Become a Financial Modeling & Valuation Analyst (FMVA)®. Enroll today to advance your career!
Login to your new FMVA dashboard today!

Day Trading

Purchasing and selling securities within the same trading day

What is Day Trading?

Day trading is a form of a trading that implies a speculation in financial instruments. The main feature of day trading is that the purchasing and selling of securities occur within the same trading day. It means that all trading positions are liquidated at the end of a trading day.

The main goals of day trading are discovering and leveraging the short-term market inefficiencies. Unlike investors, day traders do not concern with the fundamental financial data of companies or the value that said companies could possibly create. The day traders are only interested in the short-term price differences of the securities.


Day Trading


Day trading is a risky trading strategy. Even if a trader can accurately predict the movements of securities, gains from the price changes can be offset by commissions or fees associated with access to the market data.

Day traders can be employees of financial services companies such as banks and investment funds, as well as private individuals.


Key Parameters in Day Trading

The following parameters are essential for almost all day traders regardless of the trading strategy:


1. Volatility

A variable that measures the price fluctuations of a security. Volatility can help to determine the expected future prices of a security.


2. Trading volume

It is a measure of how many times a security is bought and sold in a specified trading period. The trading volume provides insights to a trader regarding interest in a security.


3. Liquidity

Liquidity indicates the bid-ask spreads in the prices of a security. The liquidity of the securities determines how fast the securities can be converted into cash.


Key Variables in Day Trading


Essential Tools for Day Traders

Day traders use various tools to profit from their strategies:


1. Real-time market data and news

Access to real-time market information is quintessential for the day traders. Real-time market data and news allow traders to grasp the latest information on the market and leverage it to make profits. Day traders usually spend significant amounts of money on access to real-time market data. One of the most popular options among the day traders is Bloomberg terminals.


2. Electronic Communication Network (ECN)

It is an electronic system that matches the buy and sell orders between institutional and individual market participants. The ECN displays the best available bid and ask quotes, as well as allow the direct interaction between the brokerages and the traders.


3. Securities price graphs

Graphs are crucial to the technical analysis of securities. One of the most utilized graphs by the day traders is candlesticks. Candlesticks display the high, low, opening, and closing prices of a security for a specific time period.


Day Trading Strategies

There are different techniques to make profits from day trading. Each trader chooses his or her own trading strategy based on their risk tolerance and current market conditions. Generally, the traders rely on the several strategies to quickly adjust to the rapidly changing market conditions.

The following are the most popular day trading strategies:


1. Scalping

It is one of the most popular day trading strategies that aims to minimize losses but only provides minimum profits. The strategy implies the immediate selling of a security after it has become profitable.


2. Momentum

Momentum is a strategy that is based on the expectations of the acceleration of the current security’s price trends. For example, a positive news release may trigger the security’s price increase. A trader who is expecting the acceleration of the price growth will buy this security.


3. Contrarian trading

It is based on the idea that a security, whose price has been steadily rising or declining for a certain time period, should take the reverse direction. Under the contrarian trading, a trader will short-sell a security whose price has been steadily growing and will buy a security whose price has been steadily declining.


Related Readings

CFI offers the Financial Modeling & Valuation Analyst (FMVA)™ certification program for those looking to take their careers to the next level. To keep learning and advancing your career, the following resources will be helpful:

  • Investing: A Beginner’s Guide
  • High-Frequency Trading (HFT)
  • Primary Market
  • Stock Investment Strategies

Corporate Finance Training

Advance your career in investment banking, private equity, FP&A, treasury, corporate development and other areas of corporate finance.

Enroll in CFI’s Finance Courses to take your career to the next level! Learn step-by-step from professional Wall Street instructors today.