Forex News

What Is Day Trading? How Does It Work?

Earlier, only those people who could trade in the stocks actively used to work for trading houses, brokerages, and big financial institutions. But with the invention and rise of online trading houses and the internet, even average investors and traders can now get in the game.

Day trading is a practice of purchasing and selling stocks within a short time, generally a day. The aim is to make a small profit on every trade and compound those earnings over time. Day trading is a lucrative career. However, it can be challenging for beginners in the trading world and are not well-prepared with well-planned strategies. When it comes to day trading, even the most experienced traders can experience losses by hitting rough patches. 

What Is a Day Trader?

A day trader executes a comparatively large volume of long and short trades to maximize intraday market price actions. They aim to make profits from short-term price movement. A day trade can use leverage also to multiply returns, but it can multiply losses as well. 

A day trader purchases and sells instruments like currencies, futures, or stocks on the same day. So, every position he/she creates is closed within the same day. There are two types of day traders: one who individually trades and another who works with some financial institutions. Regardless of the kind of day trader, they must know the financial instruments they want to invest in, the best platform to trade, and the most appropriate tools. Below are some prerequisites needed to become a highly successful day trader: 

  • Experience and Knowledge of the Marketplace 
  • The Right Strategy
  • Enough Capital 
  • Discipline 

How to Do Day Trading?

Once you have gained enough knowledge about day trading, you can now start trading profitably using a live account. Below are the main steps you should take to start trading: 

  • Open your brokerage account and deposit money in it. 
  • Make a written plan for trading to review every morning.
  • Create a watchlist every morning.
  • Trade as per your trading plan and always stick to it. 
  • Ensure to review the trades by the day’s end. 
  • Keep in mind to take it slow, especially if you are a beginner. 

Important Tip: Open a demo account at the right brokerage and practice using it before committing real money. Lots of brokerage accounts offer market simulators and practice modes. They let you make trades hypothetically and watch the results.

Tips to Start With Day Trading

If you are new to trading, our below tips will help you become successful once you start day trading: 

Knowledge: Knowledge is an essential thing to start trading. Being a day trader, you will need to keep updated on the latest financial market events and news. Do your homework completely. Make a list of what you want to trade. Keep yourself well-informed about the general market and chosen companies or currencies. 

Set Time Aside: Day trading needs time. That is why it is called day trading. You will have to give up your entire day generally. So, if you don’t have enough spare time, do not consider day trading. Day trading needs the traders to watch the market and quickly spot opportunities. 

Set Funds Aside: Find out how much money you are ready to risk on every trade. Most successful traders do not risk more than 1-2% capital in their account in each trade. You should set surplus funds aside that you are ready to lose and trade. 

Begin Small: Being a beginner, concentrate on a couple of assets only in a specific financial market during a single session. Finding opportunities and tracking just one or two assets is simpler. 

Time Your Trades: Various orders placed by traders or investors start executing just when the market opens. It, in turn, contributes to volatility in prices. An experienced trader may identify patterns and aptly pick to make huge profits. However, beginners should first read the market for the first few minutes without making a move. 

Stay Cool and Patient: Many times, the financial market may test your nerves. Being a day trader, learn to keep fear, hope, and greed at bay. Make decisions based on logic and not your emotions. 

How Much Can You Make From Day Trading?

Day trading isn’t an occasional activity or a hobby if you’re serious about making money by trading. There isn’t any guarantee that you’ll earn profits, and you can’t predict your rate of return. However, there are strategies that you can master for minimizing losses and locking in gains. 

A vital factor influencing your career longevity and earning potential is whether you work for an institution or trade independently. Day traders who work at an institution do not risk their money and can capitalize more.  A few independent trading companies let day traders access their software and platform but need them to risk their capital. Other essential factors that impact the earning of a day trader include: 

The markets you trade in – Every financial market has its benefit. So, how much money you make depends on the market you choose to trade-in. 

How much capital you have to invest – If you begin with $5000, your earning is less than someone who begins with $50000.

Time – Some day-traders attain success in a few days only. However, for others, profitable trading systems, approaches, and strategies may take many years to develop. 

Which Are the Risks Associated With Day Trading?

In spite of being lucrative, day trading has many psychological and financial risks, including: 

Market Movement: According to the experts, it is difficult to earn money if the market goes lesser than 100 points from the earlier day in any direction. Many traders chase few opportunities only. So, only those who are fast to identify an opportunity and quickly act can make money. Those who are late can turn profits into losses. 

Capital Loss: Although most trades are profitable, there are many upfront costs like news services, software, and hardware. They should be paid before trading. Moreover, ongoing expenses, like interest, ECN fees, real-time news charges, charting packages, and more, should be maintained. 

Psychological Addiction: Day trading is similar to cocaine- It is more addictive than other gambling types. Day traders and gamblers are quite similar as they have above-average intelligence and are highly competitive. 

Financial Losses: A day trader can suffer financial losses during their first few weeks of trading. Many of them never reach the profit-making status. So, risk money only if you can afford to lose it. 

Conclusion

Day trading is a pretty controversial phenomenon. It also can be a practical method to make a profit. Both individual and institutional day traders play a vital role in the market by keeping the market liquid and efficient. While day trading is famous among inexperienced, new traders, it is best for those who have the needed resources and skills to succeed. Apart from this, if you are willing to do stock trading and finding the best platform for it, you must check out Zerodha, as it provides excellent trading platforms to utilize.

Catherine Johnson
6 posts

Catherine Johnson

About author
Catherine Johnson is a Financial Education Instructor and a finance writer. She writes finance blogs and guides women to be financially independent. She also worked as a freelance finance writer.
Articles
Related posts
Forex News

How to Select a Reliable Forex Broker in 2021

The Forex market, the largest financial market in the world, has a turnover of nearly $4 trillion per day. Despite its large…
Forex News

What Is CFD, and How to Trade CFDs?

A CFD refers to the contracts between two parties. Both parties agree to pay the price difference between the opening and closing…
Forex News

Questions That You Should Always Ask Forex Broker

Shining as the world’s biggest market with a daily trading volume of over 1.5 trillion in USD and a strong customer base…