Day trading 101: Your Ultimate Guide to Short-Term Trades

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Day trading 101: Your Ultimate Guide to Short-Term Trades

day trading full guide

Day trading has become one of the fastest-growing activities globally.

While the practice has been growing for years, it became more popular during the COVID-19 pandemic as more people stayed at home, while stocks and cryptocurrencies soared.

Source: Exploding Topics

But what is day-trading? How does it differ from long-term investing? How does someone get started as a day trader?

In this article, we will look at what day trading is and everything you need to know about it.


What is day trading?

Day trading is the process of buying and selling financial assets in short time with the goal of making a profit. These assets include:

  • Stocks
  • Currencies
  • Digital currencies like Bitcoin and Ethereum
  • Bonds
  • Exchange-traded funds (ETFs)
  • Commodities

Day trading differs from other forms of making money in the financial market like investing and swing trading. The main difference is in the duration of holding an asset.

Related » Is day trading riskier than long-term investing?

Day trading vs swing trading vs investing

In day trading, the trader’s goal is to open a trade and ensure that it is closed by the end of the day. In other words, they don’t leave their trades open overnight. This is what day traders refer to as “being flat by the end of day”.

Swing trading, on the other hand, is the practice of opening trades and then holding them for a few days. These traders simply identify a short-term trend and then hold their trades for a while.

On the other hand, investors or position traders are known for holding their trades for many months or even years.

Is day trading considered controversial?

Day trading has always been a controversial industry. On the one hand, there are people who believe that it is a better way of making money than long-term investing. They argue that it is easy to make decisions based on short-term outlooks instead of long-term.

For example, it is difficult to predict industries that will go extinct in the next few years. Yet, it is easy to predict how a currency pair or stock will move within a given day.

How does day trading work?

Assets to day trade

First, let’s look at the assets that you can focus on as a day trader:

  • Currencies: These are currencies of different countries. You can buy a currency whose value you expect will rise and short one you believe will lose value.
  • Stocks: These are shares of publicly-traded companies like Google, Microsoft, and Apple. When you buy a stock, you simply own a small part of the company.
  • Commodities: These are raw materials or physical commodities. They include crude oil, copper, silver, and gold among others.
  • ETFs: An ETF is a financial asset that tracks a single or a group of assets. For example, Invesco QQQ tracks the NASDAQ 100 index while Bitcoin ETF (BITO) tracks CME Bitcoin Futures.
  • Bonds: Bonds are loans extended to companies, states, countries, and agencies by investors. The borrowers promise to pay a certain interest rate and a certain period.
  • Indices: These are indices that track certain stocks. They include the Dow Jones and NASDAQ 100 index.

Timing in trading

Certain assets like cryptocurrencies can be traded on a 24/7 basis because that is when they are offered. Currencies, on the other hand, can only be traded on a 24/5 basis. This means that you can trade them any hour from Monday to Friday.

On the other hand, stocks are offered in specific periods. For example, in the US, the regular session starts at about 9 and runs until 4. In this period, you have access to all stocks and ETFs. You can also get more data from your broker.

It is also possible to trade American shares after the session starts and before it opens.

The pre-market session happens a few hours before the regular session while extended trading hours happens after the markets close. The trading that happens in these two sessions is usually a bit different because not all assets are provided. Also, you can only open pending orders.

Prop trading vs retail trading

There are two ways to day trade.

First, you can become a retail trader. With this method, you open an account, learn trading strategies (or develop your own), deposit funds, and then execute your trades. As a retail trader, you are on your own.

Second, you can become a proprietary or prop trader. This is a practice where you use a company’s funds to trade. As a prop trader, your income will be a part of the profit that you generate. You are also encouraged to bring in more people into your trading floor.

» Related: Complete guide to prop trading

Broker vs DMA

Another concept within trading to consider is broker and direct market access (DMA).

In most cases, as a regular day trader, you will not have access to the market makers. For example, when you open a trade with Robinhood, you don’t get to choose the market maker who will execute the trade.

On the other hand, when you are using a broker with a DMA, you have access to the market makers and can select the one you want to execute the trades. At times, the market-maker can even reimburse your trading cost.

Part-time or full-time?

The good thing about day trading is that you can do it both full-time or on a part-time basis. Most people do it on a part-time basis in a bid to supplement their income. Others who are experienced do it full-time either as a retail trader or a prop-trader.

How to day trade

Day trading is a relatively complicated process, which explains why most people fail. Indeed, statistics show that more than 80% of people who attempt to make money as a day trader will fail. Therefore, there are several key strategies that will help you avoid failing as a trader.

Different styles of day traders

There are different types of traders.

First, there are scalpers, who are only interested in making small profits per trade. These traders open trades and then exit them within a few minutes provided that they have made a profit.

Second, there are algorithmic traders who use algorithms and bots to execute their trades.

Finally, there are copy traders, who rely on other experienced traders. They simply use tools offered by forex brokers to copy trades from traders who are better than them. This practice is done by both experienced traders who want to diversify their earnings and inexperienced ones.

Related » Best time-frames for day trading

Technical analysis

Technical analysis refers to the process of using indicators like moving averages, relative strength index (RSI), and MACD to analyze assets. It also involves analyzing charts in a bid to predict the future direction of the asset.

Trend indicators include Ichimoku Kinko Hyo, moving average, and envelopes while oscillators are MACD, RSI, Stochastic, and DeMarker. Volume indicators include volume, accumulation and distribution indicator, and VWAP (Volume-Weighted Average Price).

Fundamental analysis

This is the process of looking at micro and macro data to predict the direction of an asset. For commodities like crude oil and copper, you could look at demand and supply dynamics.

On the other hand, for assets like stocks and ETFs, you could look at management, company growth, earnings, and other issues like competition. For bonds and currencies, you can look at the overall performance of an economy and trends in monetary policy.

Price action

This is a method of analysis that focuses on how charts are moving. There are two main patterns that traders look at. They look at chart patterns, such as:

  • Triangles
  • Pennants
  • Flags
  • Cup and handle patterns.

They also look at candlestick patterns, such as:

  • Doji
  • Evening star
  • Bullish and bearish engulfing patterns
  • Hammer

among others.

Market orders

There are two main types of orders in the market. There is a market order, where you open a trade at the current spot price. The trade is executed right away. On the other hand, there are pending orders that are executed only when certain conditions are met.

For example, a buy stop order opens a buy trade when the price moves above the price. On the other hand, a sell-stop opens a sell trade when the asset’s price moves at a level below the current level.

Before you get started

The most difficult part of day trading is getting started. Therefore, there are several things you need to know before you start.

First, you need to understand the risks involved in the market. By having a good understanding about these risks, you will start embracing strategies to limit your losses earlier enough.

Second, you need some education. Like in all fields, it is always important for you to learn how the market works. You can get this knowledge by reading books, watching videos, and even enrolling in online courses to learn more about the industry. It will be worth it.

Third, you need to come up with a strategy or a trading plan that you will be using as a trader. Most experienced traders tend to follow a certain strategy or process. As such, you should spend a lot of time creating such a strategy and testing it in the long term.

Further, there is the concept of a demo account. This is an account that lets you trade in a real market environment with fake money. The demo account will play an important role in ensuring that you have tested and retested your trading strategy.

Finally, you need to know the importance of psychology and emotions. While skills like fundamental and technical analysis are important, your emotional well-being can make or break your trading career. Indeed, this is the main reason why many people fail and others get into depression.

» Related: 3 Most Common (& Costly) Psychological Trading Mistakes

How to start day trading

After spending time in a demo account, you need to move to the next step.

If you are a retail trader, you can simply move from a demo account to a live account. You simply do this by depositing funds to your account and then starting to trade. If you are using a prop-trading approach, you will need to be taken through an induction process.

Choose your realistic goal

Next, you should have a goal of what you want to achieve. While your overall goal is to make money in the financial market, you should ensure that you are realistic. For example, you won’t move from a novice to a professional trader instantly. You can read our article to see the several stages that traders go through.

Money management

Money management is another important concept in day trading. It refers to the process of coming up with a plan about your finances. For example, as you start, you should only trade with funds that you can afford to lose. You should not risk important funds such as medical, retirement, and education funds to trade.

Save enough funds

Also, if you are trading full-time, ensure that you have rainy-day funds that you will use since trading may not be profitable after all. Also, if you still have a job, ensure that you continue working there before you quit to become a full-time trader.

Know the rules

Also, you should be aware of some of the top rules of day trading. These include:

  1. You should not over-trade. Doing so will expose you to more losses.
  2. Do not risk more than 3% of your account per trade.
  3. Do not trade without a stop-loss.
  4. Use limit orders and not market orders.
  5. Limit your leverage.
  6. Focus on small trades at first.

Tools you need to trade

There are several tools that you will need to day trade. Let us look at some of the most important ones.

  • Trading software: This is the software that you will use to execute trades. Brokers will provide you with these tools. The most common ones are MetaTrader 4 and MetaTrader 5. Real Trading has its own trading software called Pro8™. Choosing your trading software is not easy, and there are several factors you should consider when purchasing a trading platform.
  • Economic calendar: This is a tool that provides you with a schedule of economic data and when it will be announced. Examples of these numbers are employment, inflation, and industrial production.
  • Earnings calendar: If you are a stocks trader, the earnings calendar gives you a schedule of when companies will publish their earnings.
  • Daily movers: A tool that will help you a great deal is one that shows you the top stock movers in extended hours and in the regular session. The tool will summarize to you the top stocks to focus on when the session starts. You can take advantage of TraderTV’s watchlist to learn about these stocks and potential trading opportunities.
  • News sources: You should have access to quality news sources. Some of the top news sources in trading are CNBC, Wall Street Journal, and Financial Times among others.
  • TV: In our experience, we believe that having a TV in your trading room will be an important thing since it will help you get the latest news.


As you may have guessed by now, day trading is not a joke, and the trader’s profession is a job in its own right. There are many things to consider both before you decide to start trading and once you have started your career.

Let’s take a look at the most common ones and how you can create the strategy that best suits your needs.

Risk management

Risk management refers to the process of reducing risks while at the same time maximizing your returns.

As a trader, you will need to have several risk management strategies to succeed. Some of these strategies are:

  • Stop loss and trailing stop-loss: These tools will stop your trades automatically when a certain loss threshold is reached.
  • Position sizing: You should always open relatively small trades that don’t put your trades at risk.
  • Aim to be flat at the end of the day: You should always avoid leaving your trades open overnight as a day trader. This is simply because there are many risks that can happen when the markets are closed.
  • 3% rule: embrace the 3% rule, meaning that you should avoid opening trades that expose your account to a loss of more than 3%.
  • Avoid moving the stop loss: A common mistake you should avoid is to move your stop loss as you wait for the trade to recover. In most cases, you will end up making a big loss.

Time management

Since trading can be done on a 24-hour basis, you should strive to manage your time. Furthermore, you want to have a good work and life balance. Therefore, you should spend adequate time trading but you should avoid over-trading.

Also, ensure that you focus most of the trading at key times. If you are a stocks trader, the best time is when the market is opening or when its about to close.

Diversifying your portfolio

As an investor, it is highly recommended that you hold several assets. By so doing, a major loss in one asset will be covered by a profit in another asset. This explains why exchange-traded funds (ETFs) are usually less volatile than individual assets.

However, as a day trader, the situation is relatively different. While you should have a diversified trading portfolio, you should only hold a small number of trades per time. This is important because you want to be able to track the performance of the trades easily. Also, opening more trades puts your account at risk if most of them make a loss.

» Related: What is stock diversification

Day trading journal

The next key concept of day trading is a trading journal. This is a document where you write most details about your trades. The journal includes things like:

  • Upcoming trades
  • Reasons for executing them
  • Profit and loss
  • The lessons you learn from them

A journal will play an important role in making your trading easy. It will also make you a more disciplined trader.


Another concept in day trading is leverage. Leverage refers to the funds that your broker extends to you so that you can improve your profits. While leverage can make you a lot of money, when used badly, it can lead to substantial losses.

Therefore, use it wisely!

Tips from the pros

At Real Trading, we have been in the trading business for years. And so, our trading pros are some of the best in the game. Here are a few of their tips on how to succeed as a day trader.

Have realistic profit expectations

A key mistake that people make is that of having unrealistic expectations. Many traders believe that they can double their money within a day or two. While this is possible, it will be a relatively riskier thing to do. Therefore, you should avoid exposing yourself to a lot of risks.

YOLO trades are an example of how a trader can double, if not more, his capital. But it is a very risky practice and is comparable to a casino bet. In fact, it is rarely recommended to go this way.

Start small.

Another mistake many people do is to start trading in a relatively big way. They do this in several ways.

First, they start by trading with a lot of money. We recommend that you start with a small amount. Second, they start by opening large trades in a bid to make more money. This is a major mistake since opening big trades puts your account at risk. Also, they start big by using a substantially high leverage. We recommend that you start trading moderately.

» Related: How to Become a Successful Trader Starting Small

Don’t be greedy

The market is usually driven by both fear and greed. Greed has made many people to lose money. It is usually manifested in several ways like over-trading, using large leverage, and large order sizes. Avoiding FOMO! ????(+ Mind Tricks) – via More TraderTV Live

Therefore, you should always avoid being greedy as a trader. A trading journal will help you in that.

Keep it simple

Another reason why many traders fail is that they try to complicate things. For example, they use multiple technical indicators at once. We recommend that you use only a few of them.


In this article, we have looked at what day trading is, how it works, and how it differs from swing trading and investing. We have also looked at the different methods of analysis and some of the most frequently asked questions.

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