Day Trading

The Lowdown

What is Day Trading?

Day trading is defined as the buying and selling of a financial asset, typically within the span of a day. A day trader's objective is different from an investor. Investors buy and hold their assets typically longer than a year while day traders transact by the second up to a day. The objective of a trader is to make a profit by either longing (buy low and sell high) or shorting (sell high and buy low) an asset.

Day traders mostly use technical analysis to place their positions. This includes analyzing chart patterns, price movement, volume, and technical indicators to help time longs, shorts, or staying out of a trade. Day traders also use some fundamental (Industry, financial data, management analysis, business data, etc.) analysis to understand macro-dynamics happening in the market.

Types of Day Traders

There are different types of day traders based on the execution time of their trades. The choice of trading style depends on an individual's time commitment, risk appetite, and preference. There are trader types that trade on longer times frames, but collectively we'll call them "day traders."

Scalpers - Traders that scalp make trades within seconds to minutes. They believe that making many trades, tens to hundreds a day, on small price movements is easier to predict.

Day Traders - Day traders typically make trades that all close before the end of the trading day. Day traders close out their positions before the market closes or before they finish trading for the day.

Momentum Traders - Momentum traders take advantage of major directional trends, typically with high volume, and ride the momentum of a financial asset price, up or down. Their trades typically last hours to days.

Swing Traders - Swing traders find short terms trends and capitalize on it, staying in a position for a day up to a week.

Positional Traders - Positional traders find short term trends that are longer than momentum and swing traders, typically weeks to months. They seldom trade and aren't worried about daily price fluctuations because they are focused on longer-term outcomes.

Tradeable Assets

As the world continues to evolve, more and more assets are becoming tradeable. Tradeable assets fluctuate in price based on many factors such as inflation rates, interest rates, government debt, political stability, economic outlook, recessions, company performance, etc. This fluctuation allows traders to profit by buying and selling in an attempt to profit from the disparity in buy and sell price.

Below, we'll examine the five most common assets that are traded around the world.

Stocks - Stocks represent ownership of a company. Public companies make their stocks available to the public for purchase. They do this to raise capital to further grow the company, spread risk, provide liquidity to investors, and other factors. Stock exchanges provide a marketplace between buyers and sellers, facilitating an "exchange" between both parties. Because there are millions of buyers and sellers transacting constantly, these exchanges get price data that they make available for anyone to see. Data like volume of trades, current price, historical price, and other relevant data points. This information allows traders to speculative on price movements, trying to best time their trades to make a profit.

Currency - FOREX or Foreign Currency Exchange is the largest global network of currency brokers and banks that facilitate the exchange of one currency for another. When you travel internationally and have to change your home currency for Pounds, Euros, or any other foreign currency, you are participating in the FOREX market. Trillions of dollars are wired every day around the world to facilitate international trade, and most of it has to be converted from one currency to another.

Futures - Futures are essentially standardized contracts that represent a certain amount, or quantity of an underlying asset to be transacted between two parties at an agreed-upon price and date in the future. Let's unpack this with a simple example.

A seller will have something they want to sell in the future. Maybe a wheat farmer who won't harvest their crop for another 3 months, but wants to line up a buyer. A buyer has something they want to buy in the future. Maybe a cereal producer who is trying to smooth out their supply chain by ensuring they have enough wheat in 3 months. Both the buyer and seller could make an agreement to buy and sell wheat from one another in the future, but what if one of them backs out? What if one of them sells that contract to a neighboring cereal or wheat producer because of unexpected changes in the business? What if the wheat isn't of the agreed-upon quality?

Lucky for wheat and cereal producers, this has all been thought of before and is regulated by the U.S. Government in order to better facilitate efficient exchanges of goods. Futures contracts are nothing but contracts that "derive" or more simply represent the value of an actual product, commodity, or financial instrument. They are characterized by:

  • The date the transaction will be conducted
  • Quantity or amount of the underlying asset
  • Price per unit the transaction will be done at
  • Guaranteed by an exchange ensuring buyers and sellers complete the deal

Because of this standardization and guarantee, they are easily exchangeable between parties. Meaning, they can be bought and sold nearly instantaneously between buyers and sellers, and are thus very tradable. Future Trading is the act of buying and selling futures contracts with the intention of making money on the price movements of the commodities or goods underlying the contracts. This sounds like a mouthful so let's unpack this.

Futures contracts were originally designed to help reduce the volatility of prices for goods being bought and sold. Examples included agricultural goods like wheat, corn, and cattle. They can also include other commodities like cotton or oil. Today, there are futures contracts that represent precious metals, currencies, even interest rates, among others. The point being, these are commodities or goods that are being bought and sold in large volumes around the world in the normal course of trade, and their prices move around.

Price moving around is normal and will fluctuate due to changes in supply and demand. However, because of the seasonality of consumption and other factors, sometimes prices move so violently that it inhibits global trade from actually occurring. The cereal producer and wheat producer never match up at the right time and both lose as a result. Futures contracts help reduce this volatility but still allow for price changes to occur over time due to changes in supply and demand.

Options - Options are financial instruments that allow traders and investors the option to buy or sell an underlying asset (i.e. stocks) within a certain time frame. You can purchase a "call" option or a "put" option. A call option allows you to purchase the underlying asset at a predetermined strike price (the price you buy the underlying asset if you use the option contract) and before the contract's expiry date. A put option allows you to sell the underlying asset at the strike price before the contract's expiry date. Most traders or investors use options as a way to hedge against uncertainty but options itself can be traded and profited from.

For example, if you believe that TSLA stock is going up you could buy a call option (each contract is usually for 100 shares) for each share at $5 with an expiry date of 2 months from now. Since each contract is in a bundle of 100 shares, your options contract will cost you $500 for the "option" to purchase at the strike price. If TSLA shares are currently trading at $300 dollars, the strike price is typically the same price as the current trading price or current fair market value of the stock. If TSLA shares go up to $320 dollars within 2 months, you could exercise your options contract and purchase TSLA shares for $300 dollars and immediately sell them for $320 dollars. You would profit $2,000 and your percentage gain would be 400% since you spent $500 and got a return of $2,000.

Cryptocurrencies - A cryptocurrency is a digital asset that conveys the value of something that can be bought and sold on an exchange similar to a stock market. It was first fully conceived in 2008 with the genesis of Bitcoin. Bitcoin allowed for the creation of a decentralized form of money, governed by an open distributed consensus among anyone with the savvy to participate in the network. The complexity of how cryptocurrencies work is beyond our scope here, but cryptocurrencies are a volatile asset that can be bought and sold through a cryptocurrency exchange. It has garnered a lot of attention from day traders because of its speculative and highly volatile nature.

How Does it Work?

How_Day_Trading_Works

How Do You Make Money?

Day traders make money by buying and selling financial assets, making a profit from the difference in the buy and sell price. They hold their positions (long or short - see below) for a short period of time from seconds to hours within the day.

To be clear, trading and investing are two separate things. Investors hold their investments over a long period of time, typically over a year, in hopes of their assets growing in value and/or receiving dividends. If you hold your investments over a year, your profits are taxed as capital gains, which are typically a lower tax rate than ordinary income. As day traders, profits and losses are logged daily. Your profits are taxed as ordinary income based on your income tax rate.

Long term investing allows you to grow your wealth passively over time but it's usually not enough to sustain your living costs unless you have millions in cash-generating investments. Traders can make a full-time income day trading. Good traders are able to start with a small investment amount and grow it over time, sustaining a standard of living while growing their investable income.

There are several ways for traders to make money:

Long Positions

Long positions are what most people are familiar with. It's a term that means you're buying an asset assuming that the price will go up. If it does go up, you sell making a profit on the difference between your purchase price and sale price. For example, you buy a Bitcoin for $7,500 and after two hours the price shoots up to $8,200 and you sell. In this instance, you made the difference between the purchase and sell price of $700 dollars.

Short Positions

Short positions can be more confusing than long positions. This is when you believe that an asset will fall in price. In these situations, you can still make money if the price falls. You do this through a short position through brokerages that allow shorting.

To short, you're essentially borrowing the assets, paying a fee or interest to do so, and selling them immediately (brokerages that allow shorts facilitate the exchange). You take the cash and wait for the asset to drop in price. If it drops in price, you buy the asset with the cash you received from selling the borrowed asset. You keep the difference between the price you borrowed and sold it at and what you repurchased it at.

For example, you believe Apple stocks are too high and with earnings reports coming out soon, you don't think they will meet their earning estimates. You decide to short 100 shares of Apple stock at $300 dollars each. You pay a fee to borrow the Apple stock through your brokerage firm, sell them to be in a cash position, and wait for the reports to come out. Sure enough, Apple doesn't meet its earning expectations and the price per share drops to $250 dollars. You use the cash you received from borrowing and selling the Apple shares and repurchase the shares at $250 dollars each. You return the shares you just purchased and keep the profit of $50 per share. Since you bought 100 shares, you made $5,000, on shorting Apple stock minus the fees you paid to short.

Margin Trading

Margin trading allows you to borrow money from an exchange to magnify your trades. You can use leverage for long or short positions. Margin trading is typically reserved for more experienced traders because your risk and reward increases greatly.

For example, if you only had $10,000 in your trading account, you can margin trade at 5x allowing you to borrow $40,000, giving you the purchasing power of $50,000 with just your $10,000 initial investment.

The amount of leverage you can use depends greatly on the asset you are trading. Stocks typically have a much lower leverage ratio, typically 2:1. This means if you had $25,000 in your trading account, you'd be able to borrow $25,000, giving you a purchasing power of $50,000 total.

However, assets like FOREX (currency), gives much higher leverage ratios. Because currencies value is fundamentally based on the performance of an entire country's economy, currencies are a relatively stable and secure asset. The more secure the asset, the more margin banks, brokers, and dealers are typically willing to lend to an individual trader. Most currency exchanges will extend 50:1 margin on the world's most stable currencies like the USD, GBP, EUR, AUS, NZD, CAN, and JPY. Which means for every $2 you deposit with a retail FOREX broker, they'll lend you $100 to trade with. This and cryptocurrencies provide the highest leverage of all asset classes.

What Are The Pros & Cons?

  • You can work from practically anywhere with a computer and fast reliable internet.
  • You control the hours you want to work.
  • High upside potential.
  • Lifelong skill.
  • Adrenaline rush.
  • Prestige. It's not easy day trading, but if you're good, you have high upside potential and most people are impressed by it.

  • High failure rate.
  • It can be highly addictive.
  • It can take a toll emotionally and mentally with the ups and downs.
  • It can be high stress at times.
  • You could lose your investment capital.

Estimated Startup Cost

There are different initial capital requirements depending on the asset class. With stocks, you need a minimum of $25,000 to trade. For currency, you can start with as little as $100 dollars, but it's recommended to start with at least $1,000. To trade futures, the minimum starting capital ranges from $500 to $10,000. There is no minimum for options but you'll need at least the amount to purchase your options contract. It's recommended to have at least $5,000-$10,000 to invest. With cryptocurrencies, there is no minimum amount to start, but you'll want to invest enough for some wiggle room as you learn the ropes.

Account Funding

US$
Suggested Min

Total Cost

US$

Key Activities Day Trading

Day traders tend to spend most of their time using technical analysis to find trade opportunities. They'll study charts for patterns, use technical indicators, look at historical data, and other techniques used by technical analysts. At other times, traders are studying financials markets by watching relevant financial news, reading from financial papers, websites, and listening to analyst opinions about the market. While they aren't actively trading, they spend most of their time reviewing their trading strategies and learning new techniques that will make them a more efficient and successful trader.

Technical Analysis
%
Fundamental 
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Reading Analyst Opinions
%
Reviewing Strategy
%

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Michelle Schroeder-Gardner runs the award-winning personal finance blog, Making Sense of Cents. She started blogging entirely as a hobby, and now currently earns over $100,000 a month blogging, with around $50,000 a month of that coming from affiliate marketing.

Her writing and advice have been featured on sites such as Huffington Post, Forbes, Yahoo, Cosmopolitan Magazine, Zillow, US News, Nasdaq, MSN, and more. When she's not blogging, you'll find her exploring via sailboat (we used to RV full-time!) with her husband and our two dogs. They sold their house in 2015 and have been traveling full-time since!

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By Michelle Schroeder-Gardner

WatchconspiracyLogo

Michelle Schroeder-Gardner runs the award-winning personal finance blog, Making Sense of Cents. She started blogging entirely as a hobby, and now currently earns over $100,000 a month blogging, with around $50,000 a month of that coming from affiliate marketing.

Her writing and advice have been featured on sites such as Huffington Post, Forbes, Yahoo, Cosmopolitan Magazine, Zillow, US News, Nasdaq, MSN, and more. When she's not blogging, you'll find her exploring via sailboat (we used to RV full-time!) with her husband and our two dogs. They sold their house in 2015 and have been traveling full-time since!

Program Overview

Module 1 - Getting Started
Module 2 -
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Module 7 -
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By Michelle Schroeder-Gardner

WatchconspiracyLogo

Michelle Schroeder-Gardner runs the award-winning personal finance blog, Making Sense of Cents. She started blogging entirely as a hobby, and now currently earns over $100,000 a month blogging, with around $50,000 a month of that coming from affiliate marketing.

Her writing and advice have been featured on sites such as Huffington Post, Forbes, Yahoo, Cosmopolitan Magazine, Zillow, US News, Nasdaq, MSN, and more. When she's not blogging, you'll find her exploring via sailboat (we used to RV full-time!) with her husband and our two dogs. They sold their house in 2015 and have been traveling full-time since!

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Module 2 -
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