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Trading financial products on margin carries a high risk and is not suitable for all investors. Ensure you fully understand the risks and take appropriate care to manage your risk.

Trading financial products on margin carries a high degree of risk and is not suitable for all investors. Please ensure you fully understand the risks and take appropriate care to manage your risk.

Your capital is at risk.

Trading Terms

Daytrader: Meaning & how to become one

Daytrader: Professionals in business attire, trading on computer screens.

Did you know someone by the name ‘Takashi Kotegawa’ was one of the best daytraders, turning $13,600 into $153 million trading stocks? Day trading involves buying and selling financial assets within the same trading day, making a profit or loss from short-term price fluctuations. But what exactly is a daytrader, how can you become one and what are the risks? Let's get started.

What is a daytrader?

A daytrader is someone who buys and sells financial assets, like stocks, cryptocurrencies, commodities or currencies, within the same trading day. They aim to profit from short-term price movements, often holding positions for just seconds or minutes. But it's also possible to incur a loss from your  position. For example, a daytrader might check Bitcoin price in the morning and sell it a few hours later, capitalising on price fluctuations during the day. Daytraders use various strategies and may use leverage to amplify potential returns, but this also increases the risk of losses. They typically close out all their positions before the end of the trading day to avoid the risks and charges associated with holding positions overnight.

Tools and indicators that daytrader uses

  • Charts: Daytraders rely on price charts to visualise the movement of financial assets over time. Candlestick charts, line charts, and bar charts are commonly used to identify patterns and trends.
  • Moving Averages: Moving averages smooth out price data to identify trends and potential reversals. daytraders often use short-term moving averages (e.g., 9-day or 20-day) to gauge short-term momentum and long-term moving averages (e.g., 50-day or 200-day) to identify overall trends.
  • Volume: Volume indicators measure the number of shares or contracts traded during a given period. High volume often accompanies significant price movements, indicating strong market participation and potential trading opportunities.
  • Relative Strength Index (RSI): The RSI is a momentum oscillator that measures the speed and change of price movements. Daytraders use the RSI to identify overbought or oversold conditions, which may signal potential reversal points.
  • MACD - Moving Average Convergence Divergence: The MACD is a trend-following momentum indicator that shows the relationship between two moving averages of an asset's price. Daytraders use the MACD to identify changes in trend direction and potential buy or sell signals.
  • Support and resistance levels: Support and resistance levels are price levels where a stock tends to find buying or selling pressure. Daytraders use these levels to identify potential entry and exit points for their trades.
  • News and economic calendar: Daytraders monitor news releases and economic events that can impact the financial markets. This includes earnings reports, economic data releases, geopolitical developments, and central bank announcements.
  • Level 2 quotes: Level 2 quotes provide real-time access to the order book of a particular asset, showing the bid and ask prices along with the size of orders. Daytraders use Level 2 quotes to assess market depth and liquidity.

Strategies used by daytraders

Daytraders employ various strategies to capitalise on short-term price movements in the financial markets. Here are some strategies commonly used by daytraders:

  • Scalping: Scalping involves making numerous small trades throughout the day to capitalise from minor price fluctuations. Traders aim to take advantage of small price movements by entering and exiting positions quickly, often within seconds or minutes. The goal is to accumulate small gains over time, relying on high trading volume and tight bid-ask spreads.
  • Range trading: Range trading involves identifying price ranges or support and resistance levels within which an asset's price tends to fluctuate. Traders buy at support levels and sell at resistance levels, aiming to profit from the asset's price bouncing between these levels. However, there’s also the possibility to incur a loss. Range trading is suitable for sideways or consolidating markets, where there is limited directional movement.
  • News-based trading: News-based trading involves reacting to significant news events or economic data releases that can impact the financial markets. Traders analyse news headlines, earnings reports, economic indicators, and geopolitical developments to anticipate market reactions and position themselves accordingly. News-based trading requires quick decision-making and may involve higher volatility.
  • High-Frequency Trading (HFT): High-frequency trading (HFT) involves using advanced algorithms and computer programs to execute a large number of trades in milliseconds or microseconds. HFT firms leverage technology and high-speed data connections to exploit small price discrepancies across multiple markets. HFT strategies include market making, arbitrage, and statistical arbitrage.

Advantages and disadvantages of being a daytrader

S/N Advantages Disadvantages
1. Potential for high gains: Day trading offers the potential to earn significant gains in a short amount of time. By capitalising on small price movements, daytraders can accumulate gains throughout the day. High risk: Day trading involves significant risk due to the volatile nature of financial markets. Prices could change rapidly, leading to potential losses if trades are not managed properly. Leverage could amplify both profits and losses, increasing the risk further.
2. Flexibility: Day trading allows for flexibility in terms of schedule and location. Since trades are executed within the same day, traders can choose when and where to trade, as long as they have access to the markets and a reliable internet connection. Stressful environment: Day trading can be stressful and emotionally taxing, especially for beginners. Constantly monitoring the markets, making quick decisions, and managing risk could lead to anxiety and burnout.
3. Quick results: Unlike long-term investing, where you may have to wait months or years to see significant returns, day trading provides quick results. Traders can see the outcome of their trades within minutes or hours, allowing for faster feedback and adjustments. High costs: Day trading can incur high costs in terms of commissions, spreads, and other fees associated with trading. Frequent trading activity could add up quickly, eating into potential gains.
4, No overnight risk: Daytraders close out all their positions before the end of the trading day, eliminating the risk of overnight price gaps or market fluctuations. This helps mitigate potential losses and provides peace of mind. Time-consuming: Successful day trading requires dedication, discipline, and time commitment. Traders need to spend hours analyzing the markets, executing trades, and monitoring positions, which could be demanding and time-consuming.

Steps to become a daytrader

  1. Sign up with Skilling: Create an account with Skilling, a trading platform that offers access to 1200+ instruments like stocks, cryptocurrencies, forex, and commodities.
  2. Choose your preferred instrument: Select the financial instrument you want to day trade. This could be stocks of individual companies, cryptocurrencies like Bitcoin or Ethereum currency pairs in the Forex market or commodities such as gold or oil.
  3. Educate yourself: Learn the basics of day trading, including different strategies, technical analysis, risk management and trading psychology. Take advantage of educational resources provided by Skilling, such as tutorials, webinars, and the trading assistant.
  4. Practice with a demo account: Before risking real money, practice day trading with a demo account. This allows you to familiarise yourself with the trading platform, test different strategies, and gain confidence without risking your capital.
  5. Develop a trading plan: Create a trading plan that outlines your trading goals, risk tolerance, preferred trading strategies and rules for entering and exiting trades. Stick to your plan to maintain discipline and consistency in your trading activities.
  6. Start trading with real money: Once you feel comfortable with your trading skills and strategy, fund your trading account with real money and start executing trades. Start with small position sizes and gradually increase as you gain experience and confidence.
  7. Monitor and evaluate: Keep track of your trades and monitor the markets regularly. Evaluate your performance, identify strengths and weaknesses, and make adjustments to your trading plan as needed.
  8. Continuous learning: Stay updated with market news, trends, and developments. Continuously improve your trading skills and knowledge by reading books, attending seminars, and networking with other traders.
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It's important to note that day trading involves significant risks, including the potential loss of capital. Success in day trading requires dedication, discipline, and continuous learning. Before engaging in day trading, individuals should carefully consider their financial situation, risk tolerance, and investment objectives. Additionally, past performance is not indicative of future results, and trading involves uncertainty and market volatility.

Past performance does not guarantee or predict future performance. This article is offered for general information purposes only and does not constitute investment advice.

Experience Skilling's award-winning platform
Try out any of Skilling’s trading platforms on the device of your choice across web, android or iOS.
Sign up