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What is day trading and how does it work?

Day trading for beginners: what it is, common strategies and how to get started.

Day trading is a fast-paced, highly risky trading strategy that some traders use to try to lock in quick profits. But it can also result in significant losses.

If you’re simply curious about day trading or are considering trying your hand at it, here’s what day trading is and how you can get started.

What is day trading and how does it work?

Day trading is when a trader buys and sells the same securities within a single trading day, ending the day with no open positions. This is the opposite of investing, which is typically a long-term strategy. Day trading, popular with stocks and forex markets, can at times be lucrative, though it’s highly risky. Since many day traders use margin — borrowed money — they can potentially lose large amounts if they buy or sell at inopportune times.

Day traders try to capitalize on short-term market movements, and this can require trading large amounts of money to see any sizeable gains. Day traders often utilize technical analysis, a strategy that looks at the past performance of a security, to predict how it will perform in the future and may not pay much attention to the company’s business fundamentals.

Anyone who executes four or more day trades within five business days is designated a pattern day trader. Pattern day traders must maintain at least $25,000 in equity in their margin account on any day that they day trade or their day trading access will be restricted.(1)

Day trading risks and rewards

Similar to any form of trading, day trading comes with unique risks and rewards. Here are a few to consider before starting.

Risks

  • Loss of money. You can lose significant amounts of money if you make a losing trade.
  • Time commitment. Successful day traders invest large amounts of time practicing, watching market movements and keeping sight of the news.
  • Minimum balance requirements. Pattern day traders must maintain a minimum of $25,000 in equity in their margin account when they day trade.
  • Most day traders fail. Studies have shown that less than 1% of day traders are profitable, while over 97% of day traders lose money.(2)(3)

Rewards

  • No overnight risks. Since you aren’t carrying any open positions into the following day, you won’t have to worry about overnight price movements.
  • Work for yourself. Many successful day traders are self-employed and may have more flexibility with their time.
  • Potential for significant gains. Although rare, those who succeed at day trading can make significant profits by capitalizing on short-term market movements.

How to day trade

Anyone can day trade. But to day trade successfully, you need to practice and properly manage risk.

Here are a few steps you can take to begin today.

  1. Choose a broker. When choosing a broker, consider a platform with built-in features such as research tools, charting, price alerts and more. Beginner-friendly platforms such as Robinhood may have less extensive trading tools than big brokers like Charles Schwab or Interactive Brokers.
  2. Establish a strategy. Day traders may leverage different strategies to try to profit from their intraday trading. Some common types of day trading strategies include momentum trading, scalping and news trading.
  3. Practice, practice, practice. The most successful day traders practice their trading strategies before committing real money. Some brokers offer paper trading accounts, which give you virtual currency to practice and get comfortable with your strategy before trading with actual money.
  4. Determine your initial capital. Your day trading buying power ultimately depends on how much you’re willing to risk. If you’re just starting out, you may not want to risk hefty sums.

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Day trading strategies

Day traders can use many strategies to take advantage of short-term market movements. Here are a few.

Momentum trading

Momentum trading involves purchasing securities already showing an upward or downward market trend. This is due to the belief that stocks that have performed well or poorly will continue to do so.

Scalping

Scalping is a trading strategy in which day traders aim to make smaller profits using frequent trades rather than larger profits with each trade.

Breakout trading

This strategy involves buying or selling an asset when the security’s price breaks out of its trading range. This is usually in the beginning stages of a trend.

Pullback trading

A pullback trading strategy is when day traders try to take advantage of a small reversal within a stock’s larger upward trend. They will purchase the security at this temporary lower price as an entry point and then sell the security when it rises in price and continues its larger trend.

Trade the news

The trade the news strategy involves looking at news events or global releases to decide what positions to take on securities. These can include pre-scheduled events or breaking news.

A photo of matthewmiczulski

Matt explains swing trading vs. day trading

The biggest difference between swing trading and day trading is the investment time frame. Swing trading is a trading strategy with an investment time frame of at least more than one day but typically no longer than a few weeks or a couple of months. Day traders buy and sell securities in a single trading session and don't hold their positions overnight.

— Matt Miczulski, Editor, Investments.

How to lower your risk while day trading

Day trading can be extremely risky, so you should consider ways to reduce risk and potentially cut down on losses.

  • Complete trading courses. The more you know about the market, the better. Invest in some trading courses, stock market games and investing books to grow your knowledge and confidence.
  • Use stop-loss orders. Stop-loss orders help pump the brakes on potential losses by letting you set the lowest price at which you’re willing to sell a security.
  • Practice with paper trading. Before trading with real capital, practice using virtual currency to find a potentially successful trading strategy.
  • Use reliable hardware. Faulty technology is responsible for its fair share of losses in day trading, so find the best day trading platform and ensure you have a steady internet connection.

Outside these practices, day traders can also reduce risk using the 1% rule — a twist on the popular “core-and-explore” strategy.

Christopher Liew, Chartered Financial Analyst (CFA), tells Finder, “Day traders can employ a common risk-management strategy called the 1% rule wherein traders don’t invest beyond 1% of their entire trading account in a single trade to manage possible losses.”

The 1% rule isn’t unlike the core-and-explore strategy — a strategy that allocates a majority of portfolio funds to low-cost diversified funds and leaves the rest for higher-risk, potentially higher-reward investments like growth stocks or even day trades. Core and explore might reserve 10% for riskier trades instead of 1% — but your number depends on the amount of risk you can afford to take.

Michael Shea, certified financial planner (CFP) and IRS enrolled agent, offers a similar approach:

“If you want to day trade, set aside an amount of money you’re 100% okay with losing. Make sure your retirement portfolio and savings are taken care of first, and if you have money left over to gamble on day trading, then have at it.”

What’s the pattern day trading rule?

The pattern day trading rule applies to day traders who execute at least four day trades within five business days. The rule was established by the Financial Industry Regulatory Authority (FINRA), is governed by the US Securities and Exchange Commission (SEC) and applies to all US brokerages. Pattern day trading isn’t illegal — but the pattern day trading rule limits who can execute day trades and when.

Your broker may deem you a pattern day trader if your day trading activity accounts for more than 6% of your total trading activity in five days. At this point, you’re required to bring your account balance above $25,000 to continue trading.

If you’ve been marked as a pattern day trader and fail to maintain a minimum account balance of $25,000, you won’t be able to day trade.

Is there any way to trade intraday without having $25,000 in my account?

If you’d like to day trade and don’t have the means to bring your account balance above $25,000, you have a few options:

  • Make fewer trades. As long as you make no more than three day trades in five days period, you can execute day trades with less than the required pattern day trader minimum.
  • Trade outside the US. Foreign markets and brokers may not impose the same rules or account minimums as the US. Research international brokers and stock markets to find out about day trading regulations.
  • Trade forex. Currency pairs don’t qualify for FINRA’s pattern day trading rule, so you can get started in the forex market with less startup capital.(4)
  • Trade futures. FINRA’s $25,000 account minimum also doesn’t apply to futures contracts, so if you’re determined to day trade and don’t have the capital, look into the futures market.(4)
  • Open multiple accounts. With two accounts at two separate brokerages, you can make up to six day trades in a five-day period without being subject to the pattern day trading rule.
  • Join a firm. If you’d like to pursue day trading as a career, consider joining a firm. You’ll be provided with additional trading capital and have the opportunity to learn from more experienced traders.

Day trading with cash vs. margin

Some brokers let you day trade in a cash account — but only using settled funds. Cash accounts must use settled funds to cover trades to avoid freeriding, which is the act of buying and selling securities from a cash account without having the capital to cover the trade. Stock and exchange-traded fund (ETF) transactions take three days to settle, while mutual funds and options settle in one day.

Freeriding is illegal and prohibited by the SEC. Traders who engage in freeriding will have their accounts suspended for 90 days(5). The freeriding rule makes it very difficult to day trade using a cash account.
Margin trading is trading with borrowed money. When you trade on margin, you borrow funds from your broker to execute a trade. You’ll be asked to pay back what you owe with interest, and your account serves as collateral for the loan.

So long as the trade moves in your favor, trading on margin can be lucrative: You increase your buying power by borrowing funds, executing a profitable trade, paying back what you owe and pocketing the profit.

The problem with margin trading is that the potential to compound the results of a trade swings both ways: you may increase your profit — but you may also multiply your losses. Stop-loss orders may help cushion the impact, but margin trading remains an inherently risky strategy best reserved for those with extensive trading experience.

What to look for in a day trading broker

The right broker can make or break your day trading experience. Here’s what to look for in a broker:

  • Reliability. The last thing you want to worry about when executing a sizable trade is a service outage. Unfortunately, outages happen, and some brokers are more prone to them than others.
  • Speed. Day trading is time-sensitive, so your broker’s fill times factor into successful trade execution. Look for slow fill time complaints on trading message boards to find out which brokers have a reputation for delayed executions.
  • Reputation. Your ideal day trading broker should maintain a positive online reputation. Review trader feedback on the Better Business Bureau, Trustpilot and Reddit to find out what investors think of the platform.
  • Research tools. Many day traders rely on up-to-date market news and research tools — like advanced stock screeners and charts — to pull off profitable day trades. Find out what research and analytics tools your broker offers and whether they’re sufficient to support your trading strategy.
  • Analytical tools. Sophisticated analytical software can help inform day trading decisions and may include automated pattern recognition software, neural network applications and backtesting, which lets traders backtest trading strategies to analyze how they would have performed in the past.

Day trading alternatives

Day trading is ill-suited to beginners. If you’re new to investing, you may be better off with a more beginner-friendly investing strategy.

Buy and hold stocks

This strategy involves purchasing stocks and — you guessed it — holding them. Sometimes for years. Buy-and-hold investors aim to weather market volatility by holding onto their stocks regardless of how the market moves.

The rationale behind this long-term strategy is that even if the market faces a downturn, it will eventually recover. For buy-and-hold investors, long-term gains are more appealing than trying to take advantage of small fluctuations in the market.

Index funds

You could invest in index funds that track the S&P 500 and other indices. These funds aim to reflect the return of their respective indices rather than take the inherently riskier approach of beating the market.

In fact, the average annualized total return of the S&P 500 index over the past 25 years is 9%.(6) The S&P 500 index is composed of the biggest companies in America by market capitalization and is often seen as a reliable indicator of the overall market’s shape.

Robo-advisor

A robo-advisor is a digital investment service designed to pick and manage your investments for you. It’s a practical service for those new to investing, as you don’t need to actively monitor your portfolio: The robo-advisor does it all for you.

Many robo-advisors recommend diversified portfolios based on your unique investment goals. Once you fund your account, it selects your investments and automatically rebalances your portfolio if anything strays too far from your goals.

Compare stock trading platforms

To day trade, you’ll need a brokerage account. Compare your options by platform features, fees and research tools to find the broker best suited to your investment goals.

1 - 5 of 5
Name Product Ratings Available asset types Minimum deposit Stock trade fee Cash sweep APY Signup bonus
SoFi Invest®
Finder Score: 4.1 / 5: ★★★★★
SoFi Invest®
★★★★★
Stocks, Options, Mutual funds, ETFs, Alternatives
$0
$0
0.01%
Get up to $1,000 in stock
when you fund a new account within 30 days
Tastytrade
Finder Score: 4.6 / 5: ★★★★★
Tastytrade
★★★★★
Stocks, Options, ETFs, Cryptocurrency, Futures, Treasury Bills
$0
$0
N/A
Get $100-$5,000
when you open and fund an account with $5,000 to $1,000,000+
Highly commended for Best Derivatives Trading Platform award.
Public.com
Finder Score: 4.1 / 5: ★★★★★
Public.com
★★★★★
Stocks, ETFs, Cryptocurrency, Art, Treasury Bills, Collectibles
$0
$0
5.1%
N/A
2.5% fee applies to all alternative asset transactions.
Robinhood
Finder Score: 4.3 / 5: ★★★★★
Robinhood
★★★★★
Stocks, Options, ETFs, Cryptocurrency
$0
$0
1.5%, or 5% with Robinhood Gold
Get a free stock
when you successfully sign up and link your bank account.
Try Robinhood Gold for 30 days risk-free upon signup and earn a 5% APY on your uninvested cash, a 3% match on IRA contributions, up to $50,000 in instant deposits and more. Accounts are auto-downgraded after the trial period.
Moomoo
Finder Score: 4.7 / 5: ★★★★★
Exclusive
Moomoo
★★★★★
Stocks, Options, ETFs
$0
$0
5.10%
Choose a 1.5% match or 7 free fractional shares
when you open a new account and meet funding requirements
No commission stock and ETF trading, with a chance to get a 1.5% cash reward match or 7 free fractional shares.
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Bottom line

Day trading isn’t for everyone. It’s potentially profitable, but even with a solid strategy, a reliable broker and the right tech, the risk of losing money is high. Day traders must be prepared to lose capital, especially when trading on a margin.

The right broker can play a pivotal role in your success as an investor. Explore your platform options among multiple providers to find the best account for your needs.

Frequently asked questions about day trading

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