Tuesday Jul 11 2023 07:18
13 min
Day trading is the act of buying and selling financial instruments in a single day. You close your open positions at the end of the day and start again the next. Day traders buy and sell lots of different assets within the same day, sometimes multiple times a day, so they can capitalise on small market movements.
Be warned: this type of trading activity is not suited for part timers. It requires a lot of time, attention and dedication to be successful at. Day traders make a lot of quick decisions, executing many daily trades for comparatively small profit. This is basically the opposite of conventional investment strategies which are based on price movements over longer periods of time.
A good approach to day trading for beginners is:
Here’s how do to just that.
Markets most associated with day trading are those with fixed closes, i.e. are only open for regular trading hours. While this may be the case, you can still trade across markets that are open for 24 hours.
Ultimately, the best markets for day trading will be down to your personal preferences. Think about what you’re interested in, what you can budget for, and how much time you want to spend trading.
Popular day traded markets include:
Forex day trading revolves around trading currency pairs and is a popular choice for novices. There are lots of different currency pairings out there like GBP/USD or EUR/USD, and high market liquidity makes it easy for currencies to be bought and sold. Traders often use forex day trades to avoid fees associated with rolling over positions, and lower risk of being exposed to overnight market movements.
Shares offer even more variety than forex. Their ready availability makes them very attractive for newcomers. When day trading stocks on equity markets, positions are generally closed at the end of the day. This is done to avoid gapping risk. Gapping risk occurs when factors like news or economic influences cause a company’s share price to open much higher or lower compared with the previous day’s close.
When you trade indices, you are trading on the performance of a group of shares listed together on an index. Think stocks listed on indices like the FTSE 100, the top 100 largest companies listed on the London Stock Exchange, for example. Selecting indices gives you exposure to a larger position of the stock market than trading individual stock day trading. Like shares, it’s common to close index positions at the end of the day to a) keep in line with market opening hours and b) protect against gapping.
Closing trades at the day’s end isn’t a strategy in and of itself. It’s more a trading style. Instead, we’ll look at five common day trading strategies that show how different approaches can potentially lead to profit.
Trend trading following the direction of asset prices, then buying or selling depending on which direction the trend is moving in.
If there is an upward trend in an asset, where its price might be consistently growing in price, then traders would take a long position and buy it. Likewise, if an asset is showing a consistent downward trend, then trades would take a short position and sell.
Trend trading is not exclusively used by day traders. You can keep a position open for as long as the trend continues. However, to stick with intra-day trading principles, you’d close your position before the day is over.
Short term price movements are the focus of swing traders. They base this off an assumption that prices never go in one direction. They fluctuate instead. Swing traders are looking to make money from an asset’s movements up and down in short timeframes.
Trend traders want to take advantage of long-term market trends. Swing traders focus more on reversals on price movements instead to make their profits. It is a skill to be able to spot these reversals ahead of time, so may not a suitable strategy for day trading beginners.
This is a short-term strategy that has the potential to make small but frequent profits. Scalping focuses on achieving a high win rate. The idea is that you can build a big trading account by taking lots of smaller profits over time just as easily as placing fewer trades with longer timeframes.
One thing to note is that scalping requires discipline. You will need a strict exit strategy because losses can mount quickly to counteract any profits made.
Mean reversion is based around the principle that prices and other value metrics like price-to-earnings (P/E) ratios, always eventually move back to their historical mean value, i.e. its average value.
Technical analysis is required to pull off a successful mean reversion-based day trading strategy. You need to be able to catch assets where recent performance has been very different from their historical mean. Traders employing this strategy will take advantage of the return trajectory to make profits.
Money flow is a technical indicator that shows when an asset could be oversold or overbought. Rather than measuring the asset’s price by itself, money flow adds volume to see how many times the asset has been bought or sold across the day.
The number of trades from the current day is compared against the previous day’s levels to find if the money flow was positive or negative. A score of 80 or higher shows an asset has been overbought. This is a signal for a day trader to sell. A score of 20 or under shows oversold market conditions, which is a buy signal.
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Before you begin, familiarise yourself with some of the key factors day trading can be affected by. These apply for any market, whether you’re thinking of exploring forex day trading, shares, indices or other financial instruments.
Factors to watch include:
Liquidity refers to how easily and quickly positions can be entered and exited. High liquidity is what day traders want because their whole approach is based around making multiple trades across the day.
Volatility refers to how rapidly an asset’s price moves. If high volatility is expected throughout the day for a particular asset, day traders will watch it closely as a lot of opportunities for short-term profits can potentially be created.
Trading volume is the measure of how many times an asset has been bought or sold in a given period. High trading volume shows a lot of interest in an asset and it can be useful for establishing entry and exit points.
Firstly, decide what product you want to trade with. Derivates, such as CFDs and spread bets, let you day trade without owning the underlying asset, which could be ideal for you as a beginner. You can close or open positions much faster, plus you can speculate on market prices if their rising or falling.
Consider your markets too. markets.com offers forex day trading, stocks and shares, indices and a number of other financial instruments for you to choose from.
Next, outline a day trading plan. Outline exactly what you hope to achieve. Be realistic about any targets you set yourself. Day trading has a steep learning curve. A markets.com demo account can help you play with day trading without committing any capital but be wary if you expect to make lots of money straight away when live trading with real money. You may be disappointed.
Your methodology is important here too. Generally, you can base your decisions off two different methods: fundamental or technical analysis.
If you take a fundamental-led approach, your day trades will mostly be informed by:
A technical methodology is led by:
Regardless of the products or markets being traded, risk is important to understand for all day trading beginners.
Stops and limits can be placed on accounts to cease activity when certain negative conditions are met.
Stock day trading and other types all come with different risk levels, but some day trading principles still apply to nearly everyone. Successful traders know when to cut their losses or spot when their current strategy is not paying off and react accordingly.
Even the best traders often have low win rates. Sometimes they are below 40%. However, most day traders operate on a target risk-to-reward ratio of 1:2. That means they expect to double the money they are willing to risk. That will be down to you to decide.
There is nothing wrong with making mistakes. Traders of all levels make them every day. Staying wrong and making a big loss though will probably end your career as a day trader. Be smart and keep monitoring your positions.
Day trading for beginners can be difficult, but if you keep alert and know when to alter positions you can be successful.
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