Day traders make money by buying and selling financial assets, making a profit from the difference in the buy and sell price. They hold their positions (long or short - see below) for a short period of time from seconds to hours within the day.

To be clear, trading and investing are two separate things. Investors hold their investments over a long period of time, typically over a year, in hopes of their assets growing in value and/or receiving dividends. If you hold your investments over a year, your profits are taxed as capital gains, which are typically a lower tax rate than ordinary income. As day traders, profits and losses are logged daily. Your profits are taxed as ordinary income based on your income tax rate.

Long term investing allows you to grow your wealth passively over time but it's usually not enough to sustain your living costs unless you have millions in cash-generating investments. Traders can make a full-time income day trading. Good traders are able to start with a small investment amount and grow it over time, sustaining a standard of living while growing their investable income.

There are several ways for traders to make money:

Long Positions

Long positions are what most people are familiar with. It's a term that means you're buying an asset assuming that the price will go up. If it does go up, you sell making a profit on the difference between your purchase price and sale price. For example, you buy a Bitcoin for $7,500 and after two hours the price shoots up to $8,200 and you sell. In this instance, you made the difference between the purchase and sell price of $700 dollars.

Short Positions

Short positions can be more confusing than long positions. This is when you believe that an asset will fall in price. In these situations, you can still make money if the price falls. You do this through a short position through brokerages that allow shorting.

To short, you're essentially borrowing the assets, paying a fee or interest to do so, and selling them immediately (brokerages that allow shorts facilitate the exchange). You take the cash and wait for the asset to drop in price. If it drops in price, you buy the asset with the cash you received from selling the borrowed asset. You keep the difference between the price you borrowed and sold it at and what you repurchased it at.

For example, you believe Apple stocks are too high and with earnings reports coming out soon, you don't think they will meet their earning estimates. You decide to short 100 shares of Apple stock at $300 dollars each. You pay a fee to borrow the Apple stock through your brokerage firm, sell them to be in a cash position, and wait for the reports to come out. Sure enough, Apple doesn't meet its earning expectations and the price per share drops to $250 dollars. You use the cash you received from borrowing and selling the Apple shares and repurchase the shares at $250 dollars each. You return the shares you just purchased and keep the profit of $50 per share. Since you bought 100 shares, you made $5,000, on shorting Apple stock minus the fees you paid to short.

Margin Trading

Margin trading allows you to borrow money from an exchange to magnify your trades. You can use leverage for long or short positions. Margin trading is typically reserved for more experienced traders because your risk and reward increases greatly.

For example, if you only had $10,000 in your trading account, you can margin trade at 5x allowing you to borrow $40,000, giving you the purchasing power of $50,000 with just your $10,000 initial investment.

The amount of leverage you can use depends greatly on the asset you are trading. Stocks typically have a much lower leverage ratio, typically 2:1. This means if you had $25,000 in your trading account, you'd be able to borrow $25,000, giving you a purchasing power of $50,000 total.

However, assets like FOREX (currency), gives much higher leverage ratios. Because currencies value is fundamentally based on the performance of an entire country’s economy, currencies are a relatively stable and secure asset. The more secure the asset, the more margin banks, brokers, and dealers are typically willing to lend to an individual trader. Most currency exchanges will extend 50:1 margin on the world’s most stable currencies like the USD, GBP, EUR, AUS, NZD, CAN, and JPY. Which means for every $2 you deposit with a retail FOREX broker, they’ll lend you $100 to trade with. This and cryptocurrencies provide the highest leverage of all asset classes.