traders may decide to short-sell their stocks so that they can make profits when the stock price falls. If the price of stocks goes up, day traders may assume a buy position. Irrespective of their strategy, day traders always favor a stock that moves.
The Strategies That Day Traders Use
Day traders use numerous intraday trading strategies. Scalping is a strategy that aims at making many small profits based on slight price changes throughout the day. Traders also adopt the range trading strategy that entails using support or resistance levels in determining buy and sell decisions.
Day traders also use news-based strategies that rely on heightened volatility around news events to seize trading opportunities. High-frequency trading, commonly abbreviated as HFT, is also a common strategy among day traders. It entails using sophisticated algorithms to take advantage of short-term or small market algorithms.
Every day trading strategy must have a certain component irrespective of whether it is a beginner, advanced, or automated day trading strategy. Every strategy must take into account the three most essential elements: liquidity, volatility, volume. It is vital to choose the right stock, especially if you make money from slight price movements. The three components outlined will help a trader to make the right decision.
- Liquidity. This will allow a trader to enter and exit the market when the prices are stable and attractive. Liquid strategies will focus on stock prices of commodities like natural gas, gold, and crude oil.
- Volume. With this measurement, a trader will know the number of times that an asset or a stock has traded within a short period. This is known as the average daily trading volume. If the volume is high, it indicates a high interest in the security or the asset. An increase in volume is a clear indication of an impending price increase or decrease.
- Volatility. Volatility will help a day trader understand the potential profit range. High volatility is an indication that day traders are likely to make high profits or high losses. Specific markets like the cryptocurrency markets are known to have high volatility.
Controversy in Day Trading
One of the most understood and debated topics is the profitability potential of day trading. The internet has all sorts of day trading scams that promise significant returns within a short period. Many people fall for these get-rich-quick schemes, trade without sufficient knowledge, and end up losing money. However, many day traders still make an honest and successful living despite the controversies surrounding day trading.
The majority of financial advisors and money managers shy away from day trading because the potential rewards do not justify the risks. To make the situation worse, most day traders insist that they must make profits. Even if day trading is profitable, the success rate is often lower.
Since day trading involves significant risks, it is not for everyone. It requires a sufficient understanding of how the markets work and strategies that help traders make profits in the short term. Despite the many success stories of day traders who make enormous profits, this is not always the case for every trader. Day trading is all about luck and the right timing. Bad luck could make even the most experienced day trader sink.
Why Most Day Traders Lose Their Money?
Statistics indicate that around 80% of all day traders are unprofitable over a year. You would be surprised to learn that approximately 75% of day traders quit before the end of the first two years. Most traders do not take the time to understand day trading. Most are overconfident in their trading abilities; they trade more aggressively and take more risks.
Author’s Recommendations: Top Trading and Investment Resources To Consider
Before concluding this article, I wanted to share few trading and investment resources that I have vetted, with the help of 50+ consistently profitable traders, for you. I am confident that you will greatly benefit in your trading journey by considering one or more of these resources.
- Roadmap to Becoming a Consistently Profitable Trader: I surveyed 5000+ traders (and interviewed 50+ profitable traders) to create the best possible step by step trading guide for you. Read my article: ‘7 Proven Steps To Profitable Trading’ to learn about my findings from surveying 5000+ traders, and to learn how these learnings can be leveraged to your advantage.
- Best Broker For Trading Success: I reviewed 15+ brokers and discussed my findings with 50+ consistently profitable traders. Post all that assessment, the best all round broker that our collective minds picked was M1 Finance. If you are looking to open a brokerage account, choose M1 Finance. You just cannot go wrong with it! Click Here To Sign Up for M1 Finance Today!
- Best Trading Courses You Can Take For Free (or at extremely low cost): I reviewed 30+ trading courses to recommend you the best resource, and found Trading Strategies in Emerging Markets Specialization on Coursera to beat every other course on the market. Plus, if you complete this course within 7 days, it will cost you nothing and will be absolutely free! Click Here To Sign Up Today! (If you don’t find this course valuable, you can cancel anytime within the 7 days trial period and pay nothing.)
- Best Passive Investment Platform For Exponential (Potentially) Returns: By enabling passive investments into a Bitcoin ETF, Acorns gives you the best opportunity to make exponential returns on your passive investments. Plus, Acorns is currently offering a $15 bonus for simply singing up to their platform – so that is one opportunity you don’t want to miss! (assuming you are interested in this platform). Click Here To Get $15 Bonus By Signing Up For Acorns Today! (It will take you less than 5 mins to sign up, and it is totally worth it.)
Conclusion
Despite the controversy surrounding day trading, it is still a viable way to make profits as long as you understand the markets. Day traders, both individual and institutional, constitute a significant percentage of traders and play an essential role in keeping the markets liquid and efficient.
BEFORE YOU GO: Don’t forget to check out my latest article – ‘Exploring Social Trading: Community, Profit, and Collaboration’. I surveyed 1500+ traders to identify the impact social trading can have on your trading performance, and shared all my findings in this article. No matter where you are in your trading journey today, I am confident that you will find this article helpful!
Affiliate Disclosure: We participate in several affiliate programs and may be compensated if you make a purchase using our referral link, at no additional cost to you. You can, however, trust the integrity of our recommendation. Affiliate programs exist even for products that we are not recommending. We only choose to recommend you the products that we actually believe in.
Recent Posts
Exploring Social Trading: Community, Profit, and Collaboration
Have you ever wondered about the potential of social trading? Well, that curiosity led me on a fascinating journey of surveying over 1500 traders. The aim? To understand if being part of a trading...
Ah, wine investment! A tantalizing topic that piques the curiosity of many. A complex, yet alluring world where passions and profits intertwine. But, is it a good idea? In this article, we'll uncork...