Day trading is a form of speculation in securities in which a trader buys and sells a financial instrument within the same trading day, so that all positions are closed before the market closes for the trading day to avoid unmanageable risks and negative price gaps between one day’s close and the next day’s price at the open. Traders who trade in this capacity are generally classified as speculators. Day trading contrasts with the long-term trades underlying buy-and-hold and value investing strategies. It is made easier using day trading software.
Day traders generally use leverage such as margin loans; in the United States, Regulation T permits an initial maximum leverage of 2:1, but many brokers will permit 4:1 intraday leverage as long as the leverage is reduced to 2:1 or less by the end of the trading day. In the United States, based on rules by the Financial Industry Regulatory Authority, people who make more than 3 day trades per 5-trading-day period are termed pattern day traders and are required to maintain $25,000 in equity in their accounts. However, a day trader with the legal minimum of $25,000 in their account can buy $100,000 (4× leverage) worth of stock during the day, as long as half of those positions are exited before the market close. Because of the high risk of margin use, and of other day trading practices, a day trader will often have to exit a losing position very quickly, in order to prevent a greater, unacceptable loss, or even a disastrous loss, much larger than their original investment, or even larger than their account value. Since margin interest is typically only charged on overnight balances, the trader may pay no interest fees for the margin loan, though still running the risk of margin calls. Margin interest rates are usually based on the broker’s call rate.
Some of the more commonly day-traded financial instruments are stocks, options, currency (including cryptocurrency), contracts for difference, and futures contracts such as stock market index futures, interest rate futures, currency futures and commodity futures.
Day trading was once an activity that was exclusive to financial firms and professional speculators. Many day traders are bank or investment firm employees working as specialists in equity investment and investment management. Day trading gained popularity after the deregulation of commissions in the United States in 1975, the advent of electronic trading platforms in the 1990s, and with the stock price volatility during the dot-com bubble.
Some day traders use an intra-day technique known as scalping that usually has the trader holding a position for a few minutes or only seconds. Day trading is similar to swing trading, in which positions are held for a few days.
Day traders can be professionals that work for large financial institutions, are trained by other professionals or mentors, do not use their own capital, and receive a base salary of approximately $50,000 to $70,000 as well as the possibility for bonuses of 10%–30% of the profits realized. Individuals can day trade with as little as $100, or even less, with fractional shares.
Because of the nature of financial leverage and the rapid returns that are possible, day trading results can range from extremely profitable to extremely unprofitable; high-risk profile traders can generate either huge percentage returns or huge percentage losses.
Day trading is risky, and the U.S. Securities and Exchange Commission has made the following warnings to day traders:
- Be prepared to suffer severe financial losses
- Day traders do not “invest”
- Day trading is an extremely stressful and expensive full-time job
- Day traders depend heavily on borrowing money or buying stocks on margin
- Don’t believe claims of easy profits
- Watch out for “hot tips” and “expert advice” from newsletters and websites catering to day traders
- Remember that “educational” seminars, classes, and books about day trading may not be objective
- Check out day trading firms with your state securities regulator
Most traders who day trade lose money.
A 2019 research paper analyzed the performance of individual day traders in the Brazilian equity futures market. Based on trading records from 2012 to 2017, it was concluded that day trading is almost uniformly unprofitable:
We show that it is virtually impossible for individuals to compete with HFTs and day trade for a living, contrary to what course providers claim. We observe all individuals who began to day trade between 2013 and 2015 in the Brazilian equity futures market, the third in terms of volume in the world, and who persisted for at least 300 days: 97% of them lost money, only 0.4% earned more than a bank teller (US$54 per day), and the top individual earned only US$310 per day with great risk (a standard deviation of US$2,560). We find no evidence of learning by day trading.
An article in Forbes quoting someone from an educational trading website stated that “the success rate for day traders is estimated to be around only 10%, so … 90% are losing money,” adding “only 1% of [day] traders really make money.”