What Is Day Trading?

Definition

Day trading is buying and selling securities within the same day to make a short-term profit. Day trading involves a detailed market-trend analysis and a sizable amount of risk.

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Key Takeaways

  • Day trading is when an investor buys and sells a security within the same trading day with the objective to make small, short-term profits.
  • Pattern day traders, those who meet a certain number of stock trades in a week, may need a $25,000 balance in a margin account.
  • Some standard day-trading strategies include trading on momentum indicators, high-frequency trading, and news-based trading.
  • Day trading differs from investing in that trades are short term, whereas investing is buying and holding a security for longer periods—generally months or years.
  • Day trading comes with sizable risks, such as losing more money than you originally invested, and should not be taken lightly.

How Day Trading Works

When people buy and sell a security within the same day for a profit or a loss, they are day trading. A day trader's goal is to capitalize on the short-term price changes of the asset being traded. Someone may buy a stock and sell it on the same day for a profit, which is considered one day trade.

Note

Sudden intraday price swings can lead to big losses for day traders. Those losses could be magnified, and you could stand to lose more than your original investment if the trade is made using leverage.

Pattern Day Trading

If the investor regularly buys and sells stocks on the same day, they may be designated as a pattern day trader by their investment firm. A pattern day trader is someone who executes four or more day trades within five days, representing more than 6% of their total trades.

Financial firms are required to designate investors as pattern day traders if they fit this definition or if the firm has a reasonable basis to believe that they will engage in pattern day trading.

Those designated as pattern day traders are required by Financial Industry Regulatory Authority (FINRA) rules to maintain a minimum balance of $25,000 in a margin account. Day trading in a cash account is almost always prohibited.

Example of Day Trading

Sally is an investor with a brokerage account and she trades stocks based on news headlines. Sally makes the following trades on the following days of the week:

  1. Monday: Two day trades

    • Bought 25 shares of ABC Computers, then sold all 25 shares
    • Bought 50 shares of XYZ Holdings, then sold all 50 shares
  2. Tuesday: One day trade

    • Bought 100 shares of 123 Media and later that day sold them
  3. Wednesday: Three day trades

    • Bought 50 shares of ABC Computers, then sold them all before the end of the day
    • Bought 50 shares of XYZ Holdings, then sold them all before the end of the day
    • Bought 50 shares of 123 Media, then sold them all before the end of the day

Since Sally executed four day trades within five days or less, representing more than 6% of her trades, Sally is considered a pattern day trader. Because of this designation, her brokerage requires her to maintain at least a $25,000 balance in a margin account at all times.

However, had Sally just made one buy and one sell of each company on each day in the above example, she would not be considered a pattern day trader, according to FINRA’s rules. Someone may be day trading a security but not be considered a pattern day trader if the trade volume does not exceed FINRA’s pattern day trader requirements.

Day Trading in Other Markets

Stocks are not the only asset you can day trade in. Day traders also operate in the foreign exchange market (also known as the forex market) and in the futures markets where mostly commodities are traded. Each of these markets works differently and has their own rules.

Note

The pattern day trader rule does not apply to investors who trade currencies in the forex market .

Minimum balance requirements for day trading forex will depend on the broker that maintains your account. As a result, investors can place as many buy and sell trades as they want in a foreign-exchange investment account.

Different markets also keep different hours. For example, stocks trade between 9:30 a.m. and 4 p.m. between Monday and Friday in the U.S., while futures and forex markets trade almost 24 hours a day for at least five days in a week.

Types of Day-Trading Strategies

There are many different strategies investors can implement when day trading. Some strategies focus more on technical indicators, some on news and media, and others use algorithms to buy and sell securities. Some common types of day trading include:

  • Momentum trading: This is buying and selling securities based on the strength of current price trends. Momentum is often determined by volume, volatility, and time frame.
  • High-frequency trading: This uses software and algorithms to buy and sell securities within short time frames, taking advantage of small price changes for a profit.
  • News-based trading: This type of trading makes day trades based on news reports and press releases of the underlying securities.

Some day traders stick to one strategy, and others use multiple strategies to make trading decisions. Remember that your investment bank may also provide tools and access to exclusive reports to aid your efforts in making timely day-trade decisions.

Pros and Cons of Day Trading

Pros
  • Potential for quick, large profits

  • No overnight holding risks

  • Compounding profits

Cons
  • Comes with considerable risks

  • Can be very time-consuming

  • High balance requirements

  • Taxes

Pros Explained

  • Potential for quick, large profits: Day traders can have multiple profitable trades per day, often leveraged with margin accounts for even larger returns.
  • No overnight holding risks: Because day trading is defined as buying and selling a security within the same day, all positions are closed out by the end of the trading day, which means no risks holding positions overnight, such as after-hours news updates that negatively impact your holdings, for example.
  • Compounding profits: Each profitable trade increases your buying power for the next trade, compounding with each profitable transaction.

Cons Explained

  • Comes with considerable risks: Perhaps the most significant risk associated with day trading is the potential for large losses. Day traders often leverage their positions, which means they could potentially lose more than they initially invested.
  • Can be very time-consuming: It may take a lot of time reading chart patterns, momentum indicators, news headlines, etc., in order to find the right trade. It may take hours per day to see significant profits since most profitable trades are incremental and small in relation to your account balance.
  • High balance requirements: Being a pattern day trader requires that you maintain at least $25,000 in a margin account.
  • Taxes: Buying and selling stocks for a profit within a short time can lead to tax implications. Profits from day trading could incur short-term capital gains tax, which is taxed as ordinary income.

Day Trading vs. Investing

Day Trading Investing
Buying and selling securities within the same day for short-term profits Buying securities for longer periods, generally months or years at a time
Buy/sell decisions are generally based on technical analysis Buy/sell decisions are generally based on fundamental analysis
Has minimum capital requirements of $25,0000 balance in a margin account No minimum balance requirements, may vary from broker to broker

What It Means for Individual Investors

Understanding what day trading is allows investors to strategically plan their investment strategies based on day-trading requirements. Investors who don’t want to have minimum balance requirements enforced on their account would be wise to watch how often they day trade, to stay below the FINRA requirements of a pattern day trader.

Investors with large balances and extra time to day trade can make incremental, compounding profits when they follow general day-trading strategies. In any case, remember that day trading comes with significant risks and the potential for larger-than-normal losses.

Frequently Asked Questions (FAQs)

How do you start day trading?

The first step to day trading is understanding all risks. You then can zero in on the market you want to day trade in—stocks, commodities, or currencies. Each of these markets works in different ways, keeps different hours, and has different rules. Research stocks, commodities, or currencies (whichever you’d like to trade) and come up with your trading strategies. Practice day trading using paper trading or a simulator before using your actual money. Get an appropriate brokerage account or approvals from your broker.  Determine how much money you are willing to lose and make your day-trading bets.

How do you make money day trading?

Its not easy to make money day trading. Picking the correct stock, currency, or futures contract is just the first step in a successful day trade. Other elements include determining how much money you’re trading with, how many trades you are making each day, how many trades make money, and how many result in losses. You’ll also need to keep track of any transaction costs that may eat into your profits. But research suggests that most day traders end up with losses. Even among those who make a profit, there are very few who end up making sizable gains enough to justify the effort and time put into day trading.

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Sources
The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
  1. U.S. Securities and Exchange Commission. “Thinking of Day Trading? Know the Risks.”

  2. Financial Industry Regulatory Authority. “Am I a Pattern Day Trader? Know the Day-Trading Margin Requirements.

  3. NYSE. “Holidays and Trading Hours.”

  4. CME Group. “Trading Hours.”

  5. CMC Markets. “Forex Market Hours.”

  6. IRS. “Topic No. 409 Capital Gains and Losses.”

  7. Douglas J. Jordan & J. David Diltz (2003). “The Profitability of Day Traders.” Financial Analysts Journal 59(6), 85-94.

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