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In this article, we'll answer questions like "what is day trading?", explain the pros and cons of this investment strategy, and include a quiz that will help investors figure out if day trading is suitable for them.
So, if you've been wondering why day trading has become so popular, let's dive right in.
What is Day Trading?
Day trading is a kind of securities speculation where traders buy and sell financial instruments within the same trading day. Here is a quick example that should help to explain the idea:
What is Day Trading: example
It's 9:35 on a Friday morning, and Apple (AAPL) stock is priced at $144.60. A day trader feels that the price of Apple will go up, so he buys in for $1000.
At 9:40, Apple stock's price has moved to $145.94 — a $1.34 price rise, or just short of a 1% rise. If the trader sells now, he can bank a profit of $9 minus fees.
Alternatively, our trader can wait it out and see if the price changes during the day. As long as they trade out of the position on the same trading day, then this strategy is known as day trading.
What you might notice is that day trading is quite different from other forms of investment. In more typical investing, you might buy Apple and hold on to it for months or years before taking a profit. With day trading, you realize your profit or loss on the same day.
Of course, in our example above, the stock only moves about 1%, giving a profit of less than $10 on a $1000 position. Because these gains are relatively small, day traders will often use leverage to increase their profits.
So, per our example, our trader takes out X10 leverage on his trade. Leverage is like taking a short-term loan from a broker that is guaranteed by your account balance. So instead of taking a $1000 position, in effect, the traders buy $10,000 worth of Apple stock.
With X10 leverage, the profit of the same trade becomes a far more significant $90. Stocks and forex exchange move in small increments, which is why leverage is used in these markets.
Of course, if the market instead moves against our trader, this can result in them losing their investment.
Day Trading for a Living - Is it a Good Idea?
Day trading for a living can be a good idea if you have the right temperament and a desire to work hard and learn every day. It's important to remember that day trading for a living isn't always going to be easier or involve fewer hours than a typical 9-5.
All you need to day trade is an internet connection. But, while day trading has become more accessible to retail investors, it is still a challenging industry to enter for a beginner. You'll need to weigh up many pros and cons to see if you are made for day trading. If you can make it work, you can turn your life around. But nothing is guaranteed.
Day Trading Pros
Be your own boss: Day trading for a living is like starting your own business. You can work when you want and even where you want. So if you have the discipline to be self-employed, day trading can offer you a good amount of freedom.
Fewer overheads: Working a job comes with lots of overheads. Transport, eating out at lunchand buying work clothes all add up. To day trade, all you'll need is a good internet connection, a laptop (or smartphone), and some starting capital.
Flexible Hours: A significant advantage of day trading for a living is having more flexibility in your work hours. There's always a market open somewhere, so there is always a place to find some action. Being able to work around your schedule can alter your life completely.
No commuting: The average American worker commutes an hour a day. That's around 5 hours per week that you can clawback.
Work from home: As many people found out during the COVID-19 pandemic, working from home has many upsides. There's nothing like getting up at 8:55 and commuting 5 minutes to your living room.
Significant potential earnings: Unlike other forms of investing, day traders can make large amounts of capital very quickly.
Status: Trading and investing is a very respectable and high-status occupation.
It's an exciting job: Trading is an exciting job with lots of ups and downs. It's challenging and requires discipline and lots of learning, so you'll never want to stop improving.
Day Trading Cons
No holiday pay or sick pay: A significant drawback of being self-employed is that you don't get holiday pay or sick pay. Sometimes you don't realize what you've got until it's gone.
It's a solitary life: Day trading involves a lot of staring at a screen on your own. While regular jobs have their drawbacks, the social aspects of teamwork can be tough to lose.
A lack of career progression: In a regular job, you'll gain experience and progress as the years go by. If you day trade for a living, the only "progression" you make is getting better and increasing your profits.
Inconsistent earnings: One of the best things about a salary is that you can plan around it. Day trading for a living can be up and down, with no guarantee that you'll even make a profit month by month.
Stressful: The volatile and unpredictable nature of the market can make day trading a stressful job. Variance means that you go on a losing streak. If you don't have the right temperament, stress can affect your life in negative ways. Perhaps, you can also be interested in information about the influence of temperament on trading.
Bots and Institutional Investors: Retail investors face stiff competition from both institutional investors and sophisticated bots. As a retail day trader, you'll always be outgunned by organizations that have access to better predictive software and analysis. If that's not difficult enough, bots are becoming a significant player in the industry, and account for around 60% of trading volumes.
How Much Capital Is Needed To Start a Career in Trading?
The amount of capital you need to start a trading career depends on what markets you trade.
If you day trade stocks, you'll need to meet FINRA eligibility rules. These rules state that any pattern day trader (PDT) must have $25,000 in their brokerage account at all times to cover their trades. FINRA defines a pattern day trader as anyone who makes more than three-day trades over a five-day window.
Interestingly, if you trade forex or cryptocurrency, these rules do not apply. The $25,000 pattern day trader regulations were made for stock traders for FINRA regulated brokers.
Regulations aside, what capital is needed to trade full time depends on several factors like what country you live in and what expenses or dependents you have.
If you are day trading from the United States or the UK, you'll need significantly more capital than you would in a lower-income country.
A good general rule for anyone who wants to start day trading for a living is to have enough funds for about 3-4 months. This reserve should be enough while you gain the experience of trading. On top of these savings, you'll also need the $25,000 if you are day trading stocks.
How Much Can I Make in Day Trading?
Day trading for a living comes with no guarantees. You won't make a fixed amount per month because it depends on how well you trade and manage risk. Indeed, there are several other factors to consider, too, like which brokerage you deal with, what strategy you employ, and the level of your initial deposit. Good analysis and disciplined trading should allow you to make a decent profit.
For example, if you follow the rules and manage risk appropriately, a trader can make somewhere between 1-4% of their deposit daily. So, a $5,000 deposit could make $50-200 per day. It could be more, and it could be less. But again, there are no assurances.
Day Trading for a Living: Top 6 Rules
Open a Demo Account
If you want to day trade for a living, you'll need to learn how to do it. But learning on the job can get expensive. Because of this, many brokers offer traders a way to simulate day trading. If you're new to trading, it's strongly recommended that you open what is called a paper trading account.
Demo accounts are a good way to familiarize yourself with the concepts and processes involved in day trading. You can test out different strategies and practice trading without worrying about losing money. Using a demo account is an excellent way to gain confidence with trading.
Develop & Test a Strategy
If you want to day trade for a living, you can't go in there blind. Developing a strategy takes time and research, but it's the only road to trading success. No two strategies will be exactly the same, which makes sense because no two traders are exactly the same.
To form a strategy, you need to have an idea about how the market works. And more specifically, you need to be able to answer this question: why do you think you'll be able to make money day trading? Is it because you are great at reading charts, or are you a keen student of human behavior? Use whatever you believe to be your edge to build your strategy. But remember, always test it out on paper first!
Practice Good Money Management
Proper money management is a fundamental part of successful trading. Successful traders typically use no more than 2% of their capital on each trade. Even the best strategies are subject to variance, so make sure that you aren't too exposed if the market moves against you unexpectedly.
Never Stop Learning
If you want to succeed at day trading, you need to learn and evolve constantly. Stay on top of the news that affects your market, absorb the wisdom from trading books, and keep an ear out for new thoughts and ideas in the space. Markets change and grow; if you want to compete, you'll need to change and grow too.
The Portrait of Successful Trader
Not everyone has what it takes to day trade for a living. But specific characteristics give you a good chance of success. Here are some of the qualities that you'll need.
Never Stop Learning
Trading involves a lot of mathematics. Perhaps the biggest skill that a trader needs is the mindset to read and analyze data. Generally, these numbers are visualized by charts that contain patterns and indicators from technical analysis (TA). A good trader needs to be able to digest the underlying data represented in these visuals quickly.
Self Control
Successful traders have a great deal of self-control. Trading in volatile markets has lots of ups and downs, which can be destructive to those who let their emotions rule them.
Most strategies work by minimizing losses and maximizing profits. If a trader gets too emotional, they are liable to go off-book. This can be disastrous for their bottom line. Trading is cold, calculated work, not gambling.
Focus
Focus is an essential aspect of trading. There is lots of information and news flying around, but the best traders can focus and separate the signal from the noise. Looking at reams of data and picking out the important and meaningful aspects is a great trading skill.
Thirst for Information
The best traders are curious people with an insatiable appetite for information on the markets they trade. It's almost impossible to beat the market if you don't understand it. Again, TA and chart reading are big pluses here.
Discipline
The best strategy in the world is worthless without having the discipline to implement it. Too many day traders fail to make profits because they deviate from their own strategies. You need to go into a trade with a strategy and stick to it.
How to Avoid Common Beginner Mistakes
A wise man learns from his mistakes. An even wiser man learns from others' mistakes. Here is a list of common beginner mistakes that you need to avoid.
1. Going in Without a Plan
Before you buy a stock, you need to know your exit points. Too many new traders enter a trade and then hope it goes up. When it doesn't, they watch, waiting for the trend to reverse. Suddenly, they're 20% down.
There reverse happens too. Traders take a position, the price goes up, but instead of getting out, they get greedy. A little while later, the price is down, and they've missed out on their profits.
Always have a plan and stick to it.
2. Trading Without a Stop Loss
It's essential to have a stop-loss order for every trade. When you take a position, you have to set an amount that you are happy to risk. Without placing a stop-loss order, the market can move against you violently and swallow up too much of your balance.
Losses are going to happen. But you need to minimize the impact of them.
3. Risking More Than You Can Afford to Lose
Bad money management is one of the most common mistakes that new traders make. A vital aspect of any risk management strategy is about defining how much of your capital you risk per trade. Most successful traders risk around 1-2% of their capital on a single transaction.
4. Chasing Losses
Often, after a few losing trades in a row, a trader's emotions get the better of them. Knowing that they are down, they decide to chase their losses. And the way they do it is by taking outsized positions, sometimes even with their entire balance.
Let's be clear; this is not day trading. It's gambling. And it's the easiest way that a trader loses everything.
5. Overtrading
Too many new day traders make the mistake of buying too many stocks. It could be too many at one time or taking too many positions during the week. Overtrading is a massive error for inexperienced traders. Trade one or two stocks per day; give them your full attention.
How to Choose A Day Trading Strategy?
If you want to be competitive in the market, you'll need to choose a strategy. Try and find one that suits your temperament or risk appetite.
Trend Trading
Trend Trading Example
Trend trading is one of the most straightforward day trading strategies. In essence, if the price of a share is trending upwards, then traders go long. Likewise, if the price is trending downwards, traders will go short.
It's not the most sophisticated strategy out there, but it can get results with the correct risk management.
Scalping
Scalping Example
Scalping is about small but consistent profits. Traders get into positions with strict exit strategies and hope to accumulate enough little wins to build into decent returns. Traders who use scalping can get into dozens of trades a minute.
Mean Reversion
Mean Reversion Example
Mean reversion is a strategy that is based on the theory that prices and other values like price-to-earnings (P/E) ratios typically move back towards their historical mean.
The strategy employs TA like moving averages to identify assets that have drifted away from their historical average and try to catch them as they regress to the mean.
Money Flows
Money Flows Example
A money flow indicator can be a signal that an asset is either oversold or overbought. However, it uses volume and pricethenstead of just the asset price. The strategy works by comparing the number of yesterday's and today's trades to see if the money flow is positive or negative. If it is 80+, it's overbought, and it's time to sell. If it's 20+, it's undersold, and it's time to buy.
Day Trading Strategy
Trend following is one of the simplest but potentially most effective strategies a day trader can make. The concept is simple: you establish criteria for what you consider a trend, and you trade in that direction. Setting a take profit is optional, with some traders preferring to ride the trend.
Here is a step-by-step example.
Step 1: Market Research
Market Research
Doing your market research is perhaps the most crucial part of this strategy. In this example, we'll use the 10-day exponential moving average (EMA) to identify a trend.
Step 2: Entry Point
Entry Point
The entry point is when the market trends above the 10- day average. At this point, the market is positive.
Step 3: Stop loss
Taking Stop Loss
Setting an acceptable stop loss is crucial. Even the best TA can fail to predict moves in the market that can violently wipe out your position. Put a stop loss at around 1-2% of your capital.
Step 4: Take profit
Taking Take Profit
As the market moves in your preferred direction, you'll have an exit strategy. If it trends below the 10 day mark, it's time to exit the trade. However, most likely, you'll have set a different level and exited already.
Which Market to Choose?
Day traders can choose to operate in several different markets. Each one has its own advantages and disadvantages that make it suitable for specific approaches or strategies.
For example, the stock market movements are highly correlated to fundamentals, making it a suitable candidate for momentum trading. Crypto is hugely volatile, which means it's ideal for trend trading. Finally, forex markets usually have massive liquidity, making them good markets for algorithmic systems and high-frequency trading.
Stocks
Crypto
Forex
Initial capital
$25,000
No minimum
No minimum
Risks
Average
High
Average
Volatility
Medium
High
Low
Liquidity
Average
Low-Average
High
Choice of trading assets
High
Low
Low
Can I Day Trade for A Living? A Quiz
Knowing if you’re the right person for day trading isn’t always easy. That’s why our experts have prepared this quiz to help you ask yourself the right questions.
Answer the questions, add up your score, and read the results underneath the test.
Do you gamble?
Yes - 1 point
No - 6 points
Sometimes - 3 points
Do you have an ability to analyze your mistakes, and you know how to learn lessons from them?
Yes - 5 point
No - 1 point
Sometimes - 2 points
Can you analyze statistics?
Yes, I’m very proficient - 6 points
Yes, but at a basic level - 3 points
No - I'm not good at math -1 point
Are you always in the process of self-education?
Yes - 5 points
No - 1 point
No, but I'm ready to change - 3 pints
Do you have enough savings not to worry about money for more than four months?
Yes - 5 points
No - 1 point
I have savings, but they will last for 1-2 months - 3 points.
30 points or more = It seems like you might be the right type for day trading. It's worth giving it a go.
20-30 points = It's best to wait for now, study the market, and see about day trading further down the line.
<20 points = Day trading might not be for you. Stick to passive investing.
Of course, this test is not an ultimate guide. Ultimately, you need to decide for yourself.
Best Day Trading Platforms
Choosing the right day trading platform can have a huge bearing on your success as a day trader. For starters, you need to select a broker who you can trust with your money. Then, to give yourself the best chance of profit, you need a platform with low fees that gives you quick executions of your trades.
If stocks, options, and ETF markets are what you want to day trade, Webull is a good option. There are no trading fees and no minimum deposit required. The platform itself is very user-friendly, and it has a paper simulator, which is great for new traders to practice without risking capital or for experienced traders who are trying to test a new strategy.
Binance is perfect for anyone who day trades with Bitcoin. With over 500 coins available, traders have a wide choice. Again, it’s very easy to use, secure and has lots of advanced and detailed graphs and analysis.
IG is the best choice for forex day trading. Excellent technical analysis and risk management tools are a welcome feature for traders of any kind. There are over 17,000 assets to trade, with very competitive fees too. IG has a great reputation as a trusted broker, and the platform offers lots of educational tools to help traders.
Summary
Becoming a day trader for a living is a dream job for many. The independence, freedom, and status can beat the dreary nature of 9-5. However, anyone who thinks it will be an easy road to financial freedom, beach holidays, and Lamborghinis needs to take a reality check.
The truth is, day trading as a full-time job is a tough job that requires a lot of commitment, learning, and sacrifice. If you develop good strategies, have the discipline to stick to them, and practice good money management, then you have a chance. If that doesn't sound like you, then day trading might be out of your reach.
FAQs
Should I quit my day job to become a day trader?
No. Be cautious and wait until you’re consistently profiting before you do something so rash.
What are my odds of success?
80% of traders quit within 2 years. So, roughly ⅕ to start with if success means still doing it in 2 years’ time.
Should I take out a loan to trade?
No. Absolutely not.
Should I take out CFDs (contracts-for-difference)?
It’s estimated that between 75%-90% of retail investors lose money trading these financial instruments. Be cautious.
Chinmay Soni is a financial analyst with more than 5 years of experience in working with stocks, Forex, derivatives, and other assets. As a founder of a boutique research firm and an active researcher, he covers various industries and fields, providing insights backed by statistical data. He is also an educator in the field of finance and technology.
As an author for Traders Union, he contributes his deep analytical insights on various topics, taking into account various aspects.
Dr. BJ Johnson is a PhD in English Language and an editor with over 15 years of experience. He earned his degree in English Language in the U.S and the UK. In 2020, Dr. Johnson joined the Traders Union team. Since then, he has created over 100 exclusive articles and edited over 300 articles of other authors.
The topics he covers include trading signals, cryptocurrencies, Forex brokers, stock brokers, expert advisors, binary options. He has also worked on the ratings of brokers and many other materials.
Dr. BJ Johnson’s motto: It always seems impossible until it’s done. You can do it.
Mirjan Hipolito is a journalist and news editor at Traders Union. She is an expert crypto writer with five years of experience in the financial markets. Her specialties are daily market news, price predictions, and Initial Coin Offerings (ICO). Mirjan is a cryptocurrency and stock trader. This deep understanding of the finance sector allows her to create informative and engaging content that helps readers easily navigate the complexities of the crypto world.
