Trading Articles

What is day trading?

Skilling Writers Team
2022-04-18
- Education
- Trading

What is day trading?

Day trading has become the most common trading style among retail traders. Unlike long-term investors that seek to take a position and let it mature over several days, weeks or months, day traders will buy and sell financial instruments within the same trading day.

Some day traders may even place multiple trades on the same assets. All of which are intended to exploit fractional price movements in the markets.

Day trading sits at the opposite end of the spectrum in terms of trading styles when compared with swing trading. Swing traders will often place fewer trades in the markets and take smaller risks hoping to land bigger price swings on anything from stocks and commodities to cryptocurrencies. Swing trading can also take many days or weeks for positions to play out the way you envisaged, making it harder to earn a full-time living from it exclusively.

Traits of a day trader

A day trader is someone that is serious about trading the markets for a living. They aim to extract small but frequent profits from the markets daily. When it comes to traits or characteristics needed to become a successful day trader, the following personalities are prerequisites:

Methodical: Day traders won’t be influenced by market noise. They are one-track-minded, undertaking due diligence and determining the risk-reward ratio before placing the trade.
Level-headed: Successful day trading requires a clear, calm head. One of the key trader traits of day traders is being able to leave emotion at the door. The moment emotion influences trading decisions, there is a risk of human nature meddling with your trading plan.
Strategic: Day trading requires you to have an edge over most of the market. Trading strategies give day traders multiple weapons in their trading arsenal to attack the markets and yield consistent profits while limiting losses.
Disciplined: Successful day trading requires individuals to be capable of sticking to their trading plan. The popular saying in trading circles is to “plan the trade and trade the plan”. Those who can forget about a losing trade and avoid chasing losses are more likely to thrive.

Strategies of day trading

When it comes to trading behaviours, day traders usually abide by one of three common trading strategies. Each of which is designed to exploit brief movements in the market, which occur for varying reasons:

Mean reversion: Some day traders enter the market when the price of an asset moves away from its historical mean. Moving average indicators can help find instruments that divert significantly from these historic averages, with day traders anticipating a return to its past price trajectory - a strategy known as mean reversion.
Scalping: Scalping is the shortest of all day trading strategies. It attempts to take small but regular profits, underpinned by a significant strike rate. Scalpers are highly disciplined, as they need a stop-loss in place to cap losses relative to the potential profit. Scalping is most common in forex trading, which boasts the most liquid markets on both sides of the order book.
Order flow: Day trading can also be influenced by monitoring order flow and the weight of money entering the market. Order flow indicator signals can pinpoint when assets are ‘overbought’ i.e. the number of traders seeking to buy has dried up. They can also find ‘oversold’ assets i.e. when the number of trades looking to sell has also dried up.
Trend trading: Day traders also look to piggyback on market momentum. Wherever an asset displays a string of higher highs or lower lows, it’s a sure-fire sign for trend traders to go long (buy) or short (sell).

Instruments a day trader uses and why

Trading instruments are vital for the trading behaviours of any day trader. First and foremost, trading software like MetaTrader 4 is vital for razor-sharp order execution in the markets. These trading platforms are designed to offer a host of customisations that allow day traders to utilise the instruments and data they need to make sound decisions fast.

Within these customisations, day traders will get access to many technical indicators that can be used to identify patterns in the market. There are even automated bots and algorithms that can not only be used to predict future price movements but to manage the execution of orders in the market.

Trading software will not only have technical indicators, but they’ll also offer a good breadth of fundamental indicators too in the form of multiple news sources. Access to news releases from multiple reputable sources is important when day trading reactions to corporate or geopolitical news stories.

Things you must know before you start day trading

If you’re thinking of trying day trading yourself, we’ve put together some top tips for you to use as a precaution to manage your risks in the markets:

Trading time: Be mindful of when the financial markets close for the trading day. Day traders do not hold open positions overnight, so don’t be caught out with your trading hours otherwise, your broker will ask for a bigger margin requirement to sustain your position.
Popular intraday trading instruments: Many financial instruments lend themselves well to day trading. The forex markets are naturally popular due to the sheer volume of money flowing in and out of the market. Equities and equity futures can also be popular when using technical or fundamental analysis. Commodities can also fluctuate sufficiently for day traders depending on fundamental, geopolitical factors.
Prepare your risk management approach first: It’s no secret that only a small percentage of retail traders are said to be profitable long-term. One of the main reasons why so many retail traders struggle is due to their lack of a risk management plan. At a basic level, make sure you only risk 1% of your overall trading bank on each trade. This ensures you would have to experience a 100-trade losing run to blow your entire bank. Stop-loss orders are your best friend to define the maximum acceptable loss per trade.

Starting your day trading journey today?

At Skilling, we’re here to help you start your day trading journey the right way. Check out the following articles suitable for those looking to explore the financial markets:

Understanding volatility: The key to risk management
Learn how volatility can help inform a credible risk management plan when day trading the markets.
Forex trading tips
Average daily trading volumes of $5 trillion make the forex markets a lucrative opportunity for forex traders. Find out how to get started with intraday trading forex.
The complete guide to scalping trading strategies
Scalping is a hugely popular day trading approach. Find out how to become a master scalper of the markets yourself.