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What Is Day Trading and How Does It Work?

By Will Ellis

Last Updated on January 29, 2024

If you’re an avid trader, you will have come across day trading at some point or at least heard of it. If not, then let us tell you what it is. Day trading is a type of trading that requires investors to buy and sell assets within the same day.

Day traders are usually investors who have been trading for a while and have experience with the markets, executing trades and following their intuition when closing a trading position.

Day trading can give you access to profitable traders, but the fact behind it is that day traders can lose money too. If you’re a beginner wanting to start day trading, you will need to know more about what it entails.

In this article, you’ll learn all about day trading, what it entails, the different strategies you can explore, the pros and cons, the potential risks involved and more.

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Table of Contents:

What Is Day Trading
What Are the Day Trading Strategies
Benefits and Drawbacks of Day Trading
How to Start Day Trading in Australia
Can You Make a Living by Day Trading
What Are the Risks of Day Trading
Top Tips for Beginner Day Traders
Final Thoughts
FAQs

What Is Day Trading? ➡️

Day trading is a form of investing requiring you to open and close positions within the same trading day. The idea is buying and selling securities as many times in the peace of a single trading day. Day trades are a short-term investment strategy, meaning you take advantage of the markets on the day and have to close them by the end of the day.

Day trading is different from other types of trading because it is very active. There is no intention of holding onto assets like there is with other trading strategies. Day traders use different tools for day trade, such as technical analysis with advanced technical charts and other fundamental analyses to help inform decisions.

Australian day traders use the stock and currency markets to make transactions. Day trading takes time, effort, skills and emotional control. You can do day trading in Australia with a broker or use an exchange like the Australian Securities Exchange (ASX).

You can apply day trading to a wide range of assets and securities. You day trade on the stock market. You can advance stock trading with day trading strategies. Day trading stocks and shares can be profitable (but there is also the possibility of capital losses). Depending on your broker or exchange, you can apply day trading to cryptocurrency, digital assets, bonds, and exchange–traded funds (ETFs).

Successful day traders typically start with long-term investing. Once they’ve gotten used to trading, know the financial markets, and feel confident, they’ll gradually begin short-term investing.

What Are the Day Trading Strategies? 👀️

Although the central concept of day trading is to buy and sell assets on the same day, there are various strategies day traders use to help excel in these trades. Strategies allow traders to stick to a plan, not lose focus and have a goal for investing.

Using day trading strategies can help you decide what assets to invest, what price movement to look out for, and what tools to use. Sticking to a strategy keeps your trading focus in place, making you less likely to make rogue investments that could turn sour due to insufficient information or strategy.

Investment strategies for day trading include:

Scalping: A short-term trading strategy that takes small and frequent profits by focusing on achieving a high win rate. The scalping technique is to buy and sell an individual stock multiple times throughout the same day. The key to scalping is reading and interpreting short-term charts.
Momentum trading: Looking for signs of a trend reversal, so as soon as an asset is at the very start of an uptrend, investors will buy it and sell it as soon as the value begins to decline. The idea is to look for trends, buy into the asset early, and sell it just as the trend declines.
Buy the dips: When an asset declines or pulls back from an uptrend, for example, some investors invest in it, hoping it will increase again but at a higher value. It’s a buy low, sell high approach to day trading.
Price averaging: Extending an existing position in an asset by buying or shorting additional shares at a different price than the entry price of the position, which then alters the average cost of the position as a whole.

The above strategies are only some available to you. The more you get used to day trading, the more you can create your own trading styles and tweak strategies that work best for you and your findings.

Benefits and Drawbacks of Day Trading

We’ve explored all the benefits and drawbacks below to help you decide if day trading suits you.

Benefits ✅️

High turnover capital: With day trading, you can make quick profits in comparison to other types of trading. You’re trading quickly throughout the day, and depending on the success of each transaction, you could have high turnover capital/ Every decision you make as a day trader is an opportunity to make a profit.
Leveraged trades: If you’re confident about an investment, you can leverage the trade if your broker platform allows it, so there is potential to excel in potential profits.
Easy access: Most broker platforms make it easy to day trade; you’ll need a computer setup or system at home and your smartphone. You don’t need special qualifications, just knowledge, capital and a good strategy.
No overnight risk: Day traders typically close all investment positions before the market closes each day. So overnight, the investments don’t change, unlike regular investors who risk their assets losing value overnight.
Thrilling: Making fast trading decisions and not having to wait very long to see the results of transactions, most traders enjoy the thrills that come with day trading. It’s never a dull day when trading; you’re almost always on your toes.

Drawbacks ❌️

Requires time and commitment: You must learn a lot about day trading, the strategies, and even the day-to-day activities, which take time. Day trading can be a full-time job. If you already have a full-time job, you may struggle to day trade because it is time-consuming.
Software resources: If you don’t already have a desktop set up, you must invest in one. As a day trader, you’ll spend most of your day buying and selling assets on the computer.
You don’t hold onto investments: If an investment isn’t selling well, you still have to sell it at the end of the market day. Determining the best time to sell can be difficult, but if you create realistic profit and loss limits, you can reduce the amount you lose.
You won’t earn much money in one go: Day traders make many trades and investments daily, intending to create many small profits over time. It is unlikely you’ll make large profits from a single transaction. It can take a while to become a successful day trader.

How to Start Day Trading in Australia 🔎️

Starting any new investment can be challenging. Knowing you want to start day trading is the first step, but how do you get from wanting to day trade to achieving investment objectives? Each day, a trader’s journey is different, but there is a process you can use to begin your journey.

With the following steps, you can start day trading in Australia:

Prepare your trading setup: Before starting day trading, you must have the right equipment. You will need a system that can meet your day trading needs.
Find a day trading strategy: Explore all the possible day trading strategies you can implement. Find the best method that suits your trading level and capital capacity.
Find a suitable trading platform: Check out what platforms are in Australia. Consider looking for a brokerage to trade through to avoid dealing directly on the platform.
Start trading with small investments: As you get used to day trading, you should start with one type of asset and one strategy.
Start with sufficient capital: Success isn’t guaranteed early, so you should have adequate capital and be prepared to overcome all initial losses.
Create a schedule: Day trading is time-intensive, so creating a schedule and setting out specific times for your trading hours will help you be consistent with trading.

In the following sections, we explore the above steps further with some additional tips to help you start your day trading journey.

1. Prepare Your Trading Setup

Before starting day trading, you must have the right equipment. You will need a system that can meet your trading needs.

We’re not saying you need the most expensive setup, but one that will power all day long with no interruptions, have a big enough display to have multiple pages and tabs open at once, and ideally allow you to have graphs up, access your investments and see market data simultaneously.

Consider investing in the following items for your day trading setup:

Two monitors: Having two screens means you can view everything all at once and reduce the time switching between the many tabs you’ll inevitably have open.
Decent computer chair: You may sit at your computer for many hours daily, so comfort is necessary to avoid unnecessary aches and pains.
Speedy Wi-Fi: You will want to ensure you have a fast and secure connection for your system. You may lose out on investing opportunities if your Wi-Fi is slow or shuts off frequently. You can check the speed of your connection by contacting your internet provider.

2. Find a Day Trading Strategy

Finding the best method that suits you makes all the difference to your trading experience. Day trading isn’t a one-size-fits-all approach, so if you pick a strategy and find it doesn’t work for you in the long term, you can adapt accordingly.

Consider the following factors when choosing your strategy:

Trading experience: If you’re new to day trading, avoid implementing more complex strategies. That’s not saying stay away from them forever; try a simple strategy until you’re used to day trading.
Capital: Some strategies require a certain amount of capital, so look for a strategy that fits your trading budget.

Don’t change your strategy on a whim. Try transitioning at a smooth pace to keep up with day trading needs. We recommend trying one strategy to begin with, and once you feel like you’ve mastered the strategy, you can start adding more.

3. Find a Suitable Trading Platform

Various day trading platforms are available in Australia, such as eToro, AvaTrade, Plus500, XTB and more. Check out what platforms are in Australia. Consider looking for a brokerage to trade through to avoid trading directly on the platform.

When looking for the most suitable trading platform, consider the following:

Demo availability: To try day trading before investing money, check if the platform offers paper trading accounts. Paper trading lets you get a feel for day trading and practise with a demo account.
Regulated: If you choose an unregulated broker, they are not required to follow Australian rules or regulations around day trading and investing. When investing, always use regulated and trusted providers for your protection and prevent unnecessary loss of money due to unethical business practices.
Transaction rates: Each platform will have commission fees, currency conversion fees and other trading-related costs. You can factor in how much each trade will cost you.
Features: As a beginner, having many features on a day trading platform may be a low priority, but it may be something to consider when trading for a while. Feature-rich day trading platforms can be helpful. Look for features like copying and mirroring, social trading, and more.
Available currencies: If you’re looking at overseas exchanges outside of Australia, consider the currency range the platform has to offer. Consider the range of assets they have for you to buy and sell on the platform.
Minimum balance: Some platforms require investors to hold a minimum amount in their account at all times, so consider how much minimum platform requires when deciding which platform to use for your day trading needs.

4. Start Trading With Small Investments

As a beginner day trader, it is best to ease yourself into the process rather than jump right into the deep end. Starting small initially will help you learn about day trading without it being so overwhelming. As you get used to day trading, you should start with one type of asset and one strategy.

Choose an asset you are comfortable with or know the most about. It could be cryptocurrency or trading stocks. Conduct market analysis, see what your chosen day trading platform offers, and learn as much as possible about that asset. Once you’ve understood your chosen asset and what is available, it’s time to choose a day trading strategy.

Start trading with one strategy while keeping your investment objectives in mind. Initially, using one strategy, you can learn all the ins and outs and adapt it to your liking. Once you’ve become a more experienced trader, you can apply more strategies and branch out on assets.

5. Start With Sufficient Capital

You will need money to start day trading, but plenty of it, as you’re not guaranteed to make money. So, you must be prepared to overcome all initial losses when getting into day trading. Investing comes with risk, but if you prepare for the worst, you’re covered if there are unsuccessful trades. So, start with some money in your account. Make small investments so you only risk losing a little of your capital.

Another factor to consider is that sometimes a minimum balance is required when using a broker or platform. A minimum balance in a day trading account in Australia can range from $500 to $10,000 or more. They may also ask you to keep this amount in your account.

Otherwise, you may face charges if the balance is below a certain amount. So, when deciding how much capital to have in your account, include the minimum balance and remember it may need to stay inside the account for the duration of the account life.

6. Create a Schedule

Whether you decide to do day trading full-time or start with a few hours a day, you should create a schedule. Day trading is time-intensive, so creating a schedule and setting specific times for your trading hours will help you be consistent with trading.

Depending on the assets you buy and sell, you may be limited to when you can trade them. For example, with the stock market, you can only buy and sell within business hours. Typically, day traders will work only during those hours. It would be unrealistic to set yourself up to jump into a full day of day trading; instead, set aside some dedicated time in your day to allocate towards trading.

Can You Make a Living by Day Trading? 💰️

Day trading isn’t easy; becoming a full-time day trader can be challenging. It is difficult to succeed at day trading, and making a liveable income is unlikely and inconsistent. Day trading in Australia is legal and can be profitable for day traders. Be aware of the risks involved of the possibility of capital losses.

However, it’s not an easy trading strategy, and it does require some key elements, such as:

Quick decision-making: Due to the nature of day trading, there is a small window of operations, so day traders have to make quick decisions on buying and selling their assets to take full advantage of market movements.
Focus: When making quick decisions, you must also have a strong focus. You need to look for favourable market movements to take advantage of. You could risk losing money or missing out on higher profits if you pull out too soon or late.
Time: Day trading operates only during the hours a market is open, so there is a small window of opportunity to take advantage of positions. So, you must dedicate time to trading platforms, using tools and implementing your trading strategy. For professional day traders, day trading is a full-time job.
Risk-taking: With any trading, risks are always involved, and traders must take numerous risks daily. Sure, there is a chance to lose money, but there is equal opportunity to profit, so you must be willing to take risks daily.
Discipline: Day traders make many trades and investments daily, intending to create many small profits that add up over time. But they don’t just act on impulse. They must know what they’re buying and selling and not just trade to be active. So, you need the discipline to avoid straying from your day trading strategy.

Building on the above skills allows you to make money with day trading. However, you will need to set realistic investment objectives. You won’t become a millionaire overnight or even in the first few years of being a day trader.

The key is earning small profits on many trades, and the total builds up. You must be patient and consistent with your day trading; casual trading rarely makes a profit. Dedicating a good chunk of time may make day trading more promising.

With the risks of day trading, only a few people make a consistent living wage. Investments can be unpredictable at the best times, so if you expect a set salary each month like traditional work offers, this isn’t likely for full-time day traders.

What Are the Risks of Day Trading? 🚩️

Day trading risks include:

Severe financial losses: Success is not immediate when you start day trading. Most day traders suffer financial losses in their first months of trading. It’s unexpected to make significant amounts of profit from day trading. So, expect to make less or no money when starting.
Stressful: If you decide to take day trading as a full-time job, it can be highly stressful. You will be constantly reading charts, checking markets, and watching price fluctuations to spot market trends, and overall, it takes a lot of focus and concentration.
Reliance on borrowed money: If you can save a lot before you start day trading, that would work in your favour. It can be easy for traders to borrow money to leverage trades, and if the trades aren’t successful, it could lead to debt. So, only borrow and trade what you lose to afford and pay back.
Watch out for easily advertised profits: Profits aren’t easy to come by, so if any platform promotes easy profits, they may not be trustworthy. Instead, watch market news, join a community of day traders, and try to find organic hot tips for promising investments.

Top Tips for Beginner Day Traders 🔝️

All professional day traders were beginners once, and trying to find your feet can be difficult.

So, we’ve compiled a list of top tips to help get you started in day trading:

Sign up for a paper trading account: Some brokers allow traders to open a paper account to practise day trading. As a beginner, we recommend you take advantage of these accounts as you can learn how day trades work without the risk of losing funds. You can learn the mechanics, tailor your strategy and build positive day trading habits early on.
Stay in the loop with market events and news: News and Market events can affect asset prices and value. If something happens in the market, it can impact your investments and present you with new opportunities for trading new assets. Staying in the loop of market news can help inform your investment strategy, plus you can learn first-hand how events impact the markets and see how other investors react. With day trading, everything is a learning opportunity.
Choose the most suitable trading platform: Picking a popular platform or exchange is all well until you realise it may not be compatible with your trading level or strategy. So, seek out platforms that you know you can work with. You can use more advanced exchange platforms once you’re a more confident day trader.
Have realistic expectations: You can make money day trading. However, it takes time. Typically, day traders make various small wins, contributing to a bigger profit collection. So, initially, you may not earn a lot, but your success will contribute to the bigger picture.
Only use your own money: We don’t recommend borrowing money for day trading as it is risky. You have to be prepared to lose everything you invest. You may not lose everything, but you need to be ready in case you do. So, don’t borrow money to fund your day trading, as there is a chance you won’t make the money back.
Have a risk management strategy: We can’t stress enough how risky day trading is. There are tools you can use to minimise your loss. You can’t prevent it, but you can ensure you don’t lose all your investments. For example, using a stop loss on your trades allows you to sell securities when they reach a certain threshold.

Final Thoughts 💡️

Day trading can be profitable, but it takes a lot of dedication to be worth your time and effort. The best approach is to be as fully prepared as possible, stick to your strategy, and be prepared for the possibility of capital losses and the risks involved.

Setting yourself up with high expectations may knock your trading confidence. So, if you start day trading with reasonable objectives, one asset and one strategy, you can ease yourself into the process as you learn and build your own day trading style.

Frequently Asked Questions 📢️

What Is the Difference Between Day Trading and Swing Trading?

Day trading and swing trading are different. The main difference is that swing trading often involves holding investments overnight, whereas day trading positions are limited to a single day. Swing trades can range from several days to weeks.

Is Day Trading Legal in Australia?

Day trading is legal in Australia. However, if you choose an unregulated broker, they are not required to follow Australian rules or regulations around investing. When investing, always use regulated and trusted providers for your protection and prevent unnecessary loss of money due to unethical business practices.

Is Day Trading Risky?

All investments involve risks regardless of how long you’ve invested in them. Day trading seems like one of the riskier investment approaches, and we must highlight these risks so you know exactly what you’re getting yourself into. Day trading risks include severe financial losses, stressful days with high needs, risk of debt due to borrowing for leveraged trades, and profits that aren’t easy to come by.

Can Beginner Investors Day Trade?

It is challenging to succeed at day trading, and making a liveable income is unlikely and inconsistent. Day trading in Australia is legal and can be profitable for day traders. However, it’s a challenging trading strategy, requiring focus, quick decision-making, time, discipline, risk-taking and risk management.

What Are the Benefits of Day Trades?

Regardless of your investment, there are benefits and drawbacks, and day trading is no different. The benefits of day trading are as follows:

You’re trading quickly throughout the day, and depending on the success of each transaction, you could have high turnover capital.
If you’re confident about an investment, you can leverage the trade if your broker platform allows it, so there is potential to excel in potential profits.
Most broker platforms make it easy to day trade; you’ll need a computer setup or system at home and your smartphone.
Day traders typically close all investment positions before the market closes each day, so the investments don’t change overnight.
Making fast trading decisions and not having to wait very long to see the results of transactions, most traders enjoy the thrills that come with day trading.

What Are the Drawbacks of Day Trading?

There are risks and drawbacks to day trading, and some of the drawbacks include:

You must learn a lot about day trades, the strategies, and even the day-to-day activities, which take time.
If you don’t already have a desktop set up, you must invest in one. As a day trader, you’ll spend most of your day buying and selling assets on the computer.
If an investment isn’t selling well, you still have to sell it at the end of the market day.
You won’t make a considerable amount of money in one go. Day traders make many trades and investments daily, intending to create many small profits that add up over time.