What is Day Trading?
Day trading is the practice of buying and selling financial instruments within the same trading day, closing all positions before the market closes. Unlike swing or position trading, day traders never hold overnight positions, eliminating overnight risk and gap exposure.
Why Day Trading is Different
- No overnight risk: Sleep without positions, no gap exposure
- Faster feedback: Know results within hours, not days or weeks
- More opportunities: Multiple trades per day vs few per month
- Higher capital requirements: PDT rule requires $25K minimum in US
- Time intensive: Requires active monitoring during market hours
Day trading demands precision, discipline, and a systematic approach. Backtesting is critical because emotions run high when making multiple decisions per hour. A proven, tested system prevents impulsive trades that destroy accounts.
Popular Day Trading Strategies
Scalping
Extremely short-term trades targeting small price movements. Hold time: seconds to minutes.
- ✓ High win rate (60-70%)
- ✓ Requires tight spreads
- ✓ Many trades per day (20-100+)
- ✓ Small profits per trade ($10-50)
Momentum Trading
Ride strong directional moves. Buy strength, sell weakness. Hold time: minutes to hours.
- ✓ Larger profit targets ($50-200)
- ✓ Fewer trades (3-10 per day)
- ✓ Follow news catalysts
- ✓ Exit when momentum fades
Breakout Trading
Enter when price breaks key levels (resistance, consolidation). Hold time: hours.
- ✓ Clear entry/exit rules
- ✓ Risk defined (below breakout)
- ✓ High reward potential (2:1 or better)
- ✓ Works in trending markets
News Trading
Trade volatility around earnings, economic data, or breaking news events.
- ✓ Extreme volatility
- ✓ Wide spreads initially
- ✓ Fast moves (minutes)
- ✓ High risk, high reward
Key Indicators for Day Trading
VWAP (Volume Weighted Average Price)
The most important day trading indicator. Shows average price weighted by volume. Institutional benchmark.
- Above VWAP: Bullish bias, institutions buying
- Below VWAP: Bearish bias, institutions selling
- Reversion to VWAP: Price tends to return to VWAP throughout the day
- Use case: Entry timing (buy dips to VWAP in uptrends)
Volume
Level 2 Data
Price Action
Risk Management for Day Traders
The 1% Rule
Never risk more than 1% of account per trade. With $25K account, max loss per trade = $250.
Example: $25,000 account
1% risk = $250 max loss per trade
Entry: $50, Stop: $49.50 = $0.50 risk per share
Position size: $250 / $0.50 = 500 shares
Max Daily Loss Limit
Stop trading if you lose 3-5% of account in one day. Example: On $25K account, stop at -$750 to -$1,250 loss. Prevents revenge trading and emotional decisions.
Profit Targets
Set realistic targets: 2:1 or 3:1 reward/risk. If risking $100, target $200-300 profit. Take partial profits at 1:1, let remainder run.
Backtesting Day Trading Strategies
Day trading backtesting is more complex than swing/position trading. Intraday price action, execution quality, and costs matter significantly more.
Key Metrics to Track
| Metric | Good | Red Flag |
|---|---|---|
| Win rate | 50-60% (scalps), 40-55% (momentum) | >70% with tiny R:R (likely overfit) |
| Profit factor | 1.4-2.0 | >3.0 with few trades |
| Average R per trade | 0.4-0.8R | Negative after costs |
| Max drawdown | <15% | >25% without recovery |
| Trades/day | 3-15 quality setups | 50+ random clicks |
| Cost per round trip | <0.05-0.15% (liquid names) | >0.3% or ignored |
Data Requirements
Need high-quality intraday data (1-minute or tick data). Daily data isn't sufficient.
- • 1-minute bars: Minimum for day trading backtest
- • Tick data: Best for scalping strategies
- • Volume data: Essential for VWAP and volume analysis
- • Bid-ask spreads: Critical for realistic slippage modeling
Slippage & Commissions
Costs destroy many day trading strategies. What looks profitable on paper fails live.
- • Commissions: $0.005-0.01 per share adds up fast with 10-50 trades/day
- • Slippage: 1-3 ticks per trade. On 30 trades = $30-90 per day
- • Spread costs: Market orders pay the spread. Use limit orders when possible
- • Reality check: If backtest shows $100/day profit, real trading might be $30/day
Time of Day Effects
Market behavior changes throughout the day. Test strategies by time window: Opening (9:30-10:30), Mid-day (10:30-3:00), Power Hour (3:00-4:00). Most day traders avoid slow mid-day periods.
Common Day Trading Mistakes
Overtrading
Taking too many trades destroys accounts through commissions and poor decision quality. Stick to your best setups only. Quality over quantity. Better to take 3 A+ setups than 10 mediocre trades.
No Stop Loss
"I'll just watch it" leads to disaster. One trade without a stop can wipe out weeks of profits. Always use hard stops, not mental stops. Set them before entering the trade.
Revenge Trading
Trying to make back losses immediately leads to larger losses. After 2-3 losing trades in a row, stop trading for the day. Come back tomorrow with a clear head.
Trading Illiquid Stocks
Low volume stocks have wide spreads and poor fills. Minimum requirements: 500K+ daily volume, tight spreads (0.01-0.03), multiple market makers. Avoid penny stocks for day trading.
Ignoring Market Context
A great setup in a strong uptrend becomes mediocre in choppy markets. Check SPY/QQQ direction before trading individual stocks. When market is weak, trade smaller or sit out.
Frequently Asked Questions
How much money do I need to start day trading?
What's a realistic day trading profit target?
Should I use market or limit orders for day trading?
How many trades should I make per day?
What's the best time of day to day trade?
Can I day trade with a full-time job?
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