Disclosure: Day trading is a high-risk investment strategy that requires thorough research and understanding of the associated risks. Please consider Webull's Day Trading Risk Disclosure.‌

What is day trading?

Day trading refers to opening and closing positions in the same security within the same trading day. Day traders aim to take advantage of short-term price movements and typically do not hold positions overnight.

What do day traders look at when day trading?

When deciding what to trade, they generally evaluate three factors: liquidity, volatility, and trading volume.

• Liquidity determines how quickly an order is fulfilled. Trading opportunities come and go, especially in day trading. Day traders usually choose highly liquid securities to trade. (Liquid securities often have very small bid-ask spread.)
• Volatility is how much and quickly a stock price fluctuates over a given time. As day traders pursue short-term price movements, they tend to look for volatile stocks.
• Trading volume is the number of times that a security is bought and sold during a given period. It can represent how interested the market is in the security. A dramatic increase in trading volume often indicates that the price is going to spike or plunge.

Why would investors implement day trading strategies?

Day trading may be an effective trading strategy for investors who have time to watch the market closely. Investors often expect to reduce exposure to aftermarket volatility and add up small profits in day trading.

1. Reduce exposure to aftermarket volatility.

Overnight positions can expose an investor to the risk of new events occurring in aftermarket hours. Closing positions by the end of each trading day enables investors to lock in the profits or limit the losses realized on that day.

2. Small profits could add up.

Day traders aim to make small profits from each trade. Depending on the momentum, they usually set a relatively small profit target—for example, a 2% or 4% profit. A 4% profit can be small, but small profits could add up.

Example:

The chart below shows the price of Company ABC on a Thursday that is trending in an upward direction.

A day trader might buy at the first low of the trading session and sell around $25 for an approximate 4% profit. They may reenter on the second uptrend at the subsequent low and sell around $26 for an approximate 5% profit.

What are some risks associated with day trading?

The stock market is full of unpredictable fluctuations. A stock could tumble rapidly upon the release of disappointing earnings or negative news. As day trading aims to make profits from intraday price swings, it requires investors to watch the market rather closely throughout the day to potentially avoid unexpected losses. Stop-loss techniques can help, but you can still lose all or more than your initial investment. To learn more about stop orders, click here.

Besides, day trading can be highly risky, especially with short selling. Day trading is not for everyone, be sure to find securities with an appropriate level of volatility that suit your risk tolerance. Investors should be aware of the requirements, risks, rules, and other important information such as margin calls, prior to implementing a strategy such as day trading. (Margin trading rules can be found in our course Margin Trading.)

The Bottom Line

We’ll go through some additional commonly used day trading strategies in upcoming lessons, which will include trend trading, breakout trading, chart patterns, and stop loss techniques.

Stay tuned!

What's more

-Take a quiz to evaluate your technique