The Truth About Day Trading: Is it Worth it?

Typing the truth on a typewriter

The world of online day trading attracts thousands of new traders every day.

According to some sources, there is an estimated 13.9 million active traders worldwide!

That number is expected to continue climbing in the coming years. 

But, what is day trading, and is it really worth it? How do day traders make money, and what tools do they use?

Let’s find out below…

What is Day Trading and How Does it Work?

Day trading is a short-term trading style that involves opening and closing trades within the same trading day. This means that day traders usually keep their trades open for a few minutes to several hours, or until the closing bell. 

Day trading attracts many new traders because it provides fast feedback on your trading performance. By the end of each day, day traders know whether they’ve made a profit or loss and whether the trading day was successful.

While many day traders measure the success of their trading day by the actual profit they’ve made, new day traders should embrace another approach. Instead of looking at your bottom line, measure your daily performance by whether you’ve followed your trading rules. Did you do the right thing during the day, even though you closed the day with a loss? That’s still a major success.

Day traders usually use the following strategies to decide whether to buy or sell in the markets: trend-following, breakout trading, and mean-reverting strategies. Some day traders combine those strategies to get the most out of their trading, but new traders should master each strategy one by one before deciding to add another strategy to their toolbox.

Trend following

Trend-following strategies aim to take advantage of the underlying market trend. If the trend is up, a trend-following trader will look for opportunities to buy. Conversely, if the trend is down, a trader will look for selling opportunities. 

Trend-following strategies are usually the easiest to learn yet they can provide great results, which is why I encourage beginner traders to start with a trend-following strategy.

Here’s a trend-following trade in GBP/USD. The trend reversed from an uptrend into a downtrend with a bearish Head & Shoulders pattern, followed by a pullback to the pattern’s neckline. A trend-following day trader could sell at the pullback, and ride the downtrend as long as it lasts. 

head and shoulders chart

Don’t worry if you don’t understand those charts just yet. At My Trading Skills, we’ve prepared a comprehensive Trading for Beginners course that will teach you the foundations of day trading and what it takes to become a successful trader.

Breakout strategies

Breakout strategies are strategies that look for breakouts above or below important technical levels. Those breakouts are often followed by increased volatility, which is exactly what breakout traders are looking for. An example of a breakout trade could be a push above an important resistance level on breaking news or a trendline breakout during trend reversals.

Here’s an example of a breakout trade in the GBP/USD pair. The price formed a double top pattern on the 1-hour chart and broke below a rising trendline, followed by a pullback. This pullback provides an attractive selling opportunity with tight stop-loss levels.

example of a pullback in trading

Finally, mean-reverting strategies are based on counter-trend trades that take advantage of common market behaviour – mean-reverting. During strong price-moves, markets tend to correct by moving in the opposite direction of the underlying trend. Mean-reverting strategies should be used only by experienced traders, as it can be scary to fade a strong up-or down-move.

Is Day Trading Difficult?

Day trading is a relatively fast-paced trading style that requires quick decision-making and discipline. Some day traders open dozens of trades in a day, and depending on their trading plan, they actively manage those trade by adding to or reducing the position size. 

Other day traders look for trading opportunities in the morning, open their trades, and hold them during the day and close them only if the profit target gets hit or the trading day closes. 

Without proper trading education, you’ll find day trading to be extremely stressful

Either way, day trading requires more time spent in front of your trading screen compared to longer-term trading styles, like swing or position trading. But, day trading is still slower and less stressful than scalping, which involves opening and closing trades in a matter of seconds.

So, is day trading difficult? Yes and no.

Without proper trading education, you’ll find day trading to be extremely stressful and unintuitive. You won’t be able to make any sense out of intraday charts and trading mistakes will quickly pile up. However, with the correct trading approach and a set of rules, day trading can become very interesting and rewarding.

If you’re new to the markets and want to go the slower path – by learning on your own – I encourage you to start with swing trading first before you get your feet wet with day trading. Swing trading is slower, and you’ll have more time to make the right trading decisions. Only after you master swing trading and become consistently profitable should you look to day trade the markets.

How Many Day Traders are There?

Day trading attracts a growing number of traders worldwide. According to the latest brokernotes.co Modern Trader report, there are around 13.9 million online traders globally. The number of women who are actively trading the markets is growing as well. With 2.7 million female traders. 1 in 7 online traders are women.

Looking by continent, the majority of traders come from Asia with around 4.6 million active traders. Second comes Europe with 3.1 million traders, with the UK being home to the largest online trading community in Europe.

Now, how many day traders are actually profitable? According to various retail brokers, between 60% and 70% of traders lose money. While there are many reasons for this, the main ones are the accessibility of online trading and the lack of proper trading education. If you don’t learn the foundations of day trading, you’ll have a hard time becoming a consistently profitable trader.

How Do Day Traders Make Money?

Day traders make money by trading financial assets, such as stocks, commodities, currencies, and cryptocurrencies. They aim to buy low and sell their positions later at a higher price. 

However, day traders can also make money when prices drop by short-selling. This essentially means they’re borrowing the traded financial instrument from their broker, sell them at the current (higher) market price, and return the borrowed instruments later by buying them at a lower price.

Day traders typically hold their positions for minutes or hours and avoid holding their trades overnight. This means, day traders are focused on short-term price movements, which are typically the result of intraday fundamentals, market news, short-term technical levels, and risk sentiment.

In order to make consistent profits, day traders have to keep a close eye on their risk levels. Using stop-losses is vitally important to survive in the game of day trading in the long run. The key to managing risk is to only risk a small percentage of your trading account on any single trade and to not allow a few bad trades to wipe out a big portion of your account. 

For example
You can use the 2% rule which says that the maximum risk you’re allowed to take on any single trade shouldn’t be higher than 2% of your trading account. With a $10,000 trading account, this means that the maximum loss of a losing trade shouldn’t exceed $200.To improve your performance, aim to make more on your winning trades than you lose on your losing trades. If you’re risking $1, aim for at least $2. If you place your stop-loss at $200, look for profit targets that return at least $400. This allows you to have a success rate of 50% or even lower, and still to be able to squeeze out a profit out of the markets.

The majority of day traders also use leverage to magnify their profits. Trading on leverage means that you’re opening a higher position size than your trading account size. 

The amount of leverage depends on the markets you’re trading, so make sure to check out your broker’s website to get up-to-date information on how much leverage they’re offering. Also, always bear in mind that trading on leverage doesn’t only increase your profits, but also your losses.

How Much Do Day Traders Make?

Day trading can be an extremely rewarding undertaking, but only if you know what you’re doing.

The profit potential of day trading depends on several factors. This includes whether:

You’re trading for a proprietary trading firm or your own capital

  1. The markets you’re trading
  2. Your trading account size
  3. Experience levels
  4. Market knowledge

…to name a few.

For the sake of this article, let’s assume that you’re trading your own capital.

Different markets offer different trading opportunities. Stocks are usually the most cost-intensive asset class, and brokers usually offer low leverage ratios for stock trading, such as 30:1. On the other hand, leverage ratios for forex trading can reach 100:1 or even more, depending on your broker.

Your trading account size also plays an important role in your performance. It’s usually easier to trade with higher account sizes, but always make sure that you’re depositing only the funds you can afford to lose.

The most important factor that determines how much you can make as a day trader is arguably your trading experience and knowledge. It takes months to develop and get used to a profitable trading strategy and gain valuable trading experience, but you can fast-track your learning process with online trading courses.

What Are the Risks of Day Trading?

Just like other trading styles, day trading doesn’t come without its unique set of risks. Since day trading is an active trading style, losses can quickly pile up if you don’t respect strict risk management rules. The job of a day trader is to manage risks and preserve trading capital.

Using stop-losses is a prerequisite to successfully manage risks as a day trader. Stop-losses determine the maximum amount you’ll lose if the market goes against you, and it’s also an important input in deciding what position size to open. 

Stop-losses determine the maximum amount you’ll lose

As a rule of thumb, larger position sizes require tighter stop-losses to stay inside your risk-per-trade.

Trading costs are another risk of day trading, although not as important as with scalping. Since day trading involves opening multiple trades during a day, trading costs can eat up a significant portion of your profits. To lower your trading costs as much as possible, look for brokers with tight spreads and commissions.

Day traders often keep their trades open for hours, which increases the risk of intraday news and market reports impacting their trades. While some day traders have news trading strategies in their trading plan, day traders who don’t have experience with news trading are better off closing their trades ahead of important news.

How to Become a Day Trader?

Becoming a day trader is relatively easy. All you have to do is open a trading account with a retail broker, deposit funds, and you’re ready to start trading. However, becoming a consistently profitable day trader is somewhat more difficult.

Psychology

Day trading requires distinctive psychological traits, like discipline, patience, and an open mind. Discipline is important because you’ll have to create and follow a set of rules for day trading. Those rules need to cover your entry and exit points. They also need to include how to manage your trades and risk, when to add to your position, and which parameters you’ll use to find suitable trading opportunities. Following those rules isn’t easy when trading in real-time, but it’s worth it.

Education

To create a powerful set of rules, you need to know how the market operates and what to look for. That’s where trading education comes into play. As mentioned, at My Trading Skills, we have created detailed Trading for Beginners course, hosted by expert traders including myself. It covers all you need to know to become a successful day trader.  

Patience

Patience is another important skill in day trading because you have to wait for a trade setup to form. Chasing the market for trades will never work, and if you’re doing that there is a high chance that you’ll blow your account. Instead, wait for the market to come to you. Wait for a trade setup to form and to confirm before entering into a trade. In trading, money isn’t made by actual trading, but by holding high-probability trades.

Open Mind

And finally, day trading requires an open mind as you need to quickly change your mind when the market tells you so. The best day traders out there don’t have a problem closing their buying trades in loss and quickly reversing them by short-selling the market. Don’t get married to your market view; it can change hour by hour.

Final Words

Day trading is an active trading style that involves opening and closing trades within the same trading day. Day traders rarely hold their trades open overnight. Just like with other trading styles, day traders make money by buying at a lower price and selling at a higher price or by short-selling the market, which allows to profit from falling prices.

Since day trading is a quite active trading style, it’s vitally important for day traders to watch their risk levels. Using stop-losses is mandatory with all trades.

The majority of day trading strategies can be grouped into three groups: trend-following strategies, breakout strategies, and mean-reverting strategies. Trend-following strategies are arguably the way for new traders to get acquainted with day trading. Also, make sure you fully master one strategy before adding a new one to your toolbox. 

Further Reading:

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