Understanding Day Trading: The Long and Short of It

Understanding Day Trading: The Long and Short of It

Day trading is a popular way for people to use their capital to make quick returns. But it is not without risks, especially for those starting out. While the idea is to make quick gains, trading in and out of the market can also mean quick losses.


By understanding day trading, you’re more likely to put yourself in the winner’s circle, like I have. I’ve been a day trader since 2005. Continue reading our guide to find out what day trading is, the rules that apply to day trading, the best markets for day trading, how to practice, tools you’ll need, managing your risk, and strategies you can use.

What is Day Trading?

What is Day Trading?

Day trading is a style of trading in financial markets where the trader buys and sells a financial instrument, such as stocks, options, futures, or currencies, within the same trading day.

style of trading

The goal of day trading is to make profits by taking advantage of short-term price movements in the markets. Day traders typically close out all of their positions by the end of the trading day and do not hold any overnight positions.

Day traders generally trade in both directions, going both long and short. Going “long” means buying if they think something will go up. Shorting means profiting if the price falls. For example, there are many opportunities to gain by shorting Bitcoin during trading days due to Bitcoin volatility.

Further reading

Pattern Day Trading Rule

Pattern Day Trading Rule

The pattern day trading rule only applies to day traders in the USA who are trading stocks. It does not apply to other markets or countries. That said, certain countries may have their own rules or limitations on day trading.

If you are not the in the US, or not day trading stocks, then you can skip to the next section. If you want to day trade stocks in the US, you’ll need to understand this rule. The pattern day trading (PDT) rule is a regulation enforced by the US Securities and Exchange Commission (SEC) that applies to traders in the United States who engage in pattern day trading.

A pattern day trader is defined as someone who executes four or more day trades within a five-business-day period using a margin account (I’ll discuss accounts later on). Under the PDT rule, a pattern day trader is required to maintain a minimum account balance of $25,000 in order to continue day trading.

If the account balance falls below $25,000, the trader will be restricted from day trading until the balance is restored to the $25,000 (or more) level. It’s important to note that the PDT rule applies only to margin accounts and does not apply to cash accounts. Additionally, the PDT rule applies only to traders in the United States and may not apply in other countries.

So if you want to day trade stocks in the US, you will need at least $25,000. If that’s too high for your purposes, you can trade other markets in the US using less than that. If you are outside the US, you can day trade with any amount you wish (assuming no local restrictions).

Further reading

Which Markets to Day Trade?

Which Markets to Day Trade?

Popular day trading markets include stocks, futures, forex, and options. All are viable for day trading.

good for day trading

Each market is good for day trading — that’s why people trade them. One isn’t better than another. That said, trading each market may require different amounts of capital, which may make one more suitable for you.

  • Forex requires the least amount of capital to get started. Many brokers allow you to open an account with $50. You can start day trading with this amount, although $100 or more is recommended. Cryptocurrencies are also a form of currency trading, although you will need an account with a crypto exchange in order to trade them.
  • Options are flexible because the price of options varies dramatically and you can only lose the amount you invest in the option. If you buy a call or put option, the price is multiplied by 100 because each option contract is for 100 shares of stock.

Therefore, a $0.05 option requires $5 in capital, plus fees and commissions. To trade in a risk-controlled way would require at least $500, and ideally $1000 or more to consider options trading.

Many brokers don’t allow clients to trade options unless they have at least $2000 in the account. You’ll also need to specify that you want to open an options account when going through the account opening process.

  • Futures contracts are traded on commodities and major stock indices such as the S&P 500. To trade mini contracts, you will likely need at least $6000 to day trade in a risk-controlled way (discussed later). To trade micro contracts you could likely start with $600 or more.
  • Day trading stocks requires at least $25,000 in the US, though you can start with any amount if you are outside the US. If you have to pay commissions on each trade, the commission charge should be a very tiny fraction of your account size. Otherwise, commissions will erode your capital quickly.

One market isn’t better than another, but your basic knowledge or the amount of capital you have may steer you towards one market over another.

Further reading

Day Trading Tools and Accounts Required

Day Trading Tools and Accounts Required

Depending on which market you trade, you may need additional tools to help you analyze trades, or you may need to use a specific account type.

Since each market is a bit different and may require different tools or accounts, let’s go through them one by one.

  • Stocks: day trading stocks requires a margin account. With a margin account, you can buy, short, and use leverage. If you use a cash account, you will only be able to buy stocks (no shorting or leverage).You may also need a data subscription so you can see real-time prices and charts. Some brokers provide this for free, while others charge a monthly fee for it.
  • Forex: When opening a forex account, everything is usually ready to go. Your broker will provide you with a trading platform, which includes charts and a live data feed of current prices. When opening the account, you can choose how much leverage you want. 50:1 is more than enough for most day traders.
  • Options: You will need to specify that you want an options account. Most brokers that provide options also provide stock trading accounts. Options accounts usually require that you answer more questions when opening the account since options are more complex instruments.

Once you have your account opened, the broker will provide you with the ability to place options orders. Once again, you will likely need to pay for a data feed if it is not provided for free by the broker.

  • Futures: If the broker offers other types of trading (options or stocks), specify you want a futures account. Consider what markets you want to trade, as you will usually need a data feed for those markets. The broker will generally provide you with charts for analyzing trades.

In all cases, your broker will generally provide you with the basic tools you need. However, it’s possible that as you progress, you may find that the broker’s tools aren’t to your liking. There is always the choice to make trades through your broker while using third-party tools for your analysis.

You may wish to use nicer charts, such as those offered by TradingView or Trend Spider, or you may want to use a stock screener like Finviz, or you may want a whole different trading platform, such as NinjaTrader.

The basic tools you need are a trading platform to place trades, charts to analyze, and a data feed for what you are trading. Beyond that, there are plenty of tools available online to help make trading decisions.

Further reading

Demo Trade Before You Begin

Demo Trade Before You Begin

Demo trading is a great way to practice and get used to trading before you put real money on the line.

Demo trading, also known as paper trading, is a process of simulating trades using a demo account with virtual money. It allows traders to practice and refine their trading strategies without risking real money. Here are some reasons why demo trading is beneficial before starting day trading:

  1. Learn and practice trading strategies: Demo trading provides an opportunity to learn and practice trading strategies without risking real money. Traders can test and refine their strategies until they are confident in their ability to execute trades profitably in real markets.
  2. Get familiarized with the trading platform: Demo trading allows traders to get familiar with the trading platform they plan to use for day trading. It provides an opportunity to learn about the features of the platform, how to execute trades, and how to manage risk.
  3. Gain experience and build confidence: Demo trading provides an opportunity to gain experience and build confidence in the trading process. It helps traders to become comfortable with the ups and downs of the market, and to develop a disciplined approach to trading.
  4. Evaluate trading performance: Demo trading provides a way to evaluate trading performance and make adjustments to strategies as needed. Traders can review their trading history, analyze their results, and make improvements before they start trading with real money.

Overall, demo trading can help traders develop the skills and confidence needed to be successful in day trading, while minimizing the risk of financial loss.

Further reading

The Risk and Rewards of Day Trading

The Risk and Rewards of Day Trading

Managing risk while day trading is first and foremost. Only by managing risks will the rewards come.

Managing risk

Risk must be controlled. Otherwise, the account will be eroded by bad days, lots of tiny losses, or a few big losses.

  • Don’t lose more than 1% of the account on a single trade. This means setting a stop loss and using a position size such that if the stop loss is hit, you won’t lose more than 1% of the account. When starting out, risk much less, such as 0.1% per trade.
  • Set a daily loss limit. Ideally, don’t lose more than 2% or 3% of the account in a single day. If you do, stop trading for the day. When starting out, don’t lose more than 0.5% a day since there will be many losing days, and you don’t want your capital dropping too quickly.

You may also want to set a weekly or monthly loss maximum. If you lose this amount, stop trading for the rest of the week or month. Go back to practice in the demo account.

With the risk defined, you can start thinking about making money. Profits are a function of risk/reward, win rate, and the number of trades. If you take a trade, make sure you’re getting at least double the profit versus your risk.

For example, you buy a stock at $50 and put a stop loss at $49 ($1 of risk per share), put your target at $52 ($2 profit per share) or higher. This way, even if you only win 40% of your trades, you will still make a small profit. If your win rate is higher, your profits will be higher.

You could also go for larger profits (3 or more times larger than the risk). But since these are short-term trades, make sure the target is within reasonable proximity to the current price as you ideally want the price to reach that target within minutes or hours (at most). Look at how far the price typically moves to determine if your target is reasonable and provides a good risk/reward.

“Risk is when there are multiple possible future states and the probabilities of those different future states occurring are known.” – George Soros

Further reading

Day Trading Strategies

Day Trading Strategies

A day trading strategy defines when you enter and exit trades. Here are some day trading strategies for you to consider.

The following SafeTrade articles will help you define a day trading strategy for yourself.

These are just a few examples of trading strategies. You can find many more on the blog.

Further reading


What are the risks of day trading?

Day trading involves making quick decisions based on short-term market movements. The potential for high profits also means there’s a higher risk of losing money, especially if a trader is not experienced or disciplined enough to manage their emotions and stick to their strategy.

What are the benefits of day trading?

The benefits of day trading include the potential for high profits and the ability to take advantage of short-term market movements. Day traders also have the flexibility to work from anywhere with an internet connection, and they can manage their own trading strategies and schedules.

How much money do I need to start day trading?

The amount of money needed to start day trading varies depending on the trading strategy and the markets being traded. Stock day traders are required to have a minimum account balance of $25,000 in the United States, but some traders may start with as little as a few hundred dollars in their account if trading other markets or if they are located in other countries.

What tools and resources do I need for day trading?

Day traders need a fast and reliable internet connection, a computer or mobile device with trading software, and a strategy for analyzing and executing trades. They may also use technical analysis tools, such as charts and indicators, to help identify potential trading opportunities.

What are some common day trading strategies?

Common day trading strategies include: Scalping: making small profits on small price movements. Momentum trading: buying stocks that are rising in price and selling those that are falling.

Range trading: buying and selling stocks within a specific price range. Successful day traders often develop their own customized trading strategies based on their experience and market knowledge.

Is day trading suitable for everyone?

No, day trading may not be suitable for everyone. It requires a significant amount of time, effort, and risk-taking, and may not be appropriate for those who are risk-averse or have limited trading experience. Day trading also requires capital, and not everyone has capital to use for day trading.

What are some common mistakes that day traders make?

Common mistakes made by day traders include failing to have a trading plan, not managing risk properly, overtrading, and letting emotions such as fear and greed influence their trading decisions. Successful day traders often have a disciplined approach, and focus on consistent execution of their strategy rather than trying to chase big profits.

Final Thoughts

Day trading is a great way to earn a living, but like most ventures, it is a long road to consistent profitability. Decide on what market you want to trade, define how you want to trade, and come up with a plan. Practice and refine the method in a demo account until it’s proven profitable.

Keep risk controlled at all times, on each trade and during each day/week. Controlling risk gives you the best chance at profits. Strive to utilize a favorable reward:risk ratio where you are making more on winners than you lose on losers.Looking for more ways to profit, consider trading short squeezes.

Further reading