The Ins and Outs of Day Trading

Investing means making decisions for yourself. How often you trade your stock market positions is part of that. Some investors decide to buy and sell stocks in the same market day – which is called day trading. 

How is day trading different from other types of investing, and is it actually profitable? Let's find out.

How day trading works

Those who day trade usually purchase and sell securities within a day, using leverage and short-term trading strategies to take advantage of minute-by-minute price movements. 

They make trades based on corporate earnings, interest rates, economic news, and more. Day traders seek to make quick, small, and numerous financial gains on their investments.

Some forms of day trading include:

• Scalping: Making many smaller profits based on small price changes throughout the day

• Range trading: Using support and resistance levels to make decisions around buying and selling

• High-frequency trading (HFT): Using tech and algorithms to take advantage of short-term market inefficiencies

Day traders often trade on margin, which means they borrow money from the broker to execute the trade. This is extremely risky.

Day trading vs. swing trading vs. long-term trading

Day trading focuses on making multiple trades per day and capitalizing on these transactions, with no securities owned overnight. These traders use high-tech tools and platforms to stay on top of the market's snappy changes. 

Swing trading looks at swings in securities that take place over weeks or month. Swing traders look at major momentum indicators. This can be done with a standard brokerage account as there aren't rules against swing trading.

Long-term trading refers to holding a position for a year or more. Long-term traders look at broader analyses of their holdings. This type of trading is most popular, with many Middle Eastern brokerages specializing in long-term trading.

Is day trading profitable?

Day trading isn't for everyone. While the internet has given everyday folks the freedom to learn and execute trades daily, it's worth noting that day trading is largely unprofitable – unlike swing and long-term investments, which can rake in serious returns. 

Research shows that more than 97% of day traders lose money from their trades over time, with just under 1% of traders actually making a profit.

Check your brokerage for day trading rules

Day traders are subject to specific requirements set out by FINRA and enforced by US brokerages:

1. A day trader must maintain a minimum equity of $25,000 every day they trade. 

2. A trader can trade up to $100,000 (or four times the minimum equity) by the close of business of the previous day. If the trader exceeds their buying limitation, they have five business days to deposit funds as the brokerage will issue a margin call to cover the trades.

3. FINRA rules also state that funds used to meet the maintenance requirement must remain in the trader's account for two full business days.

Some brokers don't allow day trading at all because it's too risky for average investors to take on.