Day trading definition

What is day trading?

Day trading is a trading strategy that involves opening and closing positions within the same day. Day traders tend to have no positions held overnight, opting instead to close their positions each evening, and reopen positions the following day. Day trading is a short-term strategy that intends to profit from small, intraday fluctuations in price, instead of longer-term market movements.

The meaning of day trading is in direct contrast to traditional investing techniques of buying low, holding, and then selling high. Day traders therefore have to think differently from investors, focusing on an asset’s price action rather than its long-term potential. This is why day trading strategies are usually based on vast amounts of technical analysis, and require the trader to remain up to date with breaking news that might cause market fluctuations.

Pros of day trading

Day traders can speculate on a variety of markets, including stocks, forex, commodities and futures. Shares are particularly popular, because closing positions at the end of each trading day removes the risk of markets gapping overnight.

In the past, day trading was only carried out by large investment firms. However, the rise of trading technology and increased prominence of margin trading – which amplifies both profits and losses – has made day trading more popular in recent years. Derivative products such as CFDs and spread bets enable day traders to capitalise on markets that are making negative price moves as well as positive ones.

Cons of day trading

Day trading is not for the part-time trader. It requires focus and dedication, as it involves making fast decisions and executing a large number of trades in a single day. Day traders don’t necessarily need to trade all day, but do need to remain vigilant and stay ahead of the markets.

Day traders can be limited by the costs involved. For example, if you buy and sell shares you will pay a commission, and any short-term capital gains – profit made on assets held for less than a year – will be subjected to the same tax rate as your income. This is why some day traders prefer to use spread bets, which are not subjected to the same commission structure because they are charged via the spread, and there is no capital gains tax on your profits.*