Day trading is short-term trading in the stock market, usually lasting no more than one trading session. Some day traders are very active, making many trades per day, this is called scalping. Meanwhile, others only make a few transactions per day.
Day trading is the most popular trading on the stock, Forex and futures markets. This trade is not easy, but very profitable. However, very few traders can profit from this trade for long.
Table of Contents
- 1 What is day trading and how does it work?
- 2 Pros and cons of Day Trading
- 3 Factors day traders need to consider
- 4 The best day trading markets
- 5 What tools are available for Day Traders?
- 6 Things to know before trading day trading
- 7 Day trading on margin
- 8 Conclude
What is day trading and how does it work?
Day trading is trading in the stock market for the short term.
This is a method of trading on the stock market. This method mainly buys and sells instruments and holds positions for one session only. Before the market closes, positions opened for the day will close. The goal is to make a small profit per position and accumulate those over time.
Day trading used to require quite large capital. Currently, exchanges are fiercely competitive and all want to offer the best fees, with very low minimum deposits. With the proliferation of online exchanges that offer free stock purchases, day trading is becoming increasingly popular in this market.
Day trading is such a tough business that even seasoned traders struggle to make a profit. A 2010 study by professors Brad Barber and Yi-Tsung Lee at the University of California found that only 1% of day traders regularly make profits. The study looked at transactions over a 14-year period from 1992 to 2006.
Most successful day traders are full-time traders. Their advantage is being able to observe the market all day. Individual traders can also schedule a trading session for several hours a day.
Day trading is quite risky due to many factors we will consider below. If you find it difficult to tolerate short-term volatility risk, you can switch to swing trading, or position trading by buying and holding your positions for the medium to long term. However, if you must try day trading, learn as much as you can about this style of trading before you start.
How does day trading work?
Day traders often try to exploit the ups and downs of the market. Therefore, they can short the stock if they think the price will fall in the short term or buy the instrument if they think the price will rise. They may repeat these manipulations several times a day.
Example of day trading
Usually in the first trading hours, economic indicators will be released. For instance, day traders can watch for the release of European economic indicators such as the German manufacturing PMI.
On the day the PMI is announced, they choose to trade the EUR/USD pair in the first hours after the Frankfurt market opens at 8 a.m. KST. The situations where they will buy or sell the currency pair are as follows:
● When the numbers are worse than expected, they will sell the pair in anticipation of the EUR/USD pair falling in price a few hours after the announcement.
● When the numbers are better than expected, they will buy the EUR/USD pair in anticipation of the price going up.
As the figures are released by IHS Markit, worse-than-expected figures will drive the EUR/USD pair down. Day traders take advantage of a quick sale of the currency pair as depicted in the chart below.
Pros and cons of Day Trading
The advantages of day trading far outweigh the disadvantages. One of the main reasons to day trade is to help reduce the time your positions are exposed to market risk, especially outside of trading hours.
Day traders can work from home, without the constraints of a company. They are responsible for their own performance. You can clearly define the time to look for profit opportunities and the time to rest. However, it will take discipline.
2) No risk when the market is closed
One of the biggest advantages of day trading is closing positions at the end of the day. Accordingly, there will be no risk of loss outside of trading hours.
In the stock market, a price gap can appear overnight due to factors such as announcement of results, unexpected events. Often swing traders, or position traders, can lose profits they’ve made for months overnight.
Day trading is virtually free of this risk. At the end of the day traders can rest easy knowing that they are no longer exposed to the market.
One of the most common problems beginners face is overtrading. Taking on a large number of positions will significantly increase your trading costs. You may then experience a reduction in your winnings or further losses.
2) A time consuming activity
This activity can cost you hours a day. If you’re working full time, it’s hard to keep up with trading sessions.
Factors day traders need to consider
Day trading is a tough business that requires both financial and personal investment.
We have already mentioned the importance of training for day trading. In addition to the training courses available online, you can open a demo account on an exchange and observe and practice day trading.
Need quite a capital
In the United States, it takes at least $25,000 to trade shares. However, on the Forex market, you can start trading with less than $500. You can also do intraday CFD trading on stocks with a deposit of less than $500.
You need to keep in mind that the larger the capital, the less risk you take when making money
Whether making a living or making a living, day trading requires constant discipline. Successful day trading doesn’t just depend on your technical mastery. If that were the case, there would be a lot of day traders making a profit. However, we all know that very few day traders can make money sustainably. Therefore, for a day trader, discipline is a deciding factor.
Don’t set a goal of making money, aim to work hard in your trading sessions and stick to your plan. Feeling tired or stressed from sitting for a long time in front of a screen can cause you to make unforeseen decisions in your trading plan.
Planning is a systematic process that outlines all of your trading activities. Traders need to consider a number of factors, including the instruments traded, their timing, their risks, and their goals. You should write down and fully document your trading plan. Don’t just put the things you want to do in your mind.
On the whole, trading can also be intimidating. But a trading plan will take you step-by-step, from identifying the instrument to trade to analyzing closed positions, including developing a strategy and managing positions.
There should also be risk management in the trading plan. What percentage of capital would you risk on a position? When will you stop your trading session? Your trading plan should include answers to these questions. The more comprehensive the plan, the more organized and disciplined you will be throughout your day trading.
You’ve got a trading plan, great! But you need to make sure you are prepared to comply without outside influence and without hesitation. To analyze trades, you will use your trading plan to assess whether the trades make sense. Record deviations in your transaction log.
Maintain transaction log
This is a document that lists all of your day trading activities. It should include your comments and comments. You can self-assess based on your own records of: errors, omissions, not following the trading plan, etc.
The trading journal also helps you to make an objective judgment when you have doubts about your trading system after a series of losses.
Indeed, a trading journal will be especially helpful when you are experiencing massive losses. In most cases, journaling helps identify the reason for your poor trading results.
People often confuse plan with strategy. But the strategy is part of the trading plan. It is by the rules established by your strategy that you can determine a trading signal. There are many methods of day trading. Most day traders use technical analysis, while others exploit the effect of the day’s news and events on financial instruments.
By risk management, we mean sizing positions, but also placing your stop-loss and take-profit orders. In terms of position size, most day traders don’t risk more than 1% of their capital on a position.
Here is the question of capital allocation:
- Do you use your capital just to trade one strategy?
- Do you have discretionary or systematic strategies?
- Are you going to hand over the management of your capital to another trader?
Risk management is closely linked to strategy. Good risk management will help you keep most of your capital after a long losing streak.
The best day trading markets
You can actually do day trading on most markets.
The Forex market does not close during the week so it is suitable for day trading. This market is suitable for traders who want to trade day or night, depending on their time.
With a daily trading volume of around $6.6 trillion , Forex is a very liquid market. The major currency pairs are suitable for day trading. In general, commands on these tools are executed instantly.
Forex also has a certain variety when dealing with all the different currency pairs. You can choose from about 20 other liquid currency pairs for day trading. It is also the most accessible market for novice traders.
Indices represent a basket of securities. Stocks can represent a sector or a company selection. Indicators are characterized by less volatility and more predictability. Therefore, it is very suitable for traders who prefer low volatility.
It should be noted that there can be times when indices are very volatile, especially when geopolitical events rattle the markets.
For major market players, indices are difficult financial instruments to manipulate. The value of an index changes with the price movements of the instruments that make it up, so the index has stability.
In addition, indicators also create diversity. With trading indices, you don’t target a specific stock, but diversify your selection of stocks.
Intraday stock trading is suitable for traders who like quick moves. When there is enough liquidity, these instruments are quite active. During the first hour of trading, stocks can be exceptionally volatile. Thereby creating opportunities for day traders and scalpers.
Futures Contracts (Futures)
The futures market has generally low transaction fees, making it ideal for day trading. The futures contracts most coveted by traders are very liquid. Many professional day traders focus on the futures market.
One of the most coveted futures contracts by day traders is the E-mini S&P 500. All contracts are negotiated electronically and guaranteed fast execution.
Traders can also trade other futures indices such as E-mini Nasdaq, Russel and Dow. There are also many other markets with the volume and volatility needed to gain intraday gains, including commodity futures.
Intraday crypto trading is booming right now. The high volatility and increasing trading volume of cryptocurrency exchanges attract traders who want to make quick profits.
Crypto day traders are not too interested in buying cryptocurrencies, but taking advantage of the fluctuations of these virtual currencies. Therefore, they will be satisfied with Cryptocurrency CFDs that most Forex brokers offer.
The cryptocurrency market is very volatile so it is important to be vigilant when trading during the day. For instance, in just a few seconds, the price of Bitcoin can rise and fall by double-digit percentages.
As such, day traders in the cryptocurrency market must be on the lookout for news that could shake the market.
What tools are available for Day Traders?
Online trading platforms offer most of the tools for day trading. Some brokers offer more functionality for fundamental and technical analysis.
Top 3 exchanges with the best day trading
Day traders can make frequent use of the filter by technical indicators. For example, the filter can mark instruments that have been bought, oversold, very volatile, etc. This tool is very useful when you are trading multiple instruments at the same time.
FXCM has an intraday filter by selection of technical indicators. You can also use this tool to change the time interval.
Technical analysis platform
Depending on your strategy, day trading may require an advanced charting platform. Many solutions are available. Most brokers offer Metatrader 4, which is a great technical analysis platform for beginners, but mid-range for professional traders.
They can invest more effectively in paid solutions like TradingView or ProRealTime. TradingView can be linked with some online exchanges such as FXCM.
Things to know before trading day trading
To succeed in day trading, three important factors need to be considered including liquidity, volatility, and the best time to trade.
Day traders desperately need liquidity. It is how easy it is for a trader to place his or her order without slippage. Slippage can lead to buying or selling at a much different price than you asked for. In addition, you may have difficulty placing large orders because you cannot find a counterparty. If the instrument you are trading is not very liquid, your trading day will hardly be profitable.
Volatility is an indicator of how quickly an instrument fluctuates. Most day traders prefer volatile instruments whereby they can exploit intraday trends.
However, it also depends on your trading strategy. If based on tapping the markets in a trading range, a low volatility environment would probably be more suitable.
Ideal day trading time
If you want to exploit intraday trends, trade your instrument when the respective exchange is open. Take, for example, day trading with Google shares when the US market is open.
On the other hand, maybe your strategy is better suited to a low volatility environment, in which case you should avoid trading during the most active hours.
However, it also depends on your trading strategy.
Day trading on margin
You can borrow capital from the exchange to take positions larger than your capital.
To increase profits, many day traders use leverage for their positions. With day trading, buying margin is essentially borrowing money from the exchange to get more important positions. As a result, your profits and losses will be multiplied. Most traders trade on margin. It is a phenomenon that signals increased risk.
How to trade margin?
If you want to buy $1000 (VND23,000,000) of shares, you can deposit $500 (VND11,600,000) and borrow the remaining $500(VND11,600,000). If you buy the stock at $10 (VND 230,000) a share and then increase it 20% to $12 (VND 280,000) and sell at that price, you will have $1200 (VND 27,800,000). After repaying the $500 loan floor (11,600,000 VND), you have $700 left (VND 16,200,000), 40% yield from your original $500 (11,600,000 VND). Without the borrowed funds, your performance will be only 20%.
If the stock price falls 20%, the same logic can be deduced. If you sell for more than $8 (VND 185,000), you will only have $800 (VND 18,500,000). After returning the floor $500 (11,600,000 VND), you will be left with $300 (6,900,000 VND), a 40% loss from your initial investment.
This example does not take into account other fees associated with the transaction.
Day trading is a serious business, very profitable with diligence. Regardless of the field, it is necessary to focus on a market, or a few financial instruments. Over time, you will become more familiar with the instruments you have chosen to trade with.
Thorough preparation is the key to successful day trading. Accordingly, you need to plan your trading sessions and work hard not to skip any sessions. To be a successful day trader, the two must-haves are developing a sound plan and maintaining a trading log.