What is day trading?

Day trading is the practice of buying and selling financial instruments within the course of a day. A day trader typically starts trading when the market opens and finishes when the market closes. The idea is to speculate on small price movements. 

Day traders can speculate using a variety of instruments from financial derivatives to assets such as stocks, foreign exchange, indices and commodities.

Highlights

Day trading differs from conventional, long-term investing that aims to buy and hold in an asset or an instrument in the hope that its value will increase over the course of time. 

Historically, day trading was an activity exclusive to big financial firms, banks and financial professionals. However, with the growth of online trading platforms, day trading has become more accessible to retail clients outside the financial sector. 

Day trading explained

Day trading is based around a market or asset’s price fluctuations. This means that, in many cases, traders may consider assets that move around, meaning there are more fluctuations. The relative liquidity of an asset is also something day traders may consider keeping in mind.

Derivatives, such as contracts for difference (CFD) are popular instruments for day trading, as they allow short selling and the use of leverage (restrictions may apply), which can magnify both profits and losses. 

CFDs allow traders to speculate on the price movement without owning the underlying asset.

Day trading strategies

There are a range of strategies that traders could consider to day trade. These include, but are not limited to:

Day trading rules and risk

The rules of day trading vary from place to place, depending on which jurisdiction a trader is under. Make sure to conduct your own research, looking at the government websites and other official sources.

There are, however, market risks that are universal. Markets can move against a trader’s position. If this happens, a trader could lose their money. When learning to day trade make sure to also conduct due diligence on the asset you’re trading. Remember that prices can move against your position, and never trade with more money than you can afford to lose. 

How to start day trading

You may consider taking these steps to start day trading:

1. Choosing the instrument you want to trade: You can choose between share dealing, a derivative or something else. This choice would depend on your risk tolerance, experience in the markets and trading goals.

2. Setting up a trading account with a broker: There are a number of brokers available to retail traders from discount brokers to full-services. Make sure to conduct your own due diligence finding a broker based on your personal needs.

3. Designing a day trading strategy: You can use technical analysis and fundamental analysis, forming your own trading strategy suitable for your goals. 

Day trading example

A potential example of day trading stocks comes in the form of Tesla’s (TSLA) performance on 14 February 2023. 

Following the news that a senior analyst at Barclays initiated stock coverage, giving it a “Buy” rating and a $275 price target (versus $192 share price on the day), the stock went up by more than 7% in the course of the day, reaching as high as 9% increase intraday.

A day trader could have entered the market by buying Tesla when it opened at $191.94, around the time that the analyst made his forecast, and exited the market by selling it when it reached its intraday high of $209.25.

Note that this example is for illustrative purposes only. Of course, if the stock didn’t react to the rating, or reacted differently, the trader could have lost money.