As with any new career, there is a lot to learn when you are starting day trading. Not only will you need to decide what to trade and how much capital you will need to start as a day trader, but you will have to pick the proper software, determine when to trade, what strategies to use, and of course, how to manage your risk.
Here is a day trading guide to enhancing your knowledge before you start your journey.
How to use this guide:
What is day trading?
Day trading is a popular trading style whereby an individual buys and sells a financial instrument over a time frame of a single day with the intention of profiting from intraday price movements.
Day trading involves speculating on where the price of a currency pair, stock, index, or cryptocurrency is heading before the close of the day. This means that all positions are closed before the rollover or closing bell. The methods contrast with those of swing traders who keep positions from days to weeks and long-term traders who typically utilize buy-and-hold investing strategies.
Historically, day trading was an activity exclusive to big financial firms, banks, and professional speculators, with many day traders working in investment banks or as specialists in equity investment and fund management firms. However, since the inception of retail and leveraged trading, day trading has become increasingly more accessible, and many private individuals are now day traders.
Despite the difficulty, there are some obvious benefits to day trading for a living. To name just a few:
You are your own boss. No more pandering to the needs of demanding and unreasonable bosses. You can precisely work the way you want.
No more expensive train ticket to get to work. No more petrol and parking costs. No more pricey suits. You simply need a computer, an internet connection, and some capital to get going.
You set your own working hours. In today’s world, there is always a market open. So, you can choose when you want to work and for how long, fitting it around other commitments. If you want a four-week holiday, there is no HR department to navigate first.
Whilst everyone else is ironing their shirt for the day ahead, you can slip into some comfortable clothes and begin your 15-foot commute to your desk, with a fresh cup of coffee. No more stuffy office or distracting colleagues to deal with. You work from the comfort of your own home.
Despite the obvious allures, comments about day trading highlight some downsides. The most prevalent of which are:
Your colleagues may have driven you up the wall at times, but sometimes it is reassuring to have people around. Day trading can get lonely. If you do not like being on your own, think twice.
The only thing that can improve is your takings. You may also find it challenging to get back into the business world. Some day trading forums has suggested you will be less employable by the end.
Because day traders typically suffer financial losses in their first months of trading, and many of them never graduate to making profits, they should only risk money that they can afford to lose. You will not have a stable income to rely on. You might make $300 one day and then lose $250 or more the next.
The battle against bots
Algorithms, automated systems, and bots are all taking over the market. They are now responsible for a massive 60% of all market volume. Whilst there will always be a place for humans in the market, you will need to find new ways to adapt and evolve if you want to maintain an edge.
Watch out for “hot tips” and “expert advice” from newsletters and websites catering to day traders and remember that educational seminars and classes about day trading may not be objective.
Day Trading Markets
All markets offer trading opportunities. Therefore, it often comes down to how much capital you need to get started. Do not try to master all markets at once. This will divide your attention, and it may take longer to learn to day trade. Pick one market and a few instruments so that you can focus your learning. Once you learn to day trade in one market, it is easier to adapt to learn other markets. So, be patient.
You may already have a market in mind, but here is the background briefly. It comes down to what you like, but also what you can afford.
- Foreign Exchange Market. The foreign exchange market, where you are trading currencies such as the euro and U.S. dollar (EUR/USD), requires the least capital. You can start trading forex with as little as $100, although starting with more is recommended for proper risk and money management.
- Futures Market. Trading futures may also require small money to get started. There is also a wide assortment of futures available to trade. These are often based on commodities or indexes such as crude oil, gold, bitcoin, or S&P 500 movements.
- Stock Market. Stock trading offers different opportunities than a traditional ‘buy and hold’ investment strategy. Speculating on stock and ETF (Exchange Traded Fund) prices via CFDs (contract for differences) means traders can profit from falling prices too. Margin or leverage also reduces the capital required to open a position. So, you can take a position on the latest news release, product announcement, or financial report – as well as technical indicators. However, leverage can increase not only profits but also losses.
- Cryptocurrency market. The two most popular currently are Bitcoin and Ethereum, some of the hottest financial assets of the moment. Trading cryptocurrency revolves around speculating on its price, rather than owning any of the actual coins. For this reason, brokers offering forex and CFDs can be an alternative solution for beginners.
When you create a CFD trading account with CAPEX, you will be able to:
- Trade over 2,000 international shares to speculate on their price rising or falling.
- Trade a host of global indices to go long or short on the performance of a large chunk of the economy with a single trade.
- Take a position on our range of ETFs to get exposure to a basket of shares from an entire country, index, or sector that could be rising or falling in price.
- Speculate on the energy prices, grains, and metals.
- Access the hottest +20 cryptocurrencies in the world
- Trade the world's most powerful companies in simple pre-built portfolios based on specific industries and trends.
Day Trading Strategies
It is important for day traders to familiarise themselves with different trading strategies. Typical day trading strategies will involve some form of technical analysis, fundamental analysis, or a combination of the two. Day traders will use this analysis to help decide when to buy and sell currency pairs, stocks, cryptocurrencies, and commodities.
It can be the case that more than one strategy is needed for day trading. As market conditions vary on a day-to-day basis, traders should be prepared to adapt their strategy, such as during times of high market liquidity.
When you are deciding whether to choose a financial instrument, you will want to look at three factors.
- Liquidity allows you to enter and exit a stock or currency pair quickly. More liquidity means more ability to buy and sell with less slippage and tighter spreads.
- Volatility is how much the price of an asset will fluctuate on a given day. More volatility means more potential profit, but also more risk of capital loss.
- Trading volume is how many trades of an asset there are in a day, which indicates how much demand there is for an asset. A higher trading volume means there is more interest in that asset.
Deciding when to enter and exit a position is also a key part of day trading. You will want to consider multiple strategies for when to sell assets to find the right one for you.
- News Trading. Positive or negative news around a country or company can create high volatility in the market, which can lead to high profits and losses. If you use this strategy, you will short sell when news is bad and buy when it is good. Once you're more experienced, you may be able to anticipate global and economic announcements and, for example, sell before negative news is announced.
- Gap Trading. Trading the gap means traders identify gaps between opening and closing prices on a trading chart where there has been volatile action and can use this to devise an appropriate trading strategy. They will then need to calculate potential entry and exit points for their trades. Traders often use event-based strategies when there is a market gap, as they can predict but not guarantee what will happen next. There are also different classifications of gaps, as they do not all represent the same price pattern or trend on a price chart. These can be split into the following: Breakaway gaps, Common gaps, Continuation gaps, Exhaustion gaps.
- Range trading: sometimes referred to as channel trading, is a day trading strategy that starts with an understanding of the recent price history of any given security. A trader will inspect chart patterns to identify typical highs and lows during the day while keeping a close eye on the difference between these points. For instance, if the price of a security has been rising off a support price or falling off a resistance price, then a trader might choose to buy or sell based on their perception of the market’s direction. This is known as ‘trading in a range’, where each time the price hits a high, it falls back to the low, and vice versa.
- Contrarian trading: The idea behind contrarian trading is that no financial instrument will rise in price forever, and similarly, no instrument will fall in price forever. The trader who uses this strategy is looking to trade assets that have been rising in price before selling them or prefers to buy asset classes that have been falling. The idea is to buy cheap or sell dear – or buy assets that are underpriced and sell assets that are overpriced. Traders who are using this strategy need to be quick to spot the end of a trend to open a position at the optimal entry point. This strategy is fighting the trend and can work against traders at times. Contrarian trading favors those who know a market in-depth and so know when to bet against it.
- Trend following: This involves looking at longer-term charts to identify a trend. Once the overall trend is established, day traders would look at a chart with a smaller timeframe for minor trends that arise throughout the day in short periods to try to benefit from short-term price fluctuations. There are a variety of popular strategies that intraday traders like to use, such as scalping, and there is also separate intraday trend following strategies.
- Breakout trading: This is a common strategy for day trading, which also involves waiting for big market moves. These big moves can be caused by things like changes in a country’s economic data. They can happen unexpectedly or after expected economic announcements. With breakout trading, a trader would wait for prices to break through significant price support and resistance levels, indicating the start of a trend. The trader would then open a position in the direction in which they expect prices to move. Identifying and trading breakouts can be an efficient strategy for those who keep up to date with economic and political news.
As you practice in your demo platform, experiment with these different strategies. You'll find the one that works best for both your trading style and risk tolerance. Many day traders will use a combination of these strategies, depending on the behavior of the market and the type of assets they are investing in.
Using our award-winning platform, traders can implement day trading strategies with CFDs, which is a way of speculating on the price movement of the underlying assets. CFDs enable traders to buy or sell a number of units for an instrument, depending on the direction of the price.
You can trade CFDs by opening an account with us. It is important to understand the risks of trading with derivatives, such as recognizing that a trade position can result in gaining profit as much as a loss occurring if a trade does not go the intended way.
A particularly useful technical analysis tool on our platform is the ability to create trendlines and channels, Fibonacci retracements, pivot points, and other support and resistance levels. Traders can take advantage of customizable charts and drawing tools to highlight the price action and overall direction of a trend, which can be applied to multiple chart time frames. These features enable traders to take the quality of their analysis to an even higher level.
How to Manage the Risk in Day Trading
Before you go any further, you need to know how to control risk. Day traders should control risk in two ways: trade risk and daily risk.
Trade risk is how much you are willing to risk on each trade. Ideally, risk 1% or less of your capital on each trade. This is accomplished by picking an entry point and then setting a stop loss, which will get you out of the trade if it starts going too much against you.
The risk is also affected by how big of a position you take, so learn how to calculate the proper position size for forex, stocks, or futures. Factoring in your position size, your entry price, and your stop-loss price, no single trade should expose you to more than a 1% loss in capital.
Just as you don't want a single trade to cause a lot of damage to your account (hence the 1% rule), you also don't want one day to ruin your week or month. Therefore, set a daily loss limit. One possibility is to set it at 3% of your capital. If you are risking 1% or less on each trade, you would need to lose three trades or more (with no winners) to lose 3%. With a sound strategy, that shouldn't happen very often. Once you hit your daily cap, stop trading for the day.
Once you are consistently profitable, set your daily loss limit equal to your average winning day. For example, if you typically make $500 on winning days, then you are allowed to lose $500 on losing days. If you lose more than that, stop trading. The logic is that we want to keep daily losses small so that the loss can be easily recouped by a typical winning day.
Day Trading Requirements
There are two categories of day traders: those who work alone, and/or those who work for a larger institution.
Most day traders who trade for a living work for large players like hedge funds and the proprietary trading desks of banks and financial institutions. These traders have an edge because they have access to resources such as direct lines to counterparties, a trading desk, substantial amounts of capital, and expensive analytical software (among other advantages). These traders are typically looking for easy profits they can make from arbitrage opportunities and news events; these resources allow them to capitalize on these less risky day trades before individual traders can react.
Individual traders often manage other people’s money or simply trade with their own.
Day trading demands access to some of the most complex financial services and instruments in the marketplace. Day traders typically require:
- Virtual Private Server: A Forex VPS is a virtual machine that operates independently, much like a real computer. Due to the protection and versatility it offers, a VPS is specifically configured according to your needs and is particularly beneficial to Forex day traders. It is permanently connected to the internet, which both facilitates the execution process and contributes to a safer and more stable trading environment, improving execution time and lowering the risk of slippage.
- Multiple news sources. News provides most opportunities from which day traders capitalize, so it is imperative to be the first to know when something significant happens. The typical trading room has access to multiple leading newswires, constant coverage from news organizations, and software that constantly analyses market sentiment, top analyst ratings and consensus, and big players' activity.
- Automatic pattern recognition: This means that the trading program identifies chart patterns like double tops and bottoms, triangle consolidations, head and shoulders, pivot points, and other key support and resistance levels or more complex technical indicators such as Elliott Wave patterns.
- Backtesting: This allows traders to look at how a certain trading strategy would have performed in the past to predict more accurately how it will perform in the future. Keep in mind that past performance is not always indicative of future results.
- Broker integration: Some of these applications even interface directly with the brokerage, which allows for instantaneous and even automatic execution of trades. This is helpful for eliminating emotion from trading and improving execution times.
Combined, these tools provide traders with an edge over the rest of the marketplace. It is easy to see why, without them, so many inexperienced day traders lose money. Additionally, other elements that influence a day trader’s earnings potential are the market in which they trade, how much capital they have, and how much time they are willing to devote.
Besides the patented pattern recognition monitoring the markets 24/7, another key feature is “Instrument Intraday” which indicates whether an instrument is forecasted to remain bullish or bearish throughout the day. This advanced feature is useful for traders when shaping their intraday trading strategies and decisions.
Tips for Day Traders
After you know what you'll be trading and have your tools set up, it's time to start practicing, planning, and developing a trading strategy. Below are a few tips to help you get started and manage the risk that comes with day trading.
When your first start day trading, begin with smaller amounts of money that you can afford to lose. For example, you may want to begin with $100 or $10.000, depending on the type of trading account you have chosen.
Many day traders lose money when they first start out, so you don't want to risk losing money that you need to pay your basic living expenses. It can also be stressful and lead to bad decisions if you see the money that you can't afford to lose disappearing. By starting small, you limit your losses and make it less likely that you'll trade unwisely in response to those losses.
Use limit orders
A limit order lets you set a specific price for buying or selling. A limit order to buy will be executed at the limit price or lower, while a limit order to sell will be executed at the limit price or higher.
You set the order up through your platform. When the instrument reaches the price you set, the trade is filled or partially filled automatically. This can keep you from experiencing high losses.
Don't react emotionally
It can be easy to get emotional and react thoughtlessly to either good or bad news when you are day trading. But this can lead to unwise decision making. Instead, stick to your strategy when deciding to either buy or sell. Logical decisions are more profitable in day trading than emotional ones.
Time your trades correctly
As a day trader, you don't need to trade all day. You will find more consistency by only trading two to three hours a day. Which hours you'll want to focus on will depend on what you are trading.
While some day traders trade for a whole regular session, most only trade for a portion of the day. Trading only two to three hours per day is quite common among day traders. Here are the hours you'll want to focus on:
- The forex market trades 24 hours a day during the week. The EUR/USD is the most popular pair for day trading forex. This currency pair typically records greater trading volumes when the London markets are open. And the forex market time of 8:0 a.m. to 12:00 pm EST typically produces the biggest price moves because both the London and New York markets are open.
- For stocks, the best time for day trading is the first one to two hours after the stock markets open, and the last hour before the close. This is the most volatile time of the day, offering the biggest price moves. Some sizable moves also occur during the last hour of the day. If you only want to trade for an hour or two, trade the morning session.
- For day trading futures, around the open is an exciting time to day trade. Active futures see some trading activity around the clock, so good day trading opportunities typically start a bit earlier than in the stock market. Futures markets have official closes at various times depending on the commodity, but the last hour of trading also typically offers sizable moves to capitalize on.
Use an economic calendar
As a day trader, the economic calendar is one of your best friends. You will only spend one minute with it a day (or less), but that one minute—every day—is crucial if you want to avoid the risk caused by high-impact data/news releases. The events marked red are the ones you need to be aware of. Volatility around the event is typical and expected, regardless of whether the data comes out above, below, or right in line with market expectations.
Check your economic calendar each morning before you start trading, and jot down the times of the major data releases.
Whether you trade forex, futures, or stocks, there is an economic calendar for you. Forex and options traders can use CAPEX.com/economic-calendar. If you trade stocks and stock options, check the US earnings calendar. Earnings have a significant impact on price, just like economic data releases.
Practice Your Strategy
No matter which market you trade, use a demo account to practice your day trading strategies. This lets you practice all day if you want in a risk-free environment. No two days are the same in the markets, so it takes practice to be able to see the trade setups and be able to execute the trades without hesitation. Practice for at least three months and get to the point where you can consistently apply a strategy before you switch to a live trading account.
Most traders notice a deterioration in performance when they switch from demo trading to live trading.
Demo trading lets you practice and find out if your strategy is a good one. It can't mimic the actual market. It also doesn't create the emotional turmoil many traders face when they put real money on the line.
Therefore, if you notice that your trading isn't going very well when you start to live (compared to the demo), know that this is natural. Stick with your strategy, avoid trading emotionally, and you'll eventually see your performance improve.
Should You Start Day Trading?
As mentioned above, day trading as a career can be difficult and quite challenging.
- First, you need to come in with some knowledge of the trading world and have an idea of your risk tolerance, capital, and goals.
- Day trading is also a career that requires a lot of time. If you want to perfect your strategies—after you have practiced, of course— you will have to devote a lot of time to it. This is not something that you can do part-time or whenever you get the urge. You must be fully invested in it.
- If you do decide that the thrill of trading is right for you, remember to start small. Focus on a few stock indexes and major currency pairs rather than going into the market headfirst and wearing yourself thin. Going all out will only complicate your trading strategy and can mean big losses.
- Finally, stay cool and try to keep the emotion out of your trades. The more you can do that, the more you will be able to stick to your plan. Keeping a level head allows you to maintain your focus while keeping you on the path you have selected to go down.
If you follow these guidelines, it is possible that you may be headed for a sustainable career in day trading.
Before you start day trading, you should consider using the educational resources we offer like CAPEX Academy or a demo trading account. CAPEX Academy has lots of free trading courses for you to choose from, and they all tackle a different financial concept or process – like the basics of analyses – to help you to become a better trader or make more-informed investment decisions.
Our demo account is a suitable place for you to get an intimate understanding of how trading and investing work – as well as what it’s like to trade with leverage – before risking real capital. For this reason, a demo account with us is a great tool for investors who are looking to make a transition to leveraged securities.