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. However, with the rise of the internet and online trading houses, it's become 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 of 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.

The Basics of Day Trading

Day trading usually refers to the practice of purchasing and selling a security within a single trading day. While it can occur in any marketplace, it is most common in the foreign exchange (forex) and stock markets. Day traders are typically well-educated and well-funded. They use high amounts of leverage and short-term trading strategies to capitalize on small price movements that occur in highly liquid stocks or currencies.

Day traders are attuned to events that cause short-term market moves. Trading based on 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 greatly benefit day traders.

Day traders use numerous intraday strategies. These strategies include:

Scalping : this strategy attempts to make numerous small profits on small prices changes throughout the day

this strategy attempts to make numerous small profits on small prices changes throughout the day Range trading: this strategy primarily uses support and resistance levels to determine buy and sell decisions.

News-based trading: this strategy typically seizes trading opportunities from the heightened volatility around news events

High-frequency trading (HFT): these strategies use sophisticated algorithms to exploit small or short-term market inefficiencies

A Controversial Practice

The profit potential of day trading is perhaps one of the most debated and misunderstood topics on Wall Street. Internet day trading scams have lured amateurs by promising enormous returns in a short period. Unfortunately, the idea that this kind of trading is some kind of "get-rich-quick" scheme persists. Some people day trade without sufficient knowledge. But there are day traders who make a successful living despite—or perhaps because of—the risks.

Many professional money managers and financial advisors shy away from day trading. They argue that, in most cases, the reward does not justify the risk. Conversely, those who do day trade insist there is profit to be made. Day trading profitably is possible, but the success rate is inherently lower. This is because of the complexity and necessary risk of day trading in conjunction with the related scams. Moreover, economists and financial practitioners alike argue that over long time periods, active trading strategies tend to underperform a more basic passive index strategy, especially after fees and taxes are taken into account.

Day trading is not for everyone and involves significant risks. Moreover, it requires an in-depth understanding of how the markets work and various strategies for profiting in the short term. While the success stories of those who struck it rich as a day trader often get a lot of media attention, remember this is not the case for most day traders: many will fizzle out and many will just barely stay afloat. Furthermore, don't underestimate the role that luck and good timing play—while skill is certainly an element, a stroke of bad luck can sink even the most experienced day trader.

1:24 What Is Day Trading?

Characteristics of a Day Trader

Professional day traders—those who trade for a living rather than as a hobby—are typically well-established in the field. They usually have in-depth knowledge of the marketplace, too. Here are some of the prerequisites required to be a successful day trader.

Knowledge and Experience in the Marketplace

Individuals who attempt to day trade without an understanding of market fundamentals often lose money. Technical analysis and chart reading are both good skills for a day trader to have. But without a more in-depth understanding of the market you're in and the assets that exist in that market, charts may be deceiving. Do your due diligence and understand the particular ins and outs of the products you trade.

Sufficient Capital

Day traders use only risk capital which they can afford to lose. Not only does this protect them from financial ruin, but it also helps eliminate emotion from their trading. A large amount of capital is often necessary to capitalize effectively on intraday price movements. Having access to a margin account is also key since volatile swings can incur margin calls on short notice.

Strategy

A trader needs an edge over the rest of the market. There are several different strategies day traders use including swing trading, arbitrage, and trading news. These strategies are refined until they produce consistent profits and effectively limit losses.