What is day trading — how to get started?

Day trading is a short-term trading style which refers to buying and selling financial instruments such as shares, forex currencies, commodities, indices, etc., within the same trading day, rarely keeping a position open for longer than a day.

They seek to potentially profit from short-term price fluctuations in the market by utilising different strategies and analyses. This is why these traders generally buy and sell multiple assets during the day and/or multiple times during the day.

Trades could be opened and closed within a few minutes to a few hours, depending on their analysis and trading plan.

Day traders are also known to mainly focus on price action when analysing charts, such as candlestick patterns or chart patterns. Some may add one or two indicators; however, for the most part, they prefer a more ‘clean’ looking chart in order to gain a better perspective of price movements.

Day trading or intraday trading (as it’s also known) might not be for someone looking only to trade part-time, as it might take a lot of time to monitor the market, especially for those looking to trade multiple financial instruments. There is also a certain level of focus and dedication involved.

Now, because day traders look to profit from short-term price fluctuations in the market, they will generally trade derivative products such as CFDs or spread betting, which allows them to trade on margin through leverage. 

Trading on margin through leverage enables traders to gain a bigger exposure to the market with only a small amount of investment capital, called margin. Trading with leverage will magnify potential profits because the result of the trade is based on the entire position amount, not just your deposit amount.

Nevertheless, if the market does go against a trader’s position, losses will also be magnified.

There are many to choose from when it comes to day trading strategies. However, no strategy is perfect and choosing one will come down to personal preference. Traders could also combine more than one strategy in order to achieve their trading goals.

Below, we’ve compiled a list of the five most popular day trading strategies with a detailed description for each.

Trend trading

Trend trading works by looking at the existing trend’s direction and making decisions based on which direction the trend is moving. The basis for trend trading is expecting the trend to continue for some time, with traders riding the trend until their take-profit levels are reached or when a reversal occurs.

When the trend is upward, the price will make consecutive higher highs and higher lows.

Traders could look to open a buy position at the start of the trend or after it forms a higher low and continues with the upward trend, closing their position at the end of the day or when their desired take-profit level has been reached.

If the trend is in a downward movement, the price will make consecutive lower highs and lower lows.

Traders could look at opening a sell position at the beginning of a trend or after a higher low has formed, possibly signalling a continuation of the trend, closing their position at the end of the day or when their desired take-profit level has been reached.

Also, strategically placed stop-losses can be used if the market moves against them. Stop-loss orders are predetermined levels, which, if the market goes against a trader’s prediction and reaches this level, will close the position automatically, preventing any further losses to their account.

Traders could also incorporate indicators and drawing tools in order to assist in identifying if the trend is valid, such as the 50-day moving average, 200-day moving average and trend lines.

Generally speaking, if the 50 moving average is above the 200 moving average, it indicates an upward trend; conversely, if the 50 moving average is below the 200 moving average, it suggests the market is in a downward trend.

Incorporate the trend line drawing tool by connecting three or more higher lows in an uptrend or three or more lower highs in a downtrend. This trend line could also assist in identifying possible entry points.

Range trading

Range trading is a strategy used when there is no clear trend in the market. Instead, the price is in a state of consolidation. Traders could use support and resistance zones to identify possible points of interest when the market is range-bound.

Support zones are identified through various lows, retesting the previous low while failing to beak past but reversing upward. On the other hand, resistance zones are identified through various high points in the market that retested previous highs, failing to break above and reversing to the downside.

Day traders might use support and resistance zones in range trading by opening a buy position when the price reaches the support zones, hoping it will reverse to the upside and then closing the position when it reaches the resistance zone.

If they want to open a short position, they might look to open the position at the resistance zones with the hopes of the price reversing, moving down towards support, and closing the position once it reaches that zone.

Breakout trading

A breakout trading strategy is when the market has entered a state of consolidation, generally only for a short while and usually after a strong trend, waiting for it to break out either to the upside or downside. This can also be seen as a temporary pause in the market.

This strategy involves identifying key support and resistance levels when the market has paused temporarily and waiting for the price to break out of one of these zones. Traders could incorporate candlestick patterns, such as the bullish or bearish engulfing pattern, to assist in identifying possible entry points at the breakout.

Traders could place take-profit orders above the breakout, the opposite of stop-loss orders seen in the previous section. These are predetermined levels, which, if the trade goes in their favour and reaches this level, will close automatically, securing the profits they gained.

They could also place a stop-loss order below the breakout to prevent any substantial losses if the trade moves against them.

News-based trading

The news-based trading strategy uses the latest and important news events that could bring a certain level of volatility to the market and have traders try to capitalise on these moments of market volatility.

Traders using this type of strategy will generally have a broader economic outlook on the market, as news and economic events could simultaneously affect the price movements of various financial instruments.

Day traders might tend to incorporate certain aspects of technical analysis in order to gain better insight into entry and exit points when these economic or news events are released.

High-frequency trading

High-frequency trading is a strategy involving traders using computer programs known as algorithms to execute many trades quickly. These algorithms analyse different market trends and changes and then automatically place buy and sell orders for various financial instruments.

The overall goal of high-frequency trading is to try and take advantage of slight differences in the price of an asset being traded in different places to make small but frequent profits.

The specific financial market day traders choose might ultimately come down to their own personal interests as there are many financial markets to select from. However, some of the more popular markets include:

• Forex
• Stocks
• Commodities
• Indices

Forex

The forex market is one of the most popular for day traders due to the vast amount of daily trading volume. There are many forex currency pairs to choose from, each with its own level of volatility and liquidity.

However, for the most part, many day traders might end up choosing to trade major currency pairs, such as EUR/USD, GBP/USD, AUD/USD, USD/JPY, or USD/CAD, as they generally tend to present more short-term trading opportunities than minor or exotic currency pairs.

The forex market also doesn’t have a central exchange. Instead, trades are conducted through a series of computers between traders worldwide 24 hours a day, five days a week, following the time zones of major financial capitals such as Sydney, Tokyo, London, and New York.

Forex day traders will generally only use technical analysis to make possible trading decisions; however, they still keep an eye on important economic events that could significantly impact certain currency pairs' price movement.

Stocks

The stock market is where publicly listed companies appear, and traders and investors have the opportunity to purchase shares (certificates of ownership) in any of the companies. There are many stock markets worldwide, and some of the more popular ones include the New York Stock Exchange, NASDAQ, and London Stock Exchange.

Day trading shares are different compared to traditional buy-and-hold investing of shares. 

As previously mentioned, day traders generally trade through derivative products such as CFDs or spread betting, which means they speculate on the price movements in both rising and falling markets of financial assets, and in this case, shares, without having to take ownership of the underlying asset. Whereas in traditional buy-and-hold investing, investors take ownership of the shares they buy.

Day trading shares might see traders using a combination of fundamental and technical analysis to make possible trading decisions because company news releases, financial reports, or product launches could bring a certain amount of volatility to the market, leading to quick price fluctuations.

Commodities

Commodities are any raw materials or agricultural products collected and processed for everyday use and form the basis of our active economy. These include precious metals, coffee, cotton, crude oil, natural gas, or grain.

Commodity prices are mainly influenced by supply and demand; however, other factors such as macroeconomic events, industry competition, political events, or weather patterns could also cause prices to fluctuate.

This is one of the reasons why day traders might use technical and fundamental analysis in their trading to find potential trading opportunities.

Indices

Indices are groups of stocks categorised together to form a single financial instrument based on specific aspects, such as being in the same market sector or falling into the same market capitalisation bracket.

Instead of focusing on individual shares, day trading indices allow traders to focus and open positions on multiple shares simultaneously.

Indices are known to be less volatile. However, certain economic and news events could increase that level of volatility, presenting traders with potential trading opportunities.

Much like with shares, day traders could use a combination of fundamental and technical analysis to make possible trading decisions.

Below, we’ve compiled a few key aspects that might be important to understand about day trading.

Creating a trading plan

Having a solid trading plan might be essential for every trader as they can note down what they hope to achieve, be realistic about their trading goals, and how much money they might be willing to lose with every trade because, as with any form of trading, there is always risk involved.

Day trading requires a certain amount of patience and has a steep learning curve, so creating a trading plan could assist traders to remain disciplined.

A trading plan could also help develop a system for entering and exiting trades as well as important factors about which aspects of technical and/or fundamental analysis they might want to use for different financial instruments.

Risk management

Developing a risk management plan goes hand-in-hand with your trading plan, as one of the key aspects is to try and minimise any potential losses to your account. One of the ways to potentially prevent any substantial losses to your account is by using a stop-loss order.

As previously mentioned, a stop-loss order is a predetermined level set by a trader if a trade goes against their prediction; once the level is reached, the trade will automatically close, preventing any further losses.

In determining where to place a stop-loss will be different for every trader and their risk-to-reward ratio.

Different market conditions and strategies might call for adjusting your risk-to-reward ratio. However, many traders will generally stick to risking only 1-2% of their total account on a single trade.

Monitoring trades

As we mentioned at the beginning of this article, day trading might not be for those individuals looking to trade part-time as day trading requires time to monitor the charts to potentially profit from short-term market movements.

Day trading involves making quick decisions based on a trader’s analysis of the market, which means they could be in and out of a trade within half an hour; for example, during that time, it might be crucial to monitor the charts to close out a trade if it happens to go against their prediction. Or add to that position if they see another opportunity.

There are, however, other factors you might also want to keep in mind, such as looking at important upcoming news events on an economic calendar, which could assist in planning a trader’s daily trades as most day traders might open and close multiple positions on the same financial instrument.

Also, it might be crucial to keep a trading journal where they could record all past trades and the results thereof in order to improve their skills further.

For those individuals looking to day trade, there are some advantages that come along with it. Let’s look at what those are:

• Day traders rarely keep a position open overnight, which excludes them from having to pay overnight fees.
• Also, because they don’t carry their trades over to the next day, they’re not affected by adverse price movement, which could take place overnight.
• There is a wide range of different strategies to choose from, and each of those strategies presents unique opportunities to enter and exit a position.
• They can trade rising and falling markets through derivative products such as CFDs or spread betting.
• Day traders could trade different financial markets, presenting them with an opportunity to diversify their portfolios and find opportunities in different financial markets.

There are also some disadvantages which are presented in day trading. Let’s take a closer look at what those are:

• It requires a lot of time to focus on the charts, with daily research included to find potential trading opportunities.
• All forms of trading carry a certain amount of risk, and day trading is no different. The fast-paced nature of price changes and using leverage to day trade could increase the risk of significant losses.
• Many traders could struggle with their emotions, especially after a consecutive loss, which could result in revenge trading or overtrading.
• Day trading generally requires a lot of experience and, for some, could be more difficult than swing trading or position trading as it requires quick decision-making to enter and exit a trade, which could result in increased stress levels.

Day trading vs swing trading are two of the most popular trading styles.

Day traders focus on short-term price fluctuations, looking to make small but more frequent profits, opening and closing a position or multiple positions ranging from a few minutes to a few hours, and rarely leaving a position open overnight. 

They also tend to spend more time in front of the charts looking for potential trading opportunities.

Now, swing trading, on the other hand, is slightly different in the sense that traders keep their positions open for longer, ranging from a few days to weeks. 

They are more focused on a longer-term trend, generally placing strategic take-profit orders as they don’t monitor the charts as much as day traders.

Day trading and traditional investing are complete opposites.

With traditional investing, individuals are focused on a long-term view of the market and generally hold their positions for a couple of years. They also tend to spend less time monitoring the charts compared to day traders.

Traditional investors also don’t tend to trade on margin with leverage, meaning they take complete ownership of the financial assets they buy while paying the total amount of the asset’s value.

Apart from the fact that traditional investors are focused on the long-term trend of an asset, they are also more focused on diversifying their investment portfolio across different financial markets than day traders.

Before deciding to start day trade, there might be a few essential factors to remember.

As day trading is more focused on short-term price fluctuations, which won’t necessarily have a big impact on the overall long-term trend, it might be best to focus on factors within a financial instrument that does have an effect together with your overall analysis, such as trading volume, volatility, and liquidity.

• Trading volume is the measurement of active participants in the market for a certain financial instrument. Indicating the amount of times it’s bought and sold over a given period. When the trading volume is high, it means there is a high level of interest, which provides more trading opportunities.
• Volatility is the measurement of how quickly a financial instrument’s price fluctuates, which could be a crucial aspect for day traders. When the level of volatility is high during the day, it could present many trading opportunities for traders, given the constant price fluctuation.
• Liquidity is the measurement of how quickly and effortlessly traders can enter and exit a position. High liquidity indicates a position can be entered and exited more quickly and easily, which could be a positive sign for day traders as they enter and exit multiple trades during the trading day.