What Is Day Trading?
Day trading is often referred to as being "the most difficult way to make an easy living." The constant calculations of risk vs reward, win vs loss and profit vs drawdown can become an exhausting daily grind. Yet, there are a formidable number of individuals who gladly take the daily challenge of active trading in search of financial reward.
A "day trader" is defined as being someone who takes short-term positions in the financial markets in an attempt to profit from the momentary pricing fluctuations of a chosen security. A day trader does not hold positions into the market's close; each day is a fresh ledger, with the previous day's final score being recorded in dollars and cents.
Day trading is often categorised as a "revolving door" occupation, with a steady stream of new traders entering the market while veteran traders blow up their accounts and make a hasty exit from the marketplace. Estimates on the failure rates of day traders are relatively high. Washout rates in the neighborhood of 95%, or the common "four-out-of-five traders eventually fail," are accepted as fact within the industry.
Of course, these figures are debatable depending on your perspective, but it is undeniable that success as a day trader requires the presence of a unique set of attributes. Character, work ethic, patience, organisational skills and discipline are a few of the qualities needed to have a shot at the brass ring.
Markets And Market Hours
A day trader has the freedom to trade any market, or group of markets, in which a perceived opportunity to profit is present. The largest and most liquid markets in the world are electronic in nature and readily accessible.
The NYSE, CME Globex and the forex exchange are the largest and most frequented markets by day traders. The forex exchange is by far the largest marketplace in the world, averaging nearly US$4 trillion of value traded per day. Coming in a distant second is the NYSE, the largest equities market in the world, trading an average daily volume of US$74 billion. Instead of being measured in terms of dollar value, individual futures markets listed on the CME Globex are measured by the total number of traded contracts per trading session. Total daily contracts traded in a specific sector of the CME Globex routinely measure in the millions.
Trading hours for each market are listed below, all times EST:
- NYSE: Monday through Friday 9:30 am to 4 pm
- CME Globex: Sunday to Friday 18:00 hrs to 17:00 hrs: Exact daily closing time is product specific.
- Forex: Sunday 5 pm to Friday 4:55 pm
In addition to the leading equities, futures and currency exchanges, the world's cryptocurrency markets have become premier day trading venues. Bitcoin (BTC), Ethereum (ETH), Litecoin (LTC) and Ripple (XRP) furnish participants with both market depth and consistent volatility―two attributes coveted by day traders.
Cryptocurrencies may be traded via futures, contract-or-difference (CFD) or on the cash markets. Futures and CFD products are subject to regular exchange or forex market hours. Trade of cryptocurrencies on the cash markets is conducted 24 hours per day, 365 days per year. The 24/7/365 business hours attract many participants that trade conventional securities but are interested in augmenting profits during market closures.
Types Of Day Traders
Day traders come in all shapes and sizes, with the aspiration of profit often being the only common ground among them. A trader's adopted methodology and market he or she is actively trading dictates what the trading day will look like.
For instance, a purely discretionary trader is free to adopt any trading schedule he or she deems appropriate. If a conventional 9 am to 5 pm work day is wanted, then an appropriate market and timing strategy can be crafted to accommodate this desire. The same process can be completed if a four-hour work day is the goal, or even a two-hour work day is desired. The only rule for the discretionary trader is profit; if the profits are present, then the final timeline of the trading day is irrelevant.
Automated system trading is more complex in nature, due to the fact that many systems are based upon applying a small edge many times in order to secure a profit. While it is true that automated systems can be tailored to function only during specific market hours, it is commonplace for automated systems to run continuously as long as the market being traded is open.
The ascent of the electronic marketplace has enabled day traders to adopt a 24-hour trading session. In the trader's eyes, what is the difference between a good trade setup at 7 am and a good trade setup at 11:30 pm? Ultimately, a good trade setup is a good trade setup, and the potential for profit leads the automated systems trader to a vastly different trading day.
In a fashion similar to the purely discretionary trader, the mechanical trader has the freedom to design a daily schedule without the concern of missing out on an individual trade. While a mechanical trader does employ automated systems to execute a given trading strategy, it is done on a selective basis. Trade execution is automated, but it is done at the sole direction of the trader. In turn, the trader is free to turn the automated system on or off according to predetermined guidelines or simple trader intuition.
No matter the adopted trading methodology, there are three basic components that make up a day in the life of a day trader: pre-market preparation, live trading and post-market analysis.
Benjamin Franklin described the necessity for preparation perfectly: "By failing to prepare, you are preparing to fail". His words apply to the occupation of day trader more than most other pursuits. The marketplace is dynamic in nature, with the ability to produce numerous scenarios over the course of a single trading session. Although the ultimate result of the day trader's session is either profit or loss, the path to said result can range from unexpected to routine. Depending on the level of preparation completed during the pre-market hours, the challenges presented during a trading session may or may not be overcome.
Pre-market preparation consists of many functions, each unique to the individual trader. Among the most important are market study, specifically in the areas of technical and fundamental analysis. Game planning for what the market may have in store during the coming day is a vital aspect of being prepared for contingencies. While it is impossible to always be ready for everything, strategic organisation promotes focus amid turbulent live market conditions.
It is common for traders who practice a trading strategy reliant upon technical analysis to have key levels and indicators identified long before they become important. A comprehensive game plan is built through the recognition of relevant price levels and functioning indicators ahead of time, clearly defining possible entry and exit points for potential trades.
A trader will often look for a convergence of support and resistance levels using the method of "multiple time frame analysis" (MFTA). MFTA is a method of analysing the pricing of a stock, commodity, or currency using charts of assorted durations.
Because day traders are interested in capturing short-term moves in price, the need for a fine-tuned entry into the market is often desired. Under MTFA, price charts are examined from longer durations to the shorter durations in an attempt to keep perspective on the changing market.
No matter the adopted technical approach, beit MTFA, oscillators, or market profile, it must be applied in a timely fashion to be effective. Recognizing an indicator's validity after the fact is of little use to an active day trader. The information should be interpreted before it becomes relevant ― not after. If important technical levels and strategic concerns are laid out ahead of time, the day trader is able to focus solely on executing the adopted plan.
Fundamental analysis is the study of the intrinsic value of a financial instrument. At its core, fundamental analysis operates under the assumption that over time the price of a security will move towards its intrinsic value. Financial statements, earnings ratios, inventory reports, economic data releases and simple news reporting all provide information used in fundamental analysis.
Among day traders, the usefulness of fundamental analysis is a point of contention. Due to the fact that day traders are looking to enter and exit the market quickly, the validity of information pertaining to a financial instrument on a macro level is debatable. However, one thing is agreed upon by all; anything that can move the market substantially in the short term must be accounted for. An ill-timed news story or economic release can wreak havoc on a trader's position.
During the pre-market preparation period, scheduled economic data releases can be identified and incorporated into the coming session's game plan. Individual companies release earnings reports on a designated schedule as well. These are aspects of the trade that can provide heightened volatility, and easily be identified and accounted for during pre-market preparation.
Market Hours: Live Trading Session
During market hours, the day trader is busy performing three basic tasks: identifying and executing trades, analysing market conditions in real time and conducting live market research. Live trading can be consuming on many different levels, but it is important that the trader continues to observe the market objectively and keep record of the day's occurrences.
A great way to accomplish these tasks is through documenting trade results, noting market tendencies and keeping a detailed trading journal.
The physical act of placing and managing a trade varies depending on the day trader's adopted methodology. Seeing a trade through from entry to exit can be either labor intensive or automatic. In each situation, the trade setup must be recognised, scrutinised and then executed. By far, the bulk of the time spent during a live trading session is spent searching for favourable trade setups.
Aside from high-frequency traders, the act of physically (or mechanically) placing trades is a relatively small part of the day trader's day. The trade itself is the culmination of all the time and effort that went into developing the trading plan, preparing for the trading session and waiting for the trade to present itself. While it's true that optimal trade execution is necessary in order for a day trader to succeed, the actual time spent placing trades is very small. In the electronic marketplace, placing a trade is as quick and easy as clicking a mouse.
Market Analysis And Live Market Research
The ability to interpret market data in real time is a key skill that can go unrecognised to an individual new to day trading. To keep a valid trading system operating at its maximum capabilities, it is imperative that market conditions are frequently identified and categorised to understand the strengths and weaknesses of a particular trading approach.
A number of tools are available to aid the trader in the compilation and interpretation of live market data on the fly. Trading logs, integrated spreadsheets and account summary pages can be used to record each trade in detail and analyse the characteristics of the trade in depth.
One of the most important tools at the day trader's disposal is the trading journal. A trading journal is used to record each transaction in detail. The objective of a trading journal is to provide a complete picture of trading operations to the trader for review. Much like a professional athlete watching game film of a previous performance, the day trader can review his or her journal in an attempt to gain insight on why a specific trading session unfolded the way that it did.
The development of a detailed trading journal enables the trader to identify and improve in three major areas: consistency, accountability and performance. Each of these aspects of a day trader's trading method is crucial to the eventual success or failure of the trader. The goal of journaling is to enhance trader performance, and when used diligently, the trading journal can be a catalyst for improvement.
Post Market Analysis
Upon the trading session's close, the completion of a final set of tasks is necessary. A recap of the market behaviour observed during the trading session is completed along with an evaluation of trader performance for the day's trading session. Both aspects of post-market analysis are needed to gain as much knowledge from the trading session as possible.
Aside from aiding in trader development, conducting post-market analysis is an invaluable psychological aid. Understanding what drove the session's bottom line is an integral part of moving forward with a positive mindset. For traders that took substantial losses on the day, it's important to study why the losses occurred, learn from mistakes and move on. For those that posted extraordinary profits, keeping things in perspective is the key to trading profitably in upcoming days. That is the true value of post market analysis, because it provides closure to the day trader, regardless of the session's gains or losses.
A detailed recap of a trading session can be a valuable tool for the day trader as he or she moves forward in a trading career. Unlike a simple profit and loss data sheet, a session recap focuses on how the market actually behaved during the trading session.
- Did price action behave as expected?
- Did the market react to external stimuli in a positive or negative fashion?
- Was enough volatility present to properly execute the chosen trading approach?
The major challenge for the day trader is to objectively complete the session recap. After a tumultuous trading session in which a substantial gain or loss is realised, it is a challenge to look upon the day's events and not take the outcome personally. On the flip side of that coin, a seemingly "dull" session may lend valuable insights into how to capitalise on similar markets in the future. An objective recap of the day's events can provide insight on how to proceed with future trading operations.
A key element of the day trader's routine is the post-market evaluation of trader performance. Much like statistics for a professional athlete, the performance evaluation shows in definitive terms how well or poorly a trader (or automated system) performed for that day. For the day trader, the session's close provides finality and an end to the day's business. The session was either a win or a loss, determined by how much the value of the account grew or shrunk. Proper perspective and closure are valuable assets to the day trader moving into future trading sessions.
The key elements of the daily performance evaluation are the answers to questions pertaining to the application of the trading methodology.
- Were proper trades being taken?
- Was the trade execution and management performed in accordance with the guidelines defined by the trading approach?
- Was the game plan executed properly, and did it perform to expectations?
- Was the pre-market preparation adequate?
Again, honesty and objectivity are needed in the trader performance evaluation. Without accurate performance records, it can be difficult for the day trader to measure improvement and regression.
An Average Day For A Day Trader
So, what does an average day in the life of a day trader actually look like? As mentioned above, it's a combination of preparation, live trading, market study and evaluation. To illustrate these points, assume that Erin the S&P 500 day trader is preparing for the traditional NYSE trading session. Below is a possible version of Erin's schedule per Eastern Standard Time (EST):
- Pre-market (7:30 AM - 9:25 AM): Erin is preparing for the coming trading day. Key technical levels are defined and important fundamental events accounted for.
- Live Market (9:30 AM - 4:00 PM): Erin applies a chosen strategy to the live market. Upon viable opportunities being identified, trades are executed and results logged. Also, the day's market behaviour is studied and recorded.
- Post-Market (4:00 PM - 5:00 PM): Following the closing bell, Erin begins the process of recapping the session. This entails looking over the day's trade logs and important events. Upon the session's key elements being defined, Erin evaluates performance, calculates P&L and journals pertinent observations.
One of the great things about being a day trader is that the actual workday may be formatted in countless ways. In Erin's case, the trading day entailed approximately 9.5 hours of study and live trade. However, there are no steadfast rules. As long as the time put into preparation, active trade and evaluation are adequate, the day trader's session can be as long or short as needed to sustain profitability.
A day in the life of a day trader can take many forms. Essentially, it is the combination of preparation, execution and performance analysis.
Depending on the year, there are nearly 250 days on the calendar in which the markets are open for business. Each trading session provides the opportunity for success, and the possibility of failure. Given the proper perspective, work ethic and desire, success in the marketplace can become a reality to the day trader.
This article was last updated on 13th August 2020.
Senior Market Specialist
Russell Shor (MSTA, CFTe, MFTA) is a Senior Market Specialist at FXCM. He joined the firm in October 2017 and has an Honours Degree in Economics from the University of South Africa and holds the coveted Certified Financial Technician and Master of Financial Technical Analysis qualifications from the International Federation…