Day trading

Quick definition

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Updated: Jan 10, 2024

Day trading is the process of buying and selling assets for a profit within a single working day.

Key details

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  • You can day trade just about anything, including stocks, cryptocurrencies, forex and commodities.
  • Day trading requires you to focus on technical analysis rather than fundamental analysis.
  • It can lead to rapid profits, but it is not a strategy for the faint of heart because it requires lots of time and commitment. 

What is day trading?

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It is an aggressive trading strategy that allows you to take advantage of market volatility. Whereas long-term investors buy an asset in the hope it will rise in value over time, day traders buy and sell assets in an attempt to quickly flip them for a profit. The ‘day’ component of day trading is just that: all positions are closed by the end of each trader’s working day.

Day traders set their own trading day since it is a highly autonomous profession. In the case of stocks, these working hours will usually mirror the same hours a stock exchange is open. By contrast, for the 24/7 cryptocurrency market, traders will need to impose their own time constraints. 

Conventional investing requires a focus on the fundamental value of a company and will require you to study information like its balance sheet. By contrast, day traders are more interested in the market itself, keeping a close eye on candlestick charts for technical indicators and patterns so they can enter and exit trades at the right time.

Day traders can both go long – in the belief an asset will rise in value – or go short – in the belief an asset will fall in value. In addition, experienced day traders will often use leverage to increase their exposure to certain trades, though this is a high-risk strategy.

Day trading strategy types

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Given that day trading entails opening and closing positions before the market closes, scalping has emerged as one of the most popular day trading strategies. With scalping, traders try to make small profits by taking advantage of small price changes throughout the day.

Day traders who implement scalping execute as many as a few hundred trades in a day while trying to benefit from small price movements. Trades in this case are opened when the markets are moving up or down. The idea with scalping is that small profits when compounded amount to large gains at the end of the day.

Range Trading

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Range trading is a day trading strategy that mostly focuses on support and resistance levels in the market. In this case, day traders plot resistance and support levels that will act as points of entry depending on how the price moves.

The strategy is especially beneficial in range-bound markets where price oscillates between highs and lows. In this case, a day trader would open a buy order whenever price bounces off a support level and exit the position as soon as it hits the resistance level in the case of an uptrend. Likewise, the trader would open a sell position as soon as the price rises to the resistance level and experiences strong resistance, triggering a sell-off.

News-Based Strategy

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News-based strategy is a day trading strategy that seeks to take advantage of increased levels of volatility in times of big news events. Depending on how the markets interpret a given news event, prices can move in one direction or another with high levels of velocity. A day trader would, in this case, open a position and try to ride along with the trend in response to the news event.

The pros of day trading

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There are plenty of benefits to day trading over conventional trading and investing. Chiefly, day trading is the best way to accelerate returns since all profits occur in a daily period. As a result, it can be a genuine pathway to financial independence for those committed enough to persevere through the challenges.

In addition, your capital is always being put to work rather than sitting stagnantly in a long-term position that isn’t delivering growth right now. Moreover, there is no long-term exposure to risk because positions are closed rapidly, and there is no overnight risk because all trades are concluded by the end of each trader’s working day. 

Lastly, day trading can be an excellent way to take advantage of volatility created by news events and market sentiment. Day traders can actually make money on poorly performing and overvalued stocks provided they can read investor sentiment accurately. By contrast, regular investors generally need to invest in a strong company to achieve growth. 

The cons of day trading

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Day trading does however come with several disadvantages. Firstly, it is an intense strategy, meaning that a huge amount of research and self-discipline is required to achieve success. Moreover, it involves sitting at a computer for a large chunk of your day, and it can also lead to you becoming somewhat obsessed with every small price movement in the market. 

Additionally, day trading requires inch-perfect timing and an embracement of volatility and risk. As a result, it is not well suited for everyone and can trigger rash and emotional decisions in those who bore or stress easily. 

Where can I learn more?

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We have released an in-depth guide explaining how to day trade, and you should check that out if you want to learn more. Furthermore, you can check out our stock, cryptocurrency, or commodities hubs to learn more about investing and trading in general.

Sources & references
Risk disclaimer
Prash Raval
Financial Writer
Prash is a financial writer for Invezz covering FX, the stock market and investing. For over a decade he has traded spot FX full time while... read more.