It's easy to become enchanted by the idea of turning quick profits in the stock market, but day trading makes nearly no one rich — in fact, many people are more likely to lose money. Conversely, investors who buy and hold low-cost index funds that track a broad market index like the S&P 500 could see higher returns over a long period. Historically, the S&P 500 has an annualized total return of about 10%.
However, if you're still keen to try your hand at day trading, it's important to follow some rules so you don’t get in over your head. Here's how to approach day trading in the safest way possible.
Tips to begin day trading
There are countless tips and tricks for maximizing your day-trading profits, but these three are the most important for managing the substantial risks inherent to day trading:
Trade with money you can afford to lose. It's paramount to set aside a certain amount of money for day trading. Don’t trade more than that amount or use the mortgage or rent money. Why? It’s possible you will lose it.
Start small. Especially as you begin, you will make mistakes and lose money day trading. Keep an especially tight rein on losses until you gain some experience.
Don’t quit your day job. You may have a run of luck, especially if the market's in a sustained bull run. But you’ll need to see how your trading strategy performs when the market gets rough, especially during a recession, before expanding your efforts. Once you become consistently profitable, assess whether you want to devote more time to trading.
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Best securities for day trading
To begin, you’ll need to decide what types of securities you’re going to buy and sell. You can day trade bonds, options, futures, commodities and currencies, but stocks are among the most popular securities for day traders — the market is big and active, and commissions are relatively low or nonexistent.
Typically, the best day trading stocks have the following characteristics:
Good volume. Day traders like stocks because they’re liquid, meaning they trade often and in high volume. Liquidity allows a trader to buy and sell without affecting the price much. Currency markets are also highly liquid.
Some volatility — but not too much. Volatility means the security's price changes frequently. This kind of movement is necessary for a day trader to make any profit. Someone has to be willing to pay a different price after you take a position.
Familiarity. You’ll want to understand how the security trades and what triggers moves. Will an earnings report hurt the company or help it? Is a stock stuck in a trading range, bouncing consistently between two prices? Knowing a stock can help you trade it. (Here’s how to research a stock.)
Newsworthiness. Media coverage gets people interested in buying or selling a security. That helps create volatility and liquidity. Many day traders follow the news to find ideas on which they can act.
» Access stock research: Read our review of Morningstar
Day traders who focus on stocks often rely on “technical analysis,” or analyzing the movements of stocks on a chart, rather than “fundamental analysis,” which involves examining company factors such as its products, industry and management. While some day traders might exchange dozens of different securities in a day, others stick to just a few — and get to know those well. This knowledge helps you gauge when to buy and sell, how a stock has traded in the past and how it might trade in the future.
» Read more: 5 steps to start trading stocks online
Popular day trading strategies
After deciding on securities to trade, you'll need to determine the best trading strategy to maximize your chances of trading profitably. You may wish to specialize in a specific strategy or mix and match from among some of the following typical strategies.
Swing, or range, trading
Traders find a stock that tends to bounce around between a low and a high price, called a "range bound" stock, and they buy when it nears the low and sell when it nears the high. They may also sell short when the stock reaches the high point, trying to profit as the stock falls to the low and then close out the short position.
This high-speed technique tries to profit on temporary changes in sentiment, exploiting the difference in the bid-ask price for a stock, also called a spread. For example, if a buyer’s bid price drops suddenly, the day trader might step in to buy and then try to quickly resell at the stock’s ask price or higher, earning a small “spread” on the transaction.
This sees a trader short-selling a stock that has gone up too quickly when buying interest starts to wane. The trader might close the short position when the stock falls or when buying interest picks up.
Momentum, or trend following
This strategy tries to ride the wave of a stock that’s moving, either up or down, perhaps to due to an earnings report or some other news. Traders will buy a rising stock or “fade” a falling one, anticipating that the momentum will continue.
How you execute these strategies is up to you. Some traders might angle for a penny per share, like spread traders, while others need to see a larger profit before closing a position, like swing traders. Some traders might be willing to hold overnight, while others won’t and prefer to maintain a neutral position in case bad news hits before they can react.
To know when to trade, day traders closely watch a stock’s order flow, the list of potential orders lining up to buy and sell a stock. Before buying, they’ll look for a stock to fall to “support,” a stock price at which other buyers step in to buy, and the stock is more likely to rise. To sell, they’ll look for when the stock hits “resistance,” a price where more traders start selling and the price is more likely to fall. To make judgments like this, you’ll want a broker that lets you see order flow.
» Ready to get started? Review NerdWallet’s picks of the best brokers for day trading
Whichever strategy you pick, it's important to find one (or more) that work and that you have the confidence to use. It can take a while to find a strategy that works for you, and even then the market may change, forcing you to change your approach.
The best times to day trade
Day traders need liquidity and volatility, and the stock market offers those most frequently in the hours after it opens, from 9:30 a.m. to about noon ET, and then in the last hour of trading before the close at 4 p.m. ET.
As to the best time to trade for profitability, theories abound, but what can’t be disputed is the concentration of trades that bookend the regular market session. An analysis from the Jefferies Group showed that in 2018, 25% of average daily trading volume took place in the last 30 minutes of regular trading hours, excluding the closing auction, while 5.5% took place in the first 30 minutes.
A day trader might make 100 to a few hundred trades in a day, depending on the strategy and how frequently attractive opportunities appear. With so many trades, it’s important that day traders keep costs low — our online broker comparison tool can help narrow the options.
Day trading risk management
The above ground rules can help you avoid some of the biggest catastrophes in day trading, but it’s important to manage smaller risks, as well. Risk management is all about limiting your potential downside, or the amount of money you could lose on any one trade or position. When considering your risk, think about the following issues:
Position sizing. If the trade goes wrong, how much will you lose?
Percentage of your portfolio. Closely related to position sizing, how much will your overall portfolio suffer if a position goes bad?
Losses. What level of losses are you willing to endure before you sell?
Selling. After making a profitable trade, at what point do you sell?
Even with a good strategy and the right securities, trades will not always go your way. It’s important to have a plan for when to close a position, whether it's purely mechanical — for example, sell after it goes up or down X% — or based on how the stock or market is trading that day.
Proper risk management prevents small losses from turning into large ones and preserves capital for future trades. But that means traders have to be willing to realize a loss, which is hard for many traders to accept, even though it’s essential to long-term survival.
Learn day trading the right way
If you’re not quite ready to be a prime-time player, you can always try a stock market simulator first. Paper trading involves simulated stock trades, which let you see how the market works before risking real money. Paper trading accounts are available at many brokerages. You can also get a feel for the broker’s platform and functionality with this approach, in addition to seeing how theoretically profitable you'd be.
While it can be useful to test day trading under simulated conditions, there’s still no substitute for real-life trading where you have money at stake. Here are some additional tips to consider before you step into that realm:
Establish your strategy before you start. Losing money scares people into making bad decisions, and you have to lose money sometimes when you day trade. Having an exit plan for each of your investment holdings is important because it helps you avoid making an emotional decision when you need to make a rational decision.
Be patient. Look for trading opportunities that meet your strategic criteria. If the situation doesn’t meet it, don’t trade. You don’t have to trade if nothing looks attractive.
Read, read, read. Continually watch what’s happening in the markets. Big news — even unrelated to your investments — could change the whole tenor of the market, moving your positions without any company-specific news.
Is day trading right for you?
Day trading is just one way to approach the stock market — and it’s hardly worthwhile for most investors. Here are some resources that will help you weigh less-intense and simpler approaches to growing your money: