A day trader is someone who executes multiple short and long trades during the day to profit from rapid price fluctuations. They do this by employing a variety of different techniques to maximise returns.
Day traders can make money provided they have a well-planned strategy in place to mitigate the challenges inherent to this form of trading.
7 ways in which day traders make money
Day traders trade a variety of different financial instruments including stocks, forex, commodities, cryptocurrencies, indices, and many more. Let’s discuss the ways they make money from those trades.
- Day traders attempt to profit from short-term price movements of the asset they’re trading. They typically go long when they predict prices to rise and go short if they believe prices will fall.
- Day traders make considerable use of technical analysis to achieve profitable outcomes. They look for and monitor trends in the different financial markets using charts, indicators, patterns, etc. They also seek to identify trading signals to establish whether to open or close a position.
- Using a scalping strategy, day traders will focus on markets with high liquidity to be able to enter and exit trades quickly and easily (in seconds or minutes). High liquidity also offers tighter spreads and less risk.
- Day traders may also make use of swing trading. This generally entails holding onto trades for some hours within one trading day in order to profit from wider price movements during that period.
- Leverage is another strategy used by day traders to achieve higher returns. Leverage allows the trader to essentially borrow money from the forex broker to gain a larger exposure to the financial markets. This is particularly useful for traders who don’t have a large budget, increasing their power and allowing them to manage bigger positions. Leverage is however highly volatile and therefore incredibly risky, often leading to considerable loss of capital if not handled effectively.
- Day traders may also make use of automated (algorithmic) trading in order to maximise profits on trades that they wouldn’t otherwise be able to execute. It also eliminates the emotional aspect of trading which often leads to poor decision making, and offers a level of speed and accuracy that would be difficult for a human trader to achieve.
- Day trading has the potential to earn a trader significant sums of money provided they have proper risk management measures in place. Tools like stop-loss and take-profit orders enable a trader to limit potential losses and secure profits using predefined rules.
A failure to plan is planning to fail
No matter what type of trader you are, unless you have a proper plan in place, your losses will in all likelihood exceed your wins. A plan that is likely to increase your potential for success is typically comprised of several key components. Let’s take a look at some of them:
- The amount of time you’re willing to invest in trading. Otherwise known as your time horizon, your plan must define how much time you’re able to commit to trading. Day trading is time intensive with a large volume of positions being opened and closed continuously throughout the trading day. If you don’t have the time needed to manage this form of trading, it’s probably best to reconsider the ways in which you’re able to achieve your goals.
- The level of risk you’re prepared to incur on a single trade. This refers to your preferred position size. Your trading plan should include the ground rules for making this determination. The rules should preferably align with your budget as well.
- Your level of expertise and trade performance. A plan must account for the knowledge you have, the skills you possess, and how well your trades typically perform. The latter requires an ongoing assessment of historical data to determine whether you’re making or losing money. Based on the results, your trading plan should be adjusted accordingly, only if necessary.
- Risk management strategies you’re planning to implement. A plan should seek to help you profit from trades, as well as safeguard your capital. The only way it can do this is by clearly defined risk management rules that ensure the proper orders kick in to limit potential losses or to secure specific gains.
- Continuous education to keep ahead of new trends or advances. This is an important part of any trading plan, regardless of how new or not new you are to trading. Keep yourself informed about market trends, economic developments, and innovative trading strategies. This can be achieved by reading books, participating in seminars and webinars, staying connected with trusted financial news outlets, and engaging with seasoned traders to improve your expertise and abilities.
- Using a demo account to practice trading. Make daily practice an integral part of your trading plan. Use a demo account to hone your skills, test your strategies and assess outcomes. This will allow you to identify your strengths and weaknesses, thereby reducing risk, and increasing your potential for making gains.
Other ways day traders make money
For one, day investors must be mindful of not overtrading. Whilst day trading involves entering and exiting a large number of positions in a day, overtrading can lead to unanticipated risks or errors. Impulsiveness or trading driven by fear or greed can lead to massive losses. Instead, be consistent, exercise caution and vigilance, and stay in your lane.
Another way day traders increase their potential for making more money is by learning from others. There is a massive global community of active and engaged traders whose shared insights, expertise and strategies provide a great platform to widen your own scope of knowledge insights.
Choosing a reputable CFD broker who wants to see you succeed is also another step towards achieving more profitable outcomes. A broker like T4Trade strives to deliver an exceptional experience for all its traders. This is largely achieved through its outstanding offering of flexible leverage, fast execution speeds, competitive spreads, and a secure environment.
T4Trade also provides a variety of accounts to choose from, catering to the needs and requirements of most global traders. The brokers provide access to the leading MetaTrader 4, as well as 300+ tradable instruments from 6 asset classes on a single platform. This includes shares, indices, forex, futures, metals and commodities. Its multilingual customer support team is comprised of dynamic individuals who are on-hand to answer your questions or deal with any enquiry 24/5 via telephone, email or Live Chat.
T4Trade Academy
If you’re looking for ways to learn more about the fundamentals of day trading, or any other type of trading for that matter, visit the T4Trade Academy. Here you will find a large pool of educational resources to help you improve your skills and increase your knowledge. The Academy offers learning resources for all trading types, regardless of expertise. This ranges from podcasts to webinars to videos-on-demand.
There is also an incredibly useful Economic Calendar to keep informed about global economic events and news, and Live TV. In addition to the Academy, traders can also read through an abundance of blogs on the T4Trade website. These are also useful tips, insights, strategies and analyses on the markets and trading.
Disclaimer: This material is for general informational & educational purposes only and should not be considered investment advice or an investment recommendation. T4Trade is not responsible for any data provided by third parties referenced or hyperlinked, in this communication.
