Daniel Morgan is believed to have been born in the village of New Hampton, New Jersey in Lebanon Township. All four of his grandparents were Welsh immigrants who lived in Pennsylvania. Morgan was the fifth of seven children of James Morgan (1702–1782) and Eleanor Lloyd (1706–1748). When Morgan was 17, he left home following a fight with his father. After working at odd jobs in Pennsylvania, he moved to the Shenandoah Valley. He finally settled on the Virginia frontier, near what is now Winchester, Virginia.

He worked clearing land, in a sawmill, and as a teamster. In just a year, he saved enough to buy his own team. Morgan had served as a civilian teamster during the French and Indian War, with his cousin Daniel Boone. After returning from the advance on Fort Duquesne (Pittsburgh) by General Braddock's command, he was punished with 499 lashes (a usually fatal sentence) for his superior officer. Morgan thus acquired a hatred for the British Army. He then fell in love with Abigail Curry; they married and had two daughters, Nancy and Betsy.

Morgan later served as a rifleman in the provincial forces assigned to protect the western settlements from French-backed Indian raids. Some time after the war, he purchased a farm between Winchester and Battletown. By 1774, he was so prosperous that he owned ten slaves. That year, he served in Dunmore's War, taking part in raids on Shawnee villages in the Ohio Country.

After the American Revolutionary War began at the Battles of Lexington and Concord on April 19, 1775, the Continental Congress created the Continental Army on June 14, 1775. They called for the formation of 10 rifle companies from the middle colonies to support the Siege of Boston, and late in June 1775 Virginia agreed to send two. The Virginia House of Burgesses chose Daniel Morgan to form one of these companies and become its commander. He had already been an officer in the Virginia militia since the French and Indian War. Morgan recruited 96 men in just 10 days and assembled them at Winchester on July 14. He then marched them 600 miles (970 km) to Boston, Massachusetts in 21 days, arriving on Aug. 6, 1775. His company of marksmen was nicknamed "Morgan's Riflemen."

Morgan's company had a significant advantage over the others. Instead of the smooth-bore weapo