Day trading usually refers to the practice of purchasing and selling a security within a single trading day. While it can occur in any marketplace, it is most common in the foreign exchange (forex) and stock markets. Day traders are typically well-educated and well-funded. They use high amounts of leverage and short-term trading strategies to capitalize on small price movements that occur in highly liquid stocks or currencies.

Day traders are attuned to events that cause short-term market moves. Trading based on the news is a popular technique. Scheduled announcements such as economic statistics, corporate earnings, or interest rates are subject to market expectations and market psychology. Markets react when those expectations are not met or are exceeded–usually with sudden, significant moves–which can greatly benefit day traders.

Day traders use numerous intraday strategies. These strategies include:

• Scalping: this strategy attempts to make numerous small profits on small prices changes throughout the day
• Range trading: this strategy primarily uses support and resistance levels to determine buy and sell decisions.
• News-based trading: this strategy typically seizes trading opportunities from the heightened volatility around news events
• High-frequency trading(HFT): these strategies use sophisticated algorithms to exploit small or short-term market inefficiencies.

To get started you should begin learning about markets and strategies. Read as much as you can about different markets and start following them on a day-to-day basis. At the same time, you can start reading more about the different trading strategies  as mentioned below. While a strategy can potentially have many components and can be analyzed for profitability in various ways, a strategy is often ranked based on its win-rate and risk/reward ratio.

1.  Win Rate Ratio

Your win rate represents the number of trades you win out a given total number of trades. Say you win 55 out of 100 trades, your win rate is 55 percent. While it isn’t required, having a win rate above 50 percent is ideal for most day traders, and 55 percent is acceptable and attainable.

2. Risk/Reward Ratio

Risk/reward signifies how much capital is being risked to attain a certain profit. Making more on winning trades is also a strategic component for which many forex day traders strive. A higher win rate for trades means more flexibility with your risk/reward, and a high risk/reward means your win rate can be lower and you’d still be profitable.         

3. Hypothetical View

Assume a trader has $5,000 in capital funds, and they have a decent win rate of 55% on their trades. They risk only 1% of their capital or $50 per trade. This is accomplished by using a stop-loss order. For this scenario, a stop-loss order is placed 5 pips away from the trade entry price, and a target is placed 8 pips away.

This means that the potential reward for each trade is 1.6 times greater than the risk (8 pips divided by 5 pips). Remember, you want winners to be bigger than losers. While trading a forex pair for two hours during an active time of day it’s usually possible to make about five round turn trades (round turn includes entry and exit) using the above parameters. If there are 20 trading days in a month, the trader is making 100 trades, on average, in a month.

4. Trading Currency Pairs

If you’re day trading a currency pair like the USD/CAD, you can risk $50 on each trade, and each pip of movement is worth $10 with a standard lot (100,000 units worth of currency).

Therefore you can take a position of one standard lot with a 5-pip stop-loss order, which will keep the risk of loss to $50 on the trade. That also means a winning trade is worth $80 (8 pips x $10).

This estimate can show how much a forex day trader could make in a month by executing 100 trades:

• 55 trades were profitable: 55 x $80 = $4,400
• 45 trades were losers: 45 x ($50) = ($2,250)

Gross profit is $4,400 – $2,250 = $2,150 if no commissions (win rate would likely be lower though)

Net profit is $2,150 – $500 = $1, 650 if using a commission broker (win rate would be like be higher though)

Assuming a net profit of $1,650, the return on the account for the month is 33 percent ($1,650 divided by $5,000). This may seem very high, and it is a very good return. See Refinements below to see how this return may be affected.

5. Slippage Larger Than Expected Loss

It won’t always be possible to find five good day trades each day, especially when the market is moving very slowly for extended periods.

Slippage is an inevitable part of trading. It results in a larger loss than expected, even when using a stop-loss order. It’s common in very fast-moving markets.

To account for slippage in the calculation of your potential profit, reduce the net profit by 10% (this is a high estimate for slippage, assuming you avoid holding through major economic data releases). This would reduce the net profit potential generated by your $5,000 trading capital to $1,485 per month.

You can adjust the scenario above based on your typical stop loss and target, capital, slippage, win rate, position size, and commission parameters.

As mentioned, having a sound trading plan is essential for success in trading. An adequate trading plan is more than just a strategy, it also specifies risk management measures and a trading schedule. The level of volatility can differ greatly during various trading sessions and on certain times of the day. It is important to know what the characteristics of the times and sessions during which you trade are and to adapt your strategy accordingly.

Some useful guidelines to help you figure out the best time to trade intraday:

• Monday is a quiet day in the markets. Day trading requires sufficient price movement over a short period of time. If the trading volume is low there may not be enough price movement to execute said trading strategies. Furthermore, the lack of liquidity can lead to sharp movements.
• Opening of the London trading session is generally a favorable time for short term trading as we usually see a lot of activity during this time period.
• The last hour of trading (in the London session) often showcases how strong a trend actually is. How the trading day ends is believed to be indicative for continuation of the current move. It is thought to be likely that the after a breakout to the upside will end when it is followed by a low closing price and vice versa for a bearish trend.
• Most day traders have brief days, working two to five hours per day. Five hours is high. Add on a few minutes each day for preparation, and review at the end of the day and week, and day trading still isn’t very time-consuming.  You will have lots of time to focus on other interests.
• Check the economic calendar, and make a note on your chart of when major events occur that day. Exit trades at least three minutes before a major economic event.

A breakout strategy can be used when a new maximum or minimum has been reached. Buy at the first pullback after a new high or sell at the first pullback after a new low.

• Don’t trade on public holidays or late in the day on Fridays.
• Don’t trade when the market has moved beyond a 20-30 pips range over the course of the day.
• Sometimes not holding a position in the market is as good as holding a profitable position.
• The first hour’s range is used as a benchmark for the range in which the price will move throughout the rest of the trading day.

How frequently you trade is dictated by your trading strategy. Let’s say your chosen strategy has a win ratio of around 60%. If you don’t trade setups that meet your rules you are more likely to miss out on winning trades (60%) than losing trades (40%). Be consistent and trade the opportunities that meet your rules, the aforementioned guidelines will help you identify the most favorable times for trading.

Pros of day trading

Day traders can speculate on a variety of markets, including stocks, forex, commodities and futures. Shares are particularly popular, because closing positions at the end of each trading day removes the risk of markets gapping overnight.

In the past, day trading was only carried out by large investment firms. However, the rise of trading technology and increased prominence of margin trading – which amplifies both profits and losses – has made day trading more popular in recent years. Derivative products such as CFDs enable day traders to capitalize on markets that are making negative price moves as well as positive ones.

Cons of day trading

Day trading is not for the part-time trader. It requires focus and dedication, as it involves making fast decisions and executing a large number of trades in a single day. Day traders don’t necessarily need to trade all day, but do need to remain vigilant and stay ahead of the markets.

Day traders can be limited by the costs involved. For example, if you buy and sell shares you will pay a commission fee. As with all types of trading, day trading involves market risk that can be substantial when leveraged instruments are used.