Day Trading: Basics Explained and How To Get Started

Key Takeaways:

• Day traders buy and sell stocks or other assets within a single trading day, aiming to profit from rapid, short-term price changes.

• This approach relies on specific techniques and "technical analysis" (studying price action, chart patterns and volume analysis) to spot opportunities. It requires intense focus and objectivity, not emotion.

• In the U.S., frequent traders must follow pattern day trading (PDT) rules, which require a minimum account balance of $25,000. Successful traders also strictly manage risk, often using "stop-loss" orders to prevent a string of bad trades from wiping out their account.

What Is Day Trading?

According to the Australian market context, day trading is the active strategy of buying and selling financial instruments within the same trading day to profit from small, short-term price movements, with all positions closed before the market closes, focusing on high frequency and leveraging rapid price changes rather than long-term growth. 

Day traders aim to generate profit by capitalizing on the short-term price movements of widely traded financial products, which include forex (currencies), commodities (gold), cryptocurrencies, stocks, options, and various other assets. To achieve this, they often combine different strategies and approaches, such as:

• Technical analysis: Centers on evaluating price actions and trading chart patterns to forecast future trends.

• Momentum trading: Involves riding on short-term trends and price reversals to secure rapid gains.

How Day Trading Works?

Day trading can be a very high stakes approach to trading the financial markets. It simply means you buy and sell things like stocks or other financial products very quickly, all within the same day.

The main idea is to make a profit from very small changes in price. This is why it can be very high stakes because in order to gain more profits faster, some day traders use leverage or margin, to trade a very big position size on a very small price change to amplify profits. Day traders also buy and sell their assets (like stocks) over a few hours, minutes, or even seconds. They are trying to catch those tiny, fast-moving price changes. 

The key rule is that day traders do not hold any positions overnight. They close all their trades before the market shuts down for the day. This is very different from the usual "buy and hold" investing where you keep an asset for a long time, hoping its value grows over months or years.

The table below highlights the major differences:

Day Trading vs. Long-Term Investing

Barriers to Entry: The Professional Toolkit

Unlike passive investing, day trading requires a professional infrastructure to compete.

• Real-time Data Feeds: To see accurate & granulated price moves the millisecond they happen.

• Direct Access Broker: For instant order execution, avoiding price slippage.

• Tax Calculation & Tracking: Require specialized softwares to track and calculate tax due to high volume of trades.

Survival Rules: Risk Management

ASIC (Australian Securities and Investments Commission) has issued warnings about inexperienced individuals day trading due to the high risks, emphasizing the need for professional advice and practice, as beginner traders can lose money, and it involves significant leverage and constant market monitoring.

Survival is the primary goal. Professional traders follow strict mathematical rules:

• Position Sizing: Never guessing how much to buy. This can avoid a single trade or few trades wiping out your entire account, due to margin trading.

• The 1% Rule: Never risking more than 1-2% of your account capital on a single trade. This is because as trade amount goes up, assuming that you have a standard win rate of 40%, you will lose 60% of your trades, hence risking only 1-2% of your entire account, will keep you in the game while taking small losses.

• Stop-Loss Orders: Automated exit points to prevent catastrophic loss.

The Reality of Competition: Trading Firms

Most of today’s professional day traders either work for a finance institution, often referred to as ‘trading desk’, simply because they offer large capital for the traders, where traders take salary and profits from trades, access to extremely sophisticated technologies, data sources and trading resources. 

The people who use these resources, Institutional Traders, contrast how much more advantageous being an institutional day trader is, by utilizing Algorithmic Trading Engines, Execution Management Systems (EMS) & Order Management Systems (OMS), Advanced Data & Analytics Platforms, Proprietary Data Feeds and Alternative Data, etc. 

Although it sounds like a lot, but, if you can notice, professional day traders do exactly what any retail traders should already be doing, just more fancy. 

Tools like EMS & OMS, HPC are all to avoid slippage, Data Analytics & Feeds are to ensure accurate pricing, then risk management. All of which had been mentioned in 3 simple lines under the Barrier to Entry section.

#Tip Trading Psychology is Your Saviour:

Success requires intense focus and emotional discipline. It is active, stressful work, not passive income.

By focusing on trading psychology, you will be able to ignore all unnecessary noise slowing you down, or affecting your morale. With proper techniques and discipline, day trading is a very achievable skill to acquire.

To Succeed in Day Trading

• Situational Awareness: Continuous monitoring of Market News, Economic Data and Important Announcements and so on.

• Think Fast: The market moves in seconds. You need the discipline to interpret signals and act immediately without hesitation.

• Understand Margin: Using "leverage" allows you to trade more money than you have. While this can double your profits, it can also double your losses just as fast.

The Pattern Day Trader (PDT) Rule 

If you are trading in the U.S., you need to be aware of the "PDT Rule" set by FINRA. This regulation is designed to limit the risks taken by smaller accounts. Generally, your broker will flag you as a "Pattern Day Trader" if you meet the following three conditions:

• Account Type: You are trading in a margin account (not a cash account).

• Frequency: You execute 4 or more "day trades" within a rolling five-business-day period.

• Activity: These day trades account for more than 6% of your total trading activity during that window.

What counts as a "Day Trade"? A day trade is defined strictly by the timing of opening and closing the same position.

• The Day Trade: You buy 50 shares of Tesla (TSLA) at 10:00 AM and sell them at 11:00 AM because the price jumped. Since the open and close happened in the same session, this is a day trade. 

• If you trade multiple times in a day, where all your trades or positions are closed within the same day, leaving no open position overnight, you are now performing day trading.

The $25,000 Minimum Equity Rule

Once your broker flags you as a Pattern Day Trader (PDT), you are subject to the "PDT Rule," which is designed to ensure you have enough capital to absorb rapid losses.

• The Minimum: You must maintain a minimum of $25,000 in equity within your margin account at all times.

• What Counts: This $25,000 can be a combination of cash, stocks, and other assets that can be easily liquidated.

What Happens If You Fall Below $25,000?

If your account equity drops even slightly below the $25,000 threshold, your broker will issue a margin call. You will typically be restricted from opening any new day trades until you deposit funds or transfer assets to bring the balance back up. Repeated or severe violations can lead to:

• Your account being frozen.

• Trading limited to cash-only transactions.

• The account being closed by the brokerage.

Leverage and Day Trading Buying Power

The PDT rule heavily influences your "buying power"—the maximum value of stocks you can control in a day. Pattern Day Traders often have access to a specific amount of leverage, typically 4:1 on the equity that is above the $25,000 minimum.

Example: Calculating Your Day Trading Buying Power

Let's assume you have an account balance of $35,000:

1. Maintenance Requirement: $25,000 is locked as your minimum requirement.

2. Excess Equity: This is the amount available for leverage: ($35,000 - $25,000) = {$10,000}

3. Buying Power: You multiply the excess equity by the leverage rate (4x): ($10,000 times 4) = {$40,000}

In this scenario, you could use up to $40,000 worth of borrowed funds to execute your day trades. This system is in place to ensure that only traders with sufficient resources and discipline participate in this highly leveraged, high-stakes activity.

How to Start Day Trading?

Starting day trading requires more than just opening a brokerage and margin account; it demands preparation, capital, and discipline. Professional traders focus on these three foundational steps before ever placing their first trade:

1. Build Foundational Knowledge & Experience

Day trading success hinges on interpreting rapid price action signals. Individuals who attempt this without sufficient market knowledge are almost guaranteed to lose money.

• Master the Analysis: Technical analysis (chart reading, patterns, indicators) is essential. However, this must be paired with an understanding of fundamental analysis and general market dynamics.

• Know Your Products: Do your due diligence on the specific assets or products you plan to trade (e.g., stocks, futures, forex). Each market has unique risks and jargon.

• Seek Volatility: To profit from short-term price swings, day traders favour assets that are both highly volatile (they move a lot) and highly liquid (they can be bought/sold quickly without altering the price).

2. Secure Adequate and Separate Capital

Wise traders never risk money they cannot afford to lose. Having enough capital protects you from financial ruin and, critically, removes emotion from your trading decisions.

• Meet the Thresholds: Ensure you meet the federal minimum requirement of $25,000 if you will be labeled a Pattern Day Trader (PDT) in the U.S.

• Capitalize Effectively: Trading on intraday price changes—which can be in fractions of a cent—requires substantial position sizes to generate meaningful profits. Adequate cash is required to safely use leverage in a margin account.

• The Margin Call Risk: Volatile market swings can trigger large margin calls on very short notice, demanding that you deposit cash immediately. Having a capital buffer prevents you from being forced to liquidate positions at a loss.

3. Develop and Practice Unwavering Discipline

The primary reason most day traders fail is not due to bad analysis, but a failure to follow their own rules.

• Plan the Trade, Trade the Plan: You must establish objective, written criteria for entry, exit, and stop-loss levels. Once the plan is set, you must execute it mechanically, without hesitation or second-guessing.

• Eliminate Emotion: Day trading success is impossible without discipline. Allowing emotions like fear (of missing out) or greed (to hold a winning trade too long) to influence your decisions will inevitably lead to losses.

• Trade the Setup: Profitability comes from recognizing a specific, proven setup (e.g., a stock breaking out after an earnings report) and acting only on that specific criteria.

Day Trading Strategies: Finding Your Edge

Successful day traders do not rely on chance; they rely on a repeatable, proven strategy that gives them a reliable, systematic and replicable approach. While they must always follow universal trading rules, they almost always specialize in one or two of these intraday trading strategies:

Universal Rules for Every Intraday Strategy

Regardless of the method you choose, you must adhere to these disciplined practices:

• Plan the Trade: Determine your entry price, profit target (exit point), and stop-loss level before you open the position.

• Pick Your Assets Wisely: Trade only highly liquid assets (forex, gold, cryptocurrencies or stocks) that exhibit clear, repeatable patterns.

• Trade the Plan: Stick to your pre-set criteria without allowing emotion or market noise to influence your execution.

Day Trading Strategies

Day traders use the heightened volatility of the trading day to execute strategies that exploit short-term price movements:

1. Scalping

This is the fastest and highest-frequency style of day trading.

• Goal: To make many tiny profits on minute-to-minute price fluctuations.

• How it Works: Positions are often held for seconds or minutes. A scalper seeks to profit from temporary supply and demand imbalances and quickly closes the trade once the profit target is met.

• Note on Arbitrage: Arbitrage is a specialized form of scalping that exploits temporary price differences for the same asset across different exchanges (e.g., buying on Exchange A and instantly selling on Exchange B for a guaranteed profit).

2. Momentum Trading

This strategy focuses on trading assets that are moving rapidly in one direction due to high volume or a sudden catalyst.

• Goal: To ride the wave of a sharp price move and exit before the inevitable pullback or reversal.

• How it Works: Traders look for strong uptrends or downtrends caused by high trading volume, buying into the move and using technical indicators to identify when the momentum is slowing down.

3. News-Based Trading

This method capitalizes on the massive, immediate volatility that accompanies the release of scheduled data or breaking headlines.

• Goal: To profit from the dramatic and often unpredictable price spikes that occur instantly after major news.

• How it Works: Traders anticipate scheduled economic reports (like unemployment or interest rates) or company-specific news (like earnings reports or M&A announcements) and are ready to execute trades the moment the news is released.

4. High-Frequency Trading (HFT)

HFT is a sophisticated strategy that retail (individual) traders primarily compete against.

• Goal: To exploit micro-second market inefficiencies and minor price differences invisible to human traders.

• How it Works: These are completely automated, algorithm-driven strategies that execute thousands of orders per second using specialized low-latency connections to the exchange.

Risks of Day Trading

It is crucial to understand that for the average individual, day trading is an inherently high-risk activity. The U.S. Securities and Exchange Commission (SEC) highlights three core dangers:

It is crucial to understand that for the average individual, day trading is an inherently high-risk activity. The Australian Securities and Investments Commission (ASIC) has frequently issued warnings about the core dangers:

1. High Risk of Severe Financial Loss

The overwhelming majority of individual day traders suffer severe losses. ASIC investigations have repeatedly found that most retail clients lose money trading CFDs (Contracts for Difference) due to the complexity and leverage of the products. [Source 1, 2, 3]

• Financial Loss: Be prepared to lose all capital dedicated to day trading.

• The Reality: The activity is extremely difficult, making the learning curve steep and costly.

2. Full-Time, High-Stress Commitment

Day trading is not passive income; it demands constant peak performance and is highly stressful.

• Intense Focus: Monitoring dozens of assets and reacting to rapid price changes demands total concentration for the entire trading day.

• Stress & Burnout: The combination of sp                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  deed and financial pressure leads to high stress and a risk of burnout.

3. Danger of Excessive Leverage (CFDs)

Day trading strategies often rely on highly leveraged products like CFDs, which is the fastest route to financial ruin for beginners.

• Amplified Losses: Leverage magnifies losses instantly, quickly depleting your account equity. ASIC has imposed leverage limits (ranging from 30:1 to 2:1) to reduce the speed and size of these losses. [Source 2, 3]

• Risk of Debt: Many inexperienced traders not only lose their original capital but also incur debt by facing large margin calls that they cannot afford to cover. ASIC's product intervention order specifically includes Negative Balance Protection to limit a client's losses to the funds in their trading account. [Source 2, 3]

What’s the Bottom Line?

Day trading offers an equal chance for substantial profits or significant losses, making it a high-risk pursuit.

The data confirms the reality: most individual day traders fail to profit over time. While all trading activity is essential for keeping markets liquid and efficient, its allure should not overshadow its difficulty. Anyone intending to day trade must commit completely to acquiring the necessary knowledge, capital, and discipline before engaging in this competitive environment.