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What is day trading and how to day trade?

Education /
Milan Cutkovic

What is day trading?

Day trading refers to buying and selling financial instruments within a short period of time, ranging from seconds to hours. Day traders seek to profit from short-term price movements and close their positions before the trading day ends.

Day trading strategies can be applied to a wide range of asset classes, including stocks, commodities, currencies, cryptocurrencies, and bonds. Day traders share the following characteristics:

  1. They will close their position before the end of the trading day to avoid overnight exposure.
  2. They seek volatility: A currency pair, for example, that consolidates within a 10-20 pips range per day will generate very few trading opportunities.
  3. They frequently employ technical analysis as part of their trading strategy. Even news traders (those who trade events like interest rate decisions or economic data releases) often use technical analysis to help them determine where to place their stop-loss or take-profit levels.
  4. Use more leverage than swing and position traders. As day traders are chasing small price movements, they prefer to use higher leverage to amplify their potential profit (at the risk of increasing their potential loss).

 

How does day trading work?

Day trading is a trading style that can be used on a wide range of instruments. Similarly, the strategies employed by day traders can vary greatly.

Some day traders rely entirely on technical analysis, while others prefer to trade events and rely solely on price action to make trading decisions. Other traders may employ algorithms or expert advisors (EA), which may execute hundreds of trades per day with a holding period of only a few seconds.

Manual trading requires day traders to closely monitor markets and devote a certain amount of time each day to this activity. When day traders will be active is determined by their preferences as well as their strategy and the instruments they trade. If their strategy requires volatility and they prefer to trade the British pound, it makes sense to trade during the London session, when the pound is most likely to move.

 

How to day trade

First, you must prepare yourself and determine whether day trading is appropriate for you. While it is difficult to simulate the stress that can accompany volatile PnL swings (fluctuations in a trader's account balance as a result of changes in the value of their positions), a demo account will give you an indication of whether or not potentially monitoring the markets for several hours in a row and making quick decisions will work for you.

If you decide that day trading is for you, you must develop a strategy and spend time testing it in a simulated environment. Eventually, practice will lead you to the best trading instruments for your strategy. For example, if the strategy relies on high volatility, oil or GBP/JPY may be appropriate instruments.

A well-defined trading plan is always important, but it is especially important when day trading. Day traders are more prone to overtrading, so having clear risk management rules in place is essential. You can set a maximum drawdown percentage per day or a maximum number of losing trades before stopping and analysing what happened.

 

Advantages of day trading

While day trading can be risky, it also offers several potential advantages for traders who want to participate:

  1. No overnight exposure: As day traders close all their positions before the end of the trading day, they are not affected by potentially adverse overnight price movements or unexpected events.
  2. No swap charges: There are no swap charges because day traders do not carry their positions over to the next day.
  3. Opportunities: Day trading strategies can generate a high number of trading opportunities.
  4. Flexibility: Some traders plan their day so that they only trade at certain times of day (for example, when the London and New York markets open). This allows them to make their trading days more predictable and organised rather than constantly monitoring markets.
  5. Diversification: Provided there is enough volatility for their strategy to work, day traders can easily switch between different trading instruments.

 

Disadvantages of day trading

  1. High risk: While all forms of trading carry risk, the fast-paced nature of day trading, as well as the use of high leverage, can increase the risk of significant losses for traders.
  2. Overtrading: Day traders are much more likely to overtrade than swing or position traders. Many trading opportunities can become a burden for traders who are unable to control themselves or engage in ‘revenge trading’ after suffering losses.
  3. Stress: Constant market monitoring and the need to make quick decisions can lead to noticeable levels of stress.
  4. Prior experience is required: Day trading can be more difficult than swing and position trading because it requires making quick decisions daily. Controlling emotions in such an environment can be more difficult, which is why day trading is generally not suitable for traders with little or no experience.

 

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This information is not to be construed as a recommendation; or an offer to buy or sell; or the solicitation of an offer to buy or sell any security, financial product, or instrument; or to participate in any trading strategy. It has been prepared without taking your objectives, financial situation, or needs into account. Any references to past performance and forecasts are not reliable indicators of future results. Axi makes no representation and assumes no liability regarding the accuracy and completeness of the content in this publication. Readers should seek their own advice.

FAQ


What is day trading?

Day trading is the practice of buying and selling a financial instrument on the same trading day to profit from short-term price movements.


Is day trading suitable for beginners?

Day trading can be challenging for beginners as it requires taking quick decisions, which can be stressful. Beginners should start with a demo account and practice in a risk-free environment.


What's the difference between day trading and swing trading?

Swing traders hold their positions for several days to several weeks, whereas day traders close their positions before the trading day ends.


Do I need a lot of money to begin day trading?

While there is no set amount, day traders should be careful with how much they start with because they must meet margin requirements and cover trading costs.


Which markets can be day traded?

Commonly day-traded asset classes include stocks, futures, forex, cryptocurrencies, and options.

The suitability of an asset class for day trading depends on factors such as liquidity, volatility, trading hours, and regulatory constraints.


Can day trading be done part-time?

Yes, some day traders limit their trading activities to specific times of the day (for example, the London market open), allowing them to engage in other activities for the remainder of the day.


What tools do day traders use?

Some day traders trade solely on price action, while others use technical indicators.


Is leverage important in day trading?

Day traders tend to use a higher amount of leverage as they are chasing small price movements. This can amplify their profits, but it can also amplify their losses.


What are the risks of day trading?

The risks of day trading include the potential for financial losses due to market volatility, high trading costs, and emotional stress.


How can I manage risk in day trading?

To avoid overtrading, risk management tools such as setting stop-loss and take-profit orders and determining a maximum % drawdown per day can be useful.


Do day traders hold positions overnight?

No, day traders close all positions before the trading day ends to avoid overnight exposure.


Are there taxes on day trading profits?

Tax laws differ from one jurisdiction to the next.



Milan Cutkovic

Milan Cutkovic

Milan Cutkovic has over eight years of experience in trading and market analysis across forex, indices, commodities, and stocks. He was one of the first traders accepted into the Axi Select programme which identifies highly talented traders and assists them with professional development.

As well as being a trader, Milan writes daily analysis for the Axi community, using his extensive knowledge of financial markets to provide unique insights and commentary. He is passionate about helping others become more successful in their trading and shares his skills by contributing to comprehensive trading eBooks and regularly publishing educational articles on the Axi blog, His work is frequently quoted in leading international newspapers and media portals.

Milan is frequently quoted and mentioned in many financial publications, including Yahoo Finance, Business Insider, Barrons, CNN, Reuters, New York Post, and MarketWatch.

Find him on: LinkedIn


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