Day trading is speculation in securities, specifically buying and selling financial instruments within the same trading day, such that all positions are closed before the market closes for the trading day. Traders who trade in this capacity with the motive of profit are therefore speculators. The methods of quick trading contrast with the long-term trades underlying buy and hold and value investing strategies. Day traders exit positions before the market closes to avoid unmanageable risks and negative price gaps between one day’s close and the next day’s price at the open.

There was once a time when the only people who were able to trade actively in the stock market were those working for large financial institutions, brokerages, and trading houses. But, with the rise of the internet and online trading houses, brokers have made it easier for the average individual investor to get in on the game.

Day trading can turn out to be a very lucrative career, as long as you do it properly. But it can also be a little challenging for novices—especially for those who aren’t fully prepared with a well-planned strategy. Even the most seasoned day traders can hit rough patches and experience losses. So, what exactly is day trading and how does it work?

KEY TAKEAWAYS

• Day traders are active traders who execute intraday strategies to profit off price changes for a given asset.
• Day trading employs a wide variety of techniques and strategies to capitalize on perceived market inefficiencies.
• Day trading is often characterized by technical analysis and requires a high degree of self-discipline and objectivity.

Day traders are attuned to events that cause short-term market moves. Trading the news is a popular technique. Scheduled announcements such as economic statistics, corporate earnings or interest rates are subject to market expectations and market psychology. Markets react when those expectations are not met or are exceeded, usually with sudden, significant moves, which can benefit day traders.

Day traders use numerous intraday strategies. These strategies include:

• Scalping, which attempts to make numerous small profits on small prices changes throughout the day
• Range trading, which primarily uses support and resistance levels to determine their buy and sell decisions
• News-based trading, which typically seizes trading opportunities from the heightened volatility around news events
• High-frequency trading (HFT) strategies that use sophisticated algorithms to exploit small or short-term market inefficiencies