Traders participate in financial markets by buying and selling stocks, futures, forex, and other securities, and by closing out positions to make small, frequent gains. Types of traders range from the small, independent trader working from home to the institutional player who moves tens or hundreds of millions of dollars worth of shares and contracts each trading session.
Key Takeaways
- Traders participate in markets by buying and selling securities. Day traders usually enter and exit positions in a single day.
- Day trading can happen in any marketplace but it’s 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. System traders allow computer programs to automatically execute trades.
- Traders monitor multiple markets, research, read analyst notes or media coverage on securities, and swap info with other traders when they’re not buying or selling.
Traders and Trading Styles
Traders are further defined by the time frame in which they open and close positions, referred to as 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’s available at that time.
System traders 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.
| 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 |
There’s no such thing as a “typical” day in the life of a trader because of this diversity. It’s also hard to determine the average rate of return for a day trader.
Pre-Market
Most day traders are busy catching up with coffee and breakfast in hand before the markets spring to life at 9:30 a.m. ET. They review any events that occurred overnight that could affect that day’s trading session. This might involve 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 are due that day, such as the weekly petroleum status report. 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.
Traders head to their workstations after reading about events and making notes of what the analysts are saying. They 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. Traders spend time making sure everything on their end is functioning before the trading session begins.
Traders then start scanning the markets for potential trading opportunities. Some work in just one or two markets such as two stocks or two e-minis. They’ll 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. A trader might scan for stocks that are trading above their 52-week highs with at least four million shares in volume and a minimum price of $10. They’ll put these tickers on their watch list when the computer compiles a list of stocks that meet these criteria.
Important
Day traders typically complete their trades within the day and avoid holding positions overnight, except on the forex market.
Early Trading
The first half-hour of trading is typically pretty volatile so many individual traders sit on the sidelines to give the market time to settle and avoid being instantly stopped out of a position.
Now it becomes a waiting game as traders watch for trading opportunities that are based on their trading plans, experience, intuition, and current market activity. Precision and timing become increasingly important as the holding period for the trade shortens and the profit target becomes smaller. The trader must act quickly to identify the setup and pounce on the trade when an opportunity arises. 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. They’ll either wait for this position to close out before entering another one or continue scanning the markets for additional trading opportunities depending on their goals.
Many traders also look for late-morning reversal opportunities. Trading volume and volatility diminish as midday approaches so most traders hope that any positions will reach their profit targets before lunch. The next couple of hours can be rather uneventful and even boring otherwise as the big money is out to lunch and the markets slow down.
Second Wind
The markets pick up and volume and price movement once again come to life when the institutional traders return from lunch and meetings. 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 must 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 further opportunities. Day traders don’t hold their positions overnight so many set a time limit beyond which they won’t open any additional positions such as 3:30 p.m. This helps ensure that they’ll have enough time to make a profit before the markets close.
The trader closes all open positions and cancels any unfilled orders as 4 p.m. approaches. This is an important step because open orders can get filled without the trader realizing it and this can result in potential losses. The trader will close the day with a profit, at breakeven, or at a loss. It’s just another day at the office either way and seasoned traders know to neither celebrate large wins nor cry about losses. It’s what happens over time in terms of months and years that matters.
Note
A lot of time is spent on research outside of a day trader’s market day, learning about the markets, experimenting with technical indicators, and honing their order entry skills using simulated trading platforms.
Post-Market
Traders finish up the day by reviewing their trades after the markets close, noting what went well and what could have been done better. Many discretionary traders use a trading journal, a written log of all trades that includes ticker symbol, set up and 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 it.
A trading journal can provide vital information if it’s organized and used consistently, helping a trader who’s 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.
What Is Leverage in Trading?
Leverage involves investing borrowed money. It’s also referred to as buying on margin. The funds are borrowed from the broker. Any cash you have in your margin account acts as collateral and the broker will charge you interest.
What Is Swing Trading?
Swing trading is a matter of rolling the dice on future stock trends. The trends are derived from various indicators and traders will buy and sell based on these potential trends if they think they have merit. This typically involves holding stocks overnight or even for a matter of weeks.
What Is the Forex Market?
Forex trading involves selling and buying foreign currencies. An investor’s goal is to take financial advantage of the upward or downward momentum of a given currency by effectively trading one for another. The term “forex market” refers to the foreign exchange market and it’s the most traded market in the world.
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. We often hear about these perks but it’s important to realize that day trading is nonetheless hard work. You could put in a 40-hour workweek and end up with no “paycheck.”
Day traders spend much of their day scanning the markets for trading opportunities and monitoring open positions. Many of their evenings are spent researching and improving their trading plans. Trading can be a solitary endeavor so some traders choose to participate in trading “chat rooms” for social and/or educational purposes.
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