Intraday trading, also known as day trading, is a popular way to approach the markets. Many traders earn enough from intraday trading to make a full-time living.
However, day trading requires daily dedication to trading and a lot of skill, so it’s not right for everyone. We’ll take a closer look at what intraday trading is and the pros and cons of day trading.
What is Intraday Trading?
Intraday trading involves buying and selling assets in the span of a single market day. For example, an intraday trader might buy a stock at 11 am and then sell it at 2 pm, just a few hours later. Some intraday trades last several hours, while others are as short as a few minutes.
Intraday traders rarely keep positions open overnight – that is, after the market closes. This means that they start each day with a clean slate of trades. Day traders can trade any asset, including stocks, forex, commodities, and bonds.
Importantly, when day trading stocks, traders have to keep the Pattern Day Trader (PDT) rule in mind. This is a rule created by the Financial Industry Regulatory Authority (FINRA) that puts in place certain restrictions around day trading. The PDT rule only applies to margin accounts, not cash accounts.
If you make four or more day trades within the span of five market days, you will trigger the PDT rule. Once triggered, you must keep a balance of at least $25,000 in your brokerage account. If you fall below this balance, your broker will not allow you to day trade. You can still open positions, but you’ll have to wait until at least the next market day to close them.
Goals of Intraday Trading
The goal of intraday trading is to make a profit from intraday ups and downs in the price of a stock. This daily price action creates short-term opportunities for traders to buy low and sell high or vice versa.
Intraday trading is very different from long-term investing. The goal of investing is to find strong companies that will become more valuable over time. Intraday traders rarely consider the quality of a company and focus exclusively on price action in the stock they’re trading.
Day traders also come to the market with a clean slate at the start of each day. They close out all positions before the market closes, so they have no open positions when the market opens the next morning. This is an important and unique aspect of intraday trading – each new day of trading stands on its own, so traders can focus on what’s in front of them no matter what happened the day before.
Another important aspect of intraday trading is turning over capital quickly. A trader might use the same $30,000 in starting capital for dozens of trades in a week, earning small profits with each trade. The more this capital is redeployed, the faster it can grow.
Intraday Trading Styles
There are many different strategies that intraday traders can use to find and execute trades. Every trader needs to develop a strategy that works for them and fine-tune it for market conditions.
That said, intraday trading strategies can be broadly grouped into a few categories. Two of the most popular are scalping and momentum trading.
Scalping is a type of day trading that involves placing many short-lived trades each day. One scalping trade might only last a few minutes and have a profit target of just 0.25%.
Scalping trades usually target highly predictable and relatively unexciting price movements. As a result, each scalping trade is low-risk, low-reward, but the overall probability of success is high. If a trader places 10 or even 20 scalping trades in a day by churning their capital, these small gains can add up to a significant amount of money.
Momentum trading is a style of intraday trading that involves riding a stock’s price momentum. For example, if a stock is making a strong bullish movement, momentum traders aim to buy low and sell high.
Momentum trades typically extend a few hours from start to finish. They entail greater risks and greater potential rewards than scalping trades, so traders need to be confident in the setup they’re targeting. A momentum trader may only place one or two trades in a whole day.
Note that momentum trading is also a popular type of swing trading, which involves trades that take multiple days to weeks. For the purposes of intraday trading, all momentum trades should be closed by the end of the market day.
Pros & Cons of Intraday Trading
There are benefits and drawbacks to day trading compared to other types of trading and investing.
High profit potential
One of the main reasons people get into intraday trading is that this style of trading offers the potential to make a lot of money. If you earn, on average, 2% per day for about 250 days per year, you’ll net 500% in profits before compounding your gains. If you reinvest your profits every day, you would theoretically earn 14,000% in a year.
Of course, these are theoretical numbers – no trader wins every single day. But they show how profitable day trading can potentially be. In contrast, earning 10% in a year as a long-term investor is generally considered quite good.
Higher intraday leverage
Most stock brokers offer 4x leverage for intraday trading, but only 2x leverage for positions that will be held overnight. Using more leverage can potentially increase your returns since you can take larger positions. This is especially important for scalping trades that have small profit targets.
Keep in mind leverage is a double-edged sword. If you use more leverage, you can also lose more money if a trade goes against you.
No overnight risk
Market news and political events can happen outside of market hours. If you’re holding positions overnight, you’re exposed to any market movements these events cause. You have to wait until the next morning to exit your position, when a lot of damage could already have been done.
With intraday trading, you never have positions overnight. So, there’s no risk you’ll be stuck in a position outside of market hours.
Trading is risky
While trading can be hugely profitable compared to investing, it’s also highly risky. The vast majority of day traders lose money and give up on day trading within a few years. Even if you make money, it might not be enough to make a living as a full-time day trader.
In addition, having a winning trading strategy now is not a guarantee that you’ll always be successful. Markets can change and you may find that your strategy no longer works after several years of full-time trading.
High capital requirements
You need to have at least $25,000 in your brokerage account to navigate the PDT rule. Ideally, you should have at least $30,000 in capital to leave yourself some breathing room. That’s a lot of money to commit to trading.
Any money you use to trade is at risk. Only trade with money you’re willing to lose.
The goal of intraday trading is to profit from day-to-day price action in the stock market using short-term trades. Day traders always close out their positions by the end of the day, so they start each day with a clean slate.
Intraday trading can be potentially very profitable, but many day traders don’t succeed. It’s important to have a proven trading strategy before you dive into intraday trading.