Day Trading
Definition
The practice of buying and selling securities within the same trading day, closing all positions before the market closes to avoid overnight risk.
Day trading involves entering and exiting positions within the same trading session, never holding overnight. Day traders attempt to profit from short-term price movements driven by technical patterns, news events, momentum, and other intraday factors.
The reality of day trading is harsh: studies consistently show that approximately 70-90% of day traders lose money. A comprehensive Brazilian study found that only 3% of day traders were consistently profitable over a two-year period. The combination of transaction costs, bid-ask spreads, taxes (all gains are short-term), and the difficulty of consistently predicting short-term moves makes it extremely challenging.
In the US, the Pattern Day Trader (PDT) rule requires maintaining a minimum account balance of $25,000 if you make four or more day trades in a five-business-day period in a margin account. This regulation was designed to protect undercapitalized traders from excessive risk.
Day trading in crypto operates differently — there's no PDT rule, markets are open 24/7, and volatility is higher. This attracts many traders but the success rate is similarly poor. The constant availability of crypto markets can also lead to overtrading and burnout.
For tax purposes, day trading income is taxed as short-term capital gains at ordinary income rates (potentially up to 37% federal). Frequent traders may also face wash sale complications. Some day traders qualify as "trader" status with the IRS, which allows different tax treatment but has strict requirements.
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Frequently Asked Questions
How much money do you need to start day trading?
The PDT rule requires $25,000 in a margin account for US stock day trading. You can avoid this with a cash account (but can't use settled funds for 2 days) or by trading crypto (no PDT rule). Regardless of minimums, experts recommend not day trading money you can't afford to lose.
Is day trading gambling?
Statistically, most day traders lose money, and the activity shares psychological similarities with gambling. However, a small percentage of disciplined traders with proven strategies, risk management, and adequate capitalization do profit consistently. For most people, long-term investing produces better outcomes.