Day trading means betting on whether the price of something will go up or down, and profiting if you are right. The "something" can be a currency pair, a stock index, a commodity, a crypto asset or a share.
Trading is not investing
These two words get used interchangeably, and the difference matters.
An investor buys the asset itself. Buy shares in a company and you own part of that company. The holding sits in an account in your name and can be kept for thirty years. You make money if the company grows, pays dividends, or you sell it for profit. Investing is long-term.
A day trader usually owns nothing. You trade derivatives, most commonly CFDs or futures, which are contracts whose value is derived from the price of something else. You agree to exchange the difference in price between when you open the contract and when you close it. If price moves your way you receive the difference. If it moves against you, you pay it.
The practical consequences:
- No dividends, no voting rights, no holding in your name
- You can profit when price falls (short selling), which an ordinary shareholder cannot do easily
- You can take a position far larger than your account balance, through leverage
Day traders hold positions for seconds to hours. Some positions are held overnight, which carries its own cost, covered in Topic 8. What a day trader does not do is hold a long-term bet on a company or any other asset.
Where the profit comes from
You profit when price moves in the direction you bet on. Two things decide by how much: how far price moved, and how big your position was.
Bet that an index rises, and it rises, and you are paid according to the distance it travelled. Bet that it rises and it falls, and you pay out on exactly the same basis. A bigger position makes both outcomes bigger.
That is the whole mechanism. How movement is measured is Topic 4, how position size is measured and chosen is Topic 7, and the two come together there with worked numbers.
Who is on the other side
Day trading is a zero-sum game. When one person profits, another loses, and the amounts match exactly.
This separates it from investing. A long-term shareholder makes money because the company grew, and nobody had to lose for that to happen. A derivative has no underlying growth to share out. It is a contract between two parties, and the money that reaches one side came from the other.
So every trade has someone on the other end of it. When you buy, someone else is selling. When you profit from a price move, whoever took the opposite side of it did not.
Trading also costs money, which Topic 8 covers in full.
That sets the standard for everything else here. Profitable trading requires a reason your decisions beat the average, and that reason is called an edge. An edge is a repeatable advantage in how you select, enter, size and exit trades, and it has to survive costs. Hours in front of a chart do not qualify, and neither does having watched a lot of videos.
Types of trading
The labels refer to how long you hold a position.
- Scalping: seconds to minutes per trade, often dozens of trades per session, aiming for small moves each time. Extremely sensitive to costs and execution quality, because the cost per trade is large relative to the size of the move being captured.
- Intraday: minutes to hours, usually a handful of trades per session, closed before or around the end of the session. This is what most people mean by day trading.
- Swing: days to weeks, few trades, larger moves each time. Costs matter less per trade, but you carry overnight and weekend risk, meaning price can move substantially while you are unable to react.
Shorter timeframes mean more trades, and more trades mean costs take a larger share of your results. A scalper paying the same cost per trade as a swing trader pays it ten or fifty times as often.
Terms you will meet in this guide
Each gets its own topic. Brief definitions for now:
- Position: an open trade
- Long: a bet that price rises
- Short: a bet that price falls
- Leverage: controlling a position larger than your account balance alone would allow
- Stop loss: an order that closes a trade automatically at a set loss
- Take profit: an order that closes a trade automatically at a set gain
- Spread: the difference between the price you can buy at and the price you can sell at, which makes it a cost you pay on entry
- Broker: the firm that gives you access to the market
What day trading is not
Passive income. You are working whenever a position is open, and the attention that requires is the job itself. Income also arrives unevenly and can be negative for months at a time.
A quick way to get rich. Competence takes most people years, and plenty never reach it. Accounts that grow very quickly have almost always done it by taking risk that removes them later.
Low risk. Trading requires risking money and sacrificing time, with no guarantee attached to either. Most people give up before they turn profitable and never make back what they put in. The ones who get there do it on perseverance more than talent.
Stress-free. You are making decisions about money under time pressure, repeatedly, on incomplete information. Plenty of people who attempt this lose sleep, money and relationships over it. Topic 14 and the Psychology guide deal with what that does to people.