Day trading involves trading on the stock market for the short term, usually not lasting more than one trading session. Some day traders are very active, carrying out a large number of transactions each day, this is called scalping. Others, however, may be content with just a few trades a day.
The most popular markets for day trading are stocks, Forex, and futures. It is a difficult activity, but which can be very lucrative. However, few people can do this profitably in a sustainable way.
You will discover in this guide tips and information on day trading, so that you can be better prepared.
What is Day Trading and How does it Work?
Day trading is a short-term approach to trading on the stock markets.
Day trading is a style of trading on the stock market. This involves buying and selling instruments and only holding the position for one session. Positions opened during the day are closed before the market closes. The goal is to make a small profit on each position and accumulate those gains over time.
Trading used to require significant capital. Nowadays, the competition is tough and every broker wants to offer the best fees, with a very low minimum deposit. With the rise of online brokers, which offer free stock purchases, day trading in this market is increasingly popular.
Day trading is a tough business, and even savvy traders can struggle to make a profit. A 2010 study by Professors Brad Barber and Yi-Tsung Lee at the University of California suggests that only 1% of day traders make money on a regular basis. The study looked at traders’ transactions over a 14-year period from 1992 to 2006.
Most successful day traders are full-time traders. They have the advantage of being able to observe the markets all day. Individual traders can also arrange to have a trading session for a few hours a day.
Day trading is quite risky due to several factors that we will see. If you find it difficult to tolerate the risk of short-term volatility, you can turn to swing trading, or position trading by buying and holding your positions for the medium to long term. However, if you must give day trading a try, learn as much as you can about this style of trading before you start.
How Does Day Trading Work?
Day traders often try to take advantage of upward and downward fluctuations. They can therefore sell a stock short if they think its price will fall in the short term, or buy the instrument if they think the price will rise. They can repeat their operations several times in a day.
Example of day trading
Economic indicators are often published during the first hours of trading. The day trader can for example follow the publication of European economic indicators such as the German manufacturing PMI.
On the day the PMI was published, he chose to trade EUR / USD in the first hours after the Frankfurt market opened at 8 a.m. KST. He will buy or sell the currency pair according to the following scenarios:
- If the numbers are worse than expected, he sells the currency pair in anticipation of a decline in EUR / USD within hours of the announcement.
- If the numbers are better than expected, he buys EUR / USD in anticipation of a rise in it.
When the figures were announced by the IHS Markit, the figures were worse than expected, which would cause the EUR / USD to fall. The day trader takes the opportunity to quickly short the currency pair as shown in the chart below.
Advantages and Disadvantages of Day Trading
The advantages of day trading far outweigh its disadvantages. One of the main reasons for doing day trading is to reduce the exposure time of your positions to market risks, especially outside of trading hours.
- Being Independent
The day trader can work at home, without constraints related to working in a company. He is responsible for his performance. You will be able to define the hours during which you will look for opportunities and the hours when you will rest. However, it will take discipline.
- No Risk When Markets Are Closed
One of the biggest advantages of day trading is the close of positrons at the end of the day. Thus, there is no risk of losing outside of trading hours.
In the equity markets, gaps can appear overnight due to several factors: announcement of results, unexpected events. It happens that swing traders, or position traders, lose their profits over several months overnight.
This risk is unlikely with day trading. The day trader can be calm at the end of the day, knowing that he is no longer exposed to the market.
One of the main problems for beginners is excessive trading. Taking a large number of positions significantly increases your trading costs. This can reduce your winnings or sink your losses further.
- A time-consuming activity
It is an activity that can take you several hours during the day. If you have a full-time job it can be difficult to maintain trading sessions.
Factors to Consider for Day Trader
Day trading is a demanding business that requires both a financial and a personal investment.
We have already mentioned the importance of training for the profession of day trader. In addition to the many training courses available online, you can open a demo account with a broker and see how to practice day trading.
In the United States, it takes at least $ 25,000 to day trade stocks. However, in the Forex market, you can start trading with less than $ 500. Day trading of CFDs on shares is also possible for a deposit of less than $ 500.
It is important to note that the larger your capital, the less risk you will need to take in order to earn a living
Whether it’s for a living or to make ends meet, day trading requires constant discipline. Your success in day trading doesn’t just depend on your technical mastery. If it was just based on that, there would be a lot of profitable day traders. However, we generally know that few day traders manage to earn money in a sustainable way. Discipline is therefore a critical factor for a day trader.
Your goal should not be to make money, but to be diligent in your trading sessions and to follow your plan. By staying in front of your screens for a very long time, fatigue or stress can make you make decisions that are not foreseen in your trading plan.
Defining a Trading
A plan is a systematic procedure that defines all of your trading activity. It takes into consideration a number of factors, including the instruments to be traded, time, risk and the trader’s goals. A trading plan should be written and well documented. It is not enough to just have what you are going to do in mind.
Trading, viewed as a whole, can be intimidating. But thanks to a trading plan, you can proceed step by step, from the identification of the instrument to be traded to the analysis of closed positions, including the development of the strategy and the management of the positions.
A trading plan also includes risk management. What percentage of your capital will you risk in a position? When are you going to stop your trading session? All the answers to these questions should be in your trading plan. The more comprehensive it is, the better organized you will be and the more discipline you will maintain throughout your day trading business.
Having a trading plan is great, but you need to make sure that you are prepared to follow it without outside influence and without hesitation. To analyze your trades you will use your trading plan to find out if they were well justified or not. Deviations should be noted in your trading journal.
Keeping a Trading Journal
It is a document that lists all your day trading activity. Your remarks and comments must appear there. You will be able to self-assess based on the notes you take: errors, omissions, non-compliance with the trading plan, etc.
The trading journal also allows you to draw objective conclusions when you have doubts about your trading system after a series of losses.
Indeed, the trading journal will be particularly useful when you endure a series of losing trades. In most cases, it helps determine why you are having poor results.
A Clear Strategy
One could confuse plan and strategy. But the latter is part of the trading plan. It is by the rules established in your strategy that you will be able to identify a trading signal. Several day trading approaches exist. Most day traders use technical analysis, others use intraday news and events to take advantage of their effects on financial instruments.
By risk management, we mean the definition of the size of your positions, but also the placement of your stop loss and take profit. Regarding position size, most day traders do not risk more than 1% of their capital in a position.
The question of capital allocation must also be asked:
- Are you going to use your capital to trade only one strategy?
- Will your strategies be discretionary or systematic?
- Do you plan to delegate the management of your capital to another trader?
Risk management is linked to strategy. Good risk management will allow you to keep a large part of your capital after a long series of losses.
The Best Markets for Day Trading
Day trading can be done in virtually any market.
Forex is a market suitable for day trading because it does not close during the week. It is suitable for traders who want to trade day or night, depending on their availability.
With a daily trading volume of around $ 6.6 trillion, Forex is a very liquid market. Major currency pairs are suitable for day trading. The execution of orders on these instruments is generally instantaneous.
Forex also offers a certain diversity with all the different currency pairs to trade. There are about twenty fairly liquid currency pairs, which you can choose from for day trading. This market is also the most accessible for novice traders.
Indices represent a basket of securities. For stocks, they can represent a sector or a selection of companies. Indices have the particularity of being less volatile and more predictable. They are therefore suitable for traders looking for less volatility.
It is important to note, that indices can be very volatile at times, especially when geopolitical events rock the markets.
Indices are difficult financial instruments for a large market player to manipulate. The value of an index varies according to the price fluctuations of the instruments that make it up, which gives it stability.
In addition, they offer some diversification. By trading indices, you are not targeting a particular stock, but you are diversifying into a selection of stocks.
Day trading in stocks is suitable for traders looking for quick moves. These instruments are quite dynamic when they have enough liquidity. Stocks can be particularly volatile during the first hour of trading. This provides opportunities for day traders and scalpers.
The futures markets are ideal for day trading due to the low cost of trading in general. The most coveted futures are very liquid. Many professional day traders specialize in the futures markets.
The E-mini S&P 500 is one of the most coveted futures for day traders. The contracts are all negotiated electronically and guarantee prompt execution.
Other futures indices are also traded, such as the E-mini Nasdaq, Russel and Dow. In addition, there are several other markets, which offer the volume and volatility needed to achieve intraday gains, including commodity futures.
Day trading in cryptocurrencies is booming. The high volatility and growing volume of cryptocurrency exchanges attract traders looking to turn quick profits.
Cryptocurrency day traders are not particularly interested in buying cryptocurrency, but rather in taking advantage of fluctuations in these virtual currencies. They can therefore be content with cryptocurrency CFDs offered by most Forex brokers.
The cryptocurrency market is very volatile and therefore requires great vigilance when day trading. Bitcoin’s price, for example, can increase and decrease double digit percentages in a matter of seconds.
The day trader in the crypto markets must therefore be on the lookout for news that can shake the market.
What Tools are Available for Day Traders?
Most of the tools for day trading are provided by online brokers. Some offer more functionality than others for technical and fundamental analysis.
Top 3 Best Brokers for Day Trading
|Spread + Commission (EUR / USD)||1 pip||0.47%||0.8 pip|
|Good for||xStation||No spread||Low cost|
|Execution speed||Fast||Fast||Very fast|
Screeners based on technical indicators can be of great use to day traders. They can highlight, for example, instruments that are overbought, oversold, very volatile, etc. If you are trading multiple instruments at the same time, this tool can be very useful.
FXCM offers an intraday screener based on a selection of technical indicators. The tool also allows you to change the time interval.
Technical Analysis Platform
Depending on your strategy day trading may require an advanced charting platform. There are several solutions available. Most brokers offer Metatrader 4 which is a great technical analysis platform for beginners, but average for more seasoned professionals.
Paid solutions like TradingView, or ProRealTime can prove to be better investments for professional day traders. TradingView can be linked with a number of online brokers like FXCM.
What You Should Know Before Day Trading
Liquidity, volatility, and the best time to trade are important factors to consider in order to be successful in day trading.
Liquidity is very important for the day trader. It is about the ease with which the trader can place his orders without slippage. The latter can lead to a purchase or sale at a much different price than what you asked for. In addition, you may find it difficult to place large orders because you cannot find a counterparty. If the instrument you are trading is not very liquid, you will have a hard time day trading profitably.
Volatility is an indicator of how quickly an instrument fluctuates. Most day traders prefer volatile instruments, which allow them to exploit intraday trends.
However, it all depends on your trading strategy. If this is based on the exploitation of markets in a trading range, a low volatility environment would probably be better suited.
The Ideal Time for Day Trading
If you want to take advantage of intraday trends, it is better to trade your instrument when the corresponding exchange opens. For example, day trading in Google stock when the US markets open.
On the other hand, it may be that your strategy is more suited to low volatility environments, in this case, you should avoid trading during the most active hours.
It all depends on your trading strategy.
Day Trading on Margin
It is possible to take positions larger than your capital, by borrowing funds from the broker.
To increase their profits, many day traders use leverage for their positions. In day trading, buying on margin means virtually borrowing money from the broker in order to take more substantial positions. Your gains and losses will thus be multiplied. Most traders trade on margin. It is a phenomenon that presents an increased risk.
How does it work?
If you want to buy $ 1000 of shares, you can stake $ 500 and borrow the remaining $ 500 from your broker. If you bought the stock at $ 10 each and then it increased 20% to $ 12 and sold at that price, you would have $ 1200. After repaying the loan of $ 500 to the broker, you would have $ 700 left, a performance of 40% compared to your starting $ 500. Without the borrowed funds, your return would have been only 20%.
If the share price had fallen 20%, the same logic would apply. If you had sold over $ 8, you would only have $ 800. After repaying the $ 500 to the broker, you would have $ 300 left, a loss of 40% compared to your initial investment.
This example does not take into account other costs associated with trading.
Examples of Day Trading Strategies
There are countless ways to approach the market. Most of them use technical analysis.
News Day Trading
The day trader exploits the price action following the publication of economic indicators or events that change market conditions. In the chart below, we can see that the EUR / USD begins to decline after the publication of data on employment in Germany, which is worse than expected. A rapid downward movement follows, which the informed day trader can take advantage of by selling the pair.
- Allows you to make quick wins.
- Requires little time.
- Spreads can increase after the news.
- You get stopped quickly.
Chart Pattern Trading
The development of patterns such as triangles and rectangles are also formed using smaller time frames. The breakout of a chart pattern can be followed by a fairly rapid movement, as shown by the breakout of a descending triangle below, on a 5 minute chart (M5). The breakout is followed by a rapid drop in price.
- Trading signals are easy to spot.
- The breaks are followed by rapid movements.
- Figures on small time intervals are less reliable.
- Training the models can take several hours.
Scalping is really day trading. It consists of taking advantage of micromovements in financial instruments. The scalper is less demanding than the average day trader, he takes his profits as soon as possible.
Below we have a scalping method with 2 exponential moving averages (EMA 20 and EMA 30) on the chart in one minute (M1). The idea is to take advantage of the development of a trend by opening a position each time the price action falls within the 2 moving averages.
- Allows you to make quick wins.
- Limited exposure.
- Stressful trading strategy.
- Expensive trading (commissions)
Momentum Day Trading
Momentum trading is about taking advantage of the direction and strength of a trend. The trader therefore waits for a pullback in the trend to open a position. Various indicators can be used to accurately define when to open a position.
On the chart below, the trend is bearish. Using a trendline, the day trader can find good timing, selling the instrument whenever its price hits the trendline.
- Trading in the same direction of the trend.
- Offers a good risk-reward ratio.
- The trend changes frequently.
- Ineffective when the market has no clear direction.
Mean Reversion Trading
The concept of the mean reversion is simple. When the price action goes in one direction for a prolonged period or quite quickly, it tends to fall back to find more or less the prices before the extension.
The chart below shows an example of rapid expansion. The exit of the price action of the Bollinger bands indicates that the movement has been abrupt. Subsequently, the price stabilized to gradually return to the base of the initial rise.
- Easily identifiable signals.
- Most short term extensions are fixed.
- The extension can continue after your entry.
- The trend may continue.
Tips for Forex Day Trading
It is important to constantly train yourself and plan your trading sessions.
Limit Your Sessions
Most professional day traders set goals for a day trading session. These goals can be measured in terms of the number of pips or points to gain. For example, you can decide to stop the day trading session after having gained 50 pips. It can also be a loss-based goal. You can stop trading after losing 100 pips, for example.
Establishing such goals has several advantages. This allows you to limit the duration of your trading sessions and also prevents you from over-trading, i.e. taking too many positions and therefore paying more commissions. Thus, setting goals allows you to limit your day trading sessions.
With thousands of traders using advanced systems, you need to be on constant technology watch and follow the economic calendar. Charting platforms offer a large number of market analysis functionalities.
Backtesting programs are more and more sophisticated and allow to have more accurate results for a given strategy. If you have the means, do not hesitate to invest in premium tools to improve your performance.
The successful trader does not rest, he is always looking to improve his performance and his attitude. To do this, he must keep abreast of market news, read books on trading and perpetually research to stay ahead.
Entry and Exit Rules
There is no perfect way to open or close a trade. But stick to the rules set out in your trading plan. Never try new tips in or out with your real trading account, without having tested them in demo.
Plan Your Trading Hours
If you want to be a professional day trader, you can’t trade when you want to. You have to establish a very specific schedule. It is important to define a time interval during which you will maintain your trading session. It is indeed important to trade at the same time every day in order to familiarize yourself with the behavior of the market at that time.
The Life of the Independent Trader
Contrary to what we see in the movies, traders are humble beings, always concerned with managing risk.
Movies might make you believe that successful traders are extravagant and love luxury. However, most of them are humble and know that their trading strategies might stop working at any moment.
Successful independent traders have an iron discipline. They organize their lives around the opening hours of the markets they trade. Some are forced to work at night to do their trading session. A day trader who lives in Wellington, New Zealand is going to have to start his session around midnight if he wants to trade the US markets.
Day trading is serious business, which can be very lucrative if done with diligence. In any field, it is important to specialize in one market, or focus on a few financial instruments. Over time, you will become familiar with the instruments you have chosen to trade.
Preparation is the key to day trading. It is therefore important to plan your trading sessions in advance and be diligent so that you don’t miss any. A well-developed trading plan, as well as maintaining a trading journal, is a must to become a successful day trader.
You can start with less than $ 500 with an online broker.
XTB, Libertex and FXCM are the best brokers for day trading.
Dominant currency pairs such as EUR / USD have the lowest costs for day trading.
The DAX and the Nasdaq are pretty dynamic indices.
Brokers offer you analysis platforms. Some of the most popular are MT4, ProRealTime and TradingView.