A Guide to Day Trading
What is day trading?
Day trading is defined as the buying and selling of instruments within a single trading day, but can apply generally to slightly longer timeframes. Typically, day traders utilise high amounts of leverage and short-term trading strategies to capitalise on small price movements, with the aim of making a small but not insignificant profit. There’s a lot of misinformation and controversy surrounding day trading - with the false promises of get-rich-quick schemes as well as a negative media portrayal - but as long as sensible risk management is applied, day trading can be an exciting and profitable source of income.
Can you make a profit from day trading?
Making profits from day trading is certainly possible, but so are losses if you do not approach day trading with discipline. It requires a good knowledge of the financial markets, as well as trading strategies that are geared towards short-term movement. Additionally, the use of leverage on even small price movements may give you the possibility of profits. However, leverage also gives you a bigger exposure to losses, so it’s important to manage your risk carefully with things like stop losses, trailing stops and other money management techniques.
What are the features of day trading?
There are several positives associated with this style of trading:
Reduce risk: Arguably the biggest benefit is that risk can be greatly reduced due to the lower amount of time that positions are typically left open. This leaves a far smaller time window for adverse developments to potentially occur and alter the course of the markets against you.
Trade with less capital: In light of the new leverage restrictions, traders may look to focus on shorter time frames to book profits more quickly and compound the growth of their capital.
Day traders look for two things in a market: liquidity and volatility. As day traders will be placing and closing several trades a day, a tight spread can be important to lower the cost of trading - while more volatility means greater movement in price, which can mean greater profits. However, your losses can also be magnified, so make sure you go through our Risk Management section in detail.
What strategies do day traders use?
Trading the News: Day traders use the momentum from macroeconomic events and trade on the back of news releases until the market exhibits signs of a reversal. Events like the non-farm payrolls or interest rate decisions from central banks can be the catalysts for large, volatile moves in the markets. Day traders look to capitalise on these by opening positions for a short amount of time.
Preparation is key here, as it is imperative to know what time these economic events occur and what the consensus market forecast and previous readings were. An example is the Canadian retail sales in July: