Playing The Markets As A Day Trader

Lisa Smith, BA (Hons), CeFA
By

If you fancy making some money on a side gig from home, day trading forex, stocks or cryptocurrencies may be for you – but there’s a sharp learning curve.

Day trading is the art of making money by exploiting small price movements in stocks or currencies.

During the COVID-19 pandemic retail investing – that’s the small guy with a few quid to invest – has surged by more than a third.

Researchers tracking the market say that’s down to two factors: some people have more time and money on their hands during lockdown, while others struggling to pay the bills are trying to bolster their finances.

This guide from iExpats explains how day trading works for the ordinary investor.

The hype may claim you make millions as a day trader for working a few hours a day but be warned day trading comes with a lot of risk and uncertainty, so you should never stake money on the markets that you can’t afford to lose.

Day Trading Explained

A day trader is looking to profit from small movements in the price of stocks and shares, commodities, foreign exchange or cryptocurrency within a short timescale that can range from seconds to no more than a few hours.

Day traders need technology, self-discipline and focus to analyse markets in the finest detail to look for margins to exploit.

As the name suggests, day traders nearly always close out their positions before the markets shut so they are not left exposed to unexpected price movements.

Becoming A Day Trader

You may not need a lot of cash, a licence or qualifications to become a day trader, but you do need an analytical mind and a steady relationship with a broker.

Brokers have different definitions for day trader that depend on how many trades they open or close in a given period. The definitions also vary between countries and some market regulators, for instance, in the US day traders must show they have $25,000 in the bank before trading can start.

In the UK, brokers call day traders ‘active’ traders and the busiest are ‘hyperactive’ traders.

The Day Trading Markets

The best places to make money as a day trader are markets that deal in:

  • Foreign Exchange (Forex) – Probably the most popular with day traders because of the volumes of currency traded every day. 
  • Stocks and shares – This category covers a multitude of opportunities, from shares to complex financial instruments like contracts for a difference (CFDs), exchange traded funds (ETFs). Day traders do not buy and hold for long-term gain but speculate on short and quick movements.
  • Cryptocurrency – With more than 3,000 cryptocurrencies and a volatile market, cryptocurrencies are so much more than Bitcoin and a handful of other well-known tokens like Ethereum and Dogecoin. With Bitcoin trading at more than $45,000 and easy access to the market through an exchange with an electronic wallet, now seems the time to target cryptocurrency.
  • Futures – Futures are a contract to buy something at a specific time at a pre-agreed price. Futures are tradeable on an exchange.

How To Start Day Trading

The best way to start day trading is to open a demo account with a couple of online brokerages.

Then say goodbye to the rest of your life for a while to spend time studying how the technology works and reading two of the day trading bibles – Ann Logue’s Day Trading for Dummies and Kathy Lein’s Day Trading and Swing Trading The Currency Market.

Once you have got to grips with the technology, it’s time for some serious study.

Move on to technical analysis and chart patterns. Looking for patterns in behaviour gives an insight into how someone else is thinking, which can reveal trading signals that can give you an edge.

Many traders look for continuations and reversals. Continuations are indications that a trend will rise, while a reversal highlights a fall. These are trading strategies which add to other weapons in your arsenal, like triangles, head and shoulders, cup and handle, wedges and many others.

Successful strategies depend on keeping endless data and understanding how to interpret the charts made from your underlying spreadsheets.

Day Trading Software

Day trading software aims to take the grunt work out of making money.

Most brokerages provide bespoke software that automates many of the analytical and trading functions of day trading.

Good software lets day traders track multiple technical indicators at the same time and will highlight opportunities that would otherwise be missed – and that means software will make you money if you know how to use it.

You can look outside brokerages for software with more functions and features.

For newbie day traders, web based software is first base. Web apps come with no software to update, easy connectivity wherever you are low costs.

Standalone software is more powerful, but the extra features come at a cost that a new trader may find hard to swallow.

Good brokers and software houses will offer a demo with tutorials to get started, so try before you buy to see which technology is best match for your trading style.

Where to try a demo day trading account and software

Three of the most popular platforms outside the US are:

  • eToro, which bills itself as the world’s leading day trading platform, offering a range of markets including stocks, forex, cryptocurrencies and commodities.
  • Plus500, which proudly boasts the company is the UK’s top CFD broker
  • Pepperstone, a global player with nearly 100,000 customers worldwide that promises orders executed in less than 30 milliseconds
  • Coinbase – The largest UK cryptocurrency exchange

Each platform offers a selection of day trading accounts and the chance to demo the software without staking any cash by running simulations.

Make sure you sign up for a demo and account in the right geographical area, so you do not accidently come under the US pattern trader rules.

Choosing A Day Trading Brokerage

Picking the right broker to match your trading style is the first step in becoming a day trader.

The market is packed with brokers ready and willing to accept your business, but you want a platform that you can work with for the long-term.

You need to consider lots of factors before picking a brokerage, and among the most important are an easy interface, speed of transactions and cost.

Technical tools – Your broker interface should clearly display chart patterns, price movements and trading volumes. Check you can access the common day trading indicators, like moving average convergence divergence (MACD), support and resistance levels, volatility, price oscillators and Bollinger Bands.

Check out your brokerage carefully before registration as the market is flooded with scammers and get-rich-quick gurus offering courses and tips that are no more reliable than the tons of free information on day trading available online.

Picking A Trading Account

A huge number of different accounts are offered by brokerages and you need to choose the one that best suits your profile.

For newbies, a cash account is a good place to start. A cash account only allows you to trade the cash you have in the account. This can limit your profits, but also stops you losing too much.

You can then move up to a margin account that comes with a credit line from your broker. Expect your broker to ask for a minimum investment from you before agreeing to open the account. This type of account can boost profits but also build greater losses.

After a probation period, day traders can move up to a professional account. This lifts any restrictions regulators place on retail investors.

Day Trading Jargon Explained

Here are some of the most common day trading terms explained:

  • Arbitrage trading – Buying and selling an asset to exploit price differences across different markets.
  • Binary options – A binary option is when a trader speculates on a simple yes or no outcome within a timeframe. At the expiry time, the trader’s call must be within the terms set by the option for a profit to be made.
  • Cash account – A day trading account with a brokerage that only allows buying and selling with available funds.
  • Continuations – A trading pattern that signals a price is likely to follow a trend.
  • Cup and handle – A chart pattern that often comes before an upward trend.
  • Currency pair – This shows the value of one currency against another. The first is the base currency and the second the quoted currency. For example, a British Pound is worth $1.39 US Dollars is a currency pair with the Pound as the base currency and the dollar the quoted currency.
  • Forex (FX) – Short for foreign exchange. The markets are where foreign currencies are exchanged against each other.
  • Head and shoulders – A chart pattern that is a base line with three peaks with the middle at the highest.
  • Margin account – A margin account lets day traders leverage their trades by borrowing from the broker. The result is day traders have more cash to stake.
  • Moving average convergence divergence (MACD) – One of the most popular chart pattern analysis tools for day traders that can signal the best time to enter or exit a trade.
  • Pip – Short for ‘percentage in point’ and represents a fractional movement in the price of a currency pair, usually $0.0001 or 100th of 1%.  
  • Reversals – The opposite to a continuation – a trend that the price will reverse the trend.
  • Scalp – A type of day trading where a profit is made on small price adjustments.
  • Strike price – The price a derivative like a binary option is bought or sold.
  • Support and resistance levels – Chart analysis tools – the support level is a pause in a downward trend while resistance heralds a sell-off when an upward trend reverses.
  • Swing trading – This type of trading falls between day trading and investing by capturing short term gains over a few days or weeks.
  • Trading on volume – This is a measure of the number of times a specific stock or asset is traded over time, typically a day but which can range from minutes to months or years.
  • Triangles – An ascending chart pattern is a method of analysing price movements. If a price moves several times, traders can draw a trend line.

Day Trading FAQ

If you have a desperate need for more money to make ends meets, then day trading is not for you.

Day trading is a time-consuming job that requires dedication, technical ability and a stash of cash you can afford to lose to play the markets.

To help you decide if trading stocks, cryptocurrency or forex is for you, here are some answers to the most asked questions about day trading

Is day trading legal?

Yes, but financial regulators may apply local rules.
 
In the US, the Financial Industry Regulatory Authority (FINRA) demands day traders have a $25,000 balance in their marginal accounts before they can make a trade. It’s called the pattern day trader rule.
 
The rule is aimed at stopping investors from losing more than they can afford on the markets.
 
Day traders in other countries can ignore the rule providing their trading broker is not regulated in the US.

Is day trading just another form of gambling?

If you think about it, all investment is just a gamble on the price of your asset rising over time.
 
Day trading is speculation that comes with high rewards balanced against high risks.
 
Successful traders increase the risk by leveraging their stakes on the hope that the short-term gains will outweigh the cost of borrowing to leave them with a small profit.

Do day traders make money?

Various studies have looked at if day traders can really make money. Most conclude the answer is no.
 
In 2019, a detailed analysis of trades on the Brazilian equity futures market going back five years was carried out and decided day trading was unprofitable.
 
“The research show it is virtually impossible for individuals to compete with high frequency trades and day trade for a living, contrary to what course providers claim,” says the report.
 
“We observe all individuals who began to day trade between 2013 and 2015 in the Brazilian equity futures market, the third in terms of volume in the world, and who persisted for at least 300 days: 97% of them lost money, only 1.1% earned more than minimum wage, only 0.4% earned more than a bank teller (US$54 a day), and the top individual earned only US$310 a day with great risk.”
 
Other studies rate the chance of losing money as a day trader between 60% and 85%, depending on the market. CFDs are often quoted as the riskiest day trades.

What’s the most popular day trade market?

Most day traders started with forex. It’s the world’s largest market and has no central exchange, so it’s possible to trade 24 hours a day. The minimum stake for getting started depends on your platform and account, but can be as low as $100, although putting between $500 and $1,000 is more usual.

Why is day trading more of a risk than holding investments for the long term?

If you are relying on a strategy of buying and selling almost instantly, you need the market to move with you or you will quickly lose money.
 
Longer term investors have the benefit of years of market movements smoothing out profits to cover losses.

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