Traders participate in financial markets by buying and selling stocks, futures, forex, and other securities, and by closing out positions with the intention of making small, frequent gains. Just as there are many types of investors, there are many types of traders, ranging from the small, independent trader working from a home office to the institutional player who moves tens or hundreds of millions of dollars worth of shares and contracts each trading session.
- Traders participate in markets through buying and selling securities; day traders, by definition, usually enter and exit positions in a single day.
- Day trading can happen in any marketplace but is most commonly seen in the stock markets and foreign exchange (forex) markets.
- Day traders use leverage and short-term trading strategies to profit from small price movements in liquid, or heavily-traded, currencies or stocks.
- Discretionary traders make manual trades based on research, while system traders allow computer programs to automatically execute trades.
- When traders are not buying or selling, they monitor multiple markets, research, read analyst notes or media coverage on securities, and swap info with other traders.
Traders and Trading Styles
Traders are further defined by the time frame in which they open and close positions (the holding period) and the method by which they find trading opportunities and send orders to the market.
Discretionary traders are decision-based traders who scan the markets and place manual orders in response to information that is available at that time.
System traders, on the other hand, use some level of automation to implement an objective set of rules, allowing a computer to both scan for trading opportunities and handle all order entry activity. The chart below lists the different trading styles with the corresponding time frame and method for each.
|Trading style||Time frame (holding period)||Method|
|Position trading||Months to years||Discretionary or system|
|Swing trading||Days to weeks||Discretionary or system|
|Day trading||Day only—no overnight positions||Discretionary or system|
|Scalp trading||Seconds to minutes—no overnight positions||Discretionary or system|
|High-frequency trading||Seconds to minutes||System only|
Because of this diversity among traders, there really is no such thing as a "typical" day in the life of a trader. It is also hard to determine the average rate of return for a day trader. With that in mind, let's take a look at what a day may be like for an individual, discretionary day trader since this is where many people begin trading.
Before the markets spring to life at 9:30 a.m. ET, most day traders are busy catching up with coffee and breakfast in hand on any events that happened overnight that could affect that day's trading session. This involves reading stories from various newspapers and financial websites, as well as listening to updates from financial news networks, such as CNBC and Bloomberg.
The futures markets, as well as the broad market indexes, are noted as traders form opinions about the direction they expect the market to trend. Traders will also review economic calendars to find out which market-moving financial reports—such as the weekly petroleum status report—are due that day. It should be noted that many traders participate in round-the-clock markets, such as futures and forex, and these traders can expect increased volume before the rest of the markets open at 9:30 a.m.
After reading about events and making note of what the analysts are saying, traders head to their workstations, turn on their computers and monitors, and open up their analysis and trading platforms. Many layers of technology are at work here, from the trader's computer, keyboard, and mouse, to the internet, trading platform, broker, and ultimately the exchanges themselves. As such, traders spend time making sure that everything on their end is functioning correctly before the trading session begins.
If everything is working properly, traders start scanning the markets for potential trading opportunities. Some traders work in just one or two markets (such as two stocks or two e-minis), and they will open up these charts and apply selected technical indicators to see what's going in those markets. Others use market-scanning software to find securities that meet their exact specifications. For example, a trader might scan for stocks that are trading above their 52-week highs with at least 4 million shares in volume and a minimum price of $10. Once the computer compiles a list of stocks that meet these criteria, the trader will put these tickers on their watch list.
Day traders typically complete their trades within the day and avoid holding positions overnight, with the exception of the Forex Market.
The first half-hour of trading is typically pretty volatile, so many (but certainly not all) individual traders sit on the sidelines to give the market time to settle and avoid being instantly stopped out of a position.
Now it's a waiting game, while traders watch for trading opportunities that are based on their trading plans, experience, intuition, and current market activity. Precision and timing become increasingly important the shorter the holding period for the trade and the smaller the profit target. Once an opportunity arises, the trader must act quickly to identify the setup and pounce on the trade—seconds can make the difference between a winning and losing trade.
The trader uses an order entry interface to submit orders to the market. Many traders will also submit simultaneous orders for profit targets and stop losses to protect against adverse price moves. Depending on the trader's goals, they will either wait for this position to close out before entering another one or will continue scanning the markets for additional trading opportunities.
Many traders also look for late-morning reversal opportunities. Since trading volume and volatility diminish as midday approaches, most traders will hope that any positions will reach their profit targets before lunch. Otherwise, the next couple hours can be rather uneventful (and boring) as the big money is out to lunch and the markets slow down.
Once the institutional traders are back from lunch and meetings, the markets pick up and volume and price movement once again come to life. Traders take advantage of this second wind, looking for additional trading opportunities before markets close at 4 p.m. ET. Any positions entered during the morning and taken now will have to be closed before the end of the day, so traders are keen to get into trades as soon as possible to reach a profit target before the session's end.
Traders continue to monitor their open positions and look for any more opportunities. Because day traders do not hold their positions overnight, many set a time limit past which they will not open any additional positions (e.g., 3:30 p.m.). This helps ensure that they will have enough time to make a profit before the markets close.
As 4 p.m. approaches, the trader closes all open positions and cancels any unfilled orders. This is an important step since open orders can get filled without the trader realizing it, resulting in potential losses. The trader will close the day with a profit, at breakeven or at a loss. Either way, it's just another day at the office, and seasoned traders know to neither celebrate large wins nor cry about losses. To traders, it's what happens over time—in terms of months and years—that matters.
Outside of a day trader's market day, a lot of time is spent on research— learning about the markets, experimenting with technical indicators, and honing their order entry skills using simulated trading platforms.
After the markets close, traders finish up the day by reviewing their trades, making note of what went well and what could have been done better. Many discretionary traders use a trading journal—a written log of all trades including ticker symbol, setup (why the trade was taken), entry price, exit price, number of shares, and any notes about the trade or what was going on in the market that may have affected the trade.
If organized and consistently used, a trading journal can provide vital information to a trader looking to improve their plan and performance. Many traders will return to a financial news network to get a recap of the day and start making plans for the next trading session.
The Bottom Line
Day trading has many advantages. You can be your own boss, set your own schedule, work from home and achieve unlimited profits. While we often hear about these perks, it's important to realize that day trading is hard work, and you could put in a 40-hour work week and end up with no "paycheck."
Day traders spend much of their days scanning the markets for trading opportunities and monitoring open positions, and many of their evenings researching and improving their trading plans. Because trading can be a solitary endeavor, some traders choose to participate in trading "chat rooms" for social and/or educational purposes.