Day trading

Day trading is a popular way to speculate on financial markets. Here we look at what day trading is and which markets you can day trade on – plus two handy strategies.

What is day trading?

Day trading is an approach to the markets that involves opening and closing positions within a single day. How much you trade is up to you: you could stick to once per session or less, or open positions frequently as you spot new opportunities.

Because trades are kept open for such short periods, day traders look to profit from small price fluctuations in very liquid markets.

One major advantage of day trading is that it removes the risks and costs associated with keeping a trade open beyond the market close. Day traders don't have to worry about prices gapping overnight, and don't have to pay financing charges on their positions.

However, it requires a lot of time to devote to the markets – although many day traders use mobile apps, stops, take profits and more to avoid sitting at a screen for many hours each session. Day trading is fast paced, so it requires proficiency and skill to analyse the market and make rapid decisions. This can be very stressful and is certainly not suitable for everyone.

Which markets can you day trade?

Market liquidity is important to day traders because they need to be able to move in and out of positions quickly. Any delay to the trade could make a difference between a profit or loss. So, while you can day trade on any market, the most popular ones are usually FX pairs and indices.

One other key factor in choosing markets to trade is cost. As day traders look to take advantage of relatively small price moves, the costs to open each position can have a significant impact on its result.

Say that you're looking to earn a profit from a 10-point move in a market. Paying a 0.5 spread on EUR/USD means you can keep 9.5 points as a return. Trading stocks, where you have to pay a commission charge, means your gain is far lower.

Finding day trades

Because of the time-intensive nature of day trading, most participants aren't able to pour over fundamental data when choosing which opportunities to pursue. Instead, they tend to rely heavily on technical analysis.

Ignoring economic data entirely can be treacherous, however. Major releases will often have a significant impact on market prices, so you'll need to be aware of what might be driving volatility in any given session.

Day trading strategies

Any strategy that enables you to capture short-term profits can be used when day trading. But here, we're going to focus on two popular options: trend trading and scalping.

Trend trading

As we covered in the previous lesson, this strategy can work over both the long and short term. When day trading, you're looking to take advantage of price action over a single day – either by capturing a small portion of a larger trend or by finding ‘mini' trends.

There are lots of different ways to identify trends. For example, you could look at price action to try and spot higher highs and lower lows, or you could use indicators such as trend lines, moving averages and more.

Scalping

Scalping is a very short-term strategy that involves taking lots of small profits each day. Scalpers will open and close multiple positions each session – with some trading every few minutes or even seconds as they hunt for opportunities.

When scalping, you're aiming to earn small profits from most of your trades, targeting a higher win-rate than day or position trading. Once a market has moved a little bit in your favour, you exit it to realise the profit. If a market moves even slightly against you, you immediately close the trade and take a small loss.

Scalping is one of the most intense forms of day trading. It requires more even more time, and a disciplined approach to avoid letting profits or losses run. After all, when margins are this thin, a single large loss could wipe out the gains from multiple successful positions.

Whichever strategy you decide to use, solid risk management is essential when day trading. Day traders often use market structure to set stop losses, for example by identifying support and resistance levels or using moving averages.

Summary 

• Day trading is the opening and closing of a trade or multiple trades before the markets close
• Day traders often trade FX and indices as they have high liquidity and tight spreads
• A sound risk management strategy is essential to prevent wiping profits out
• While this style of trading avoids the potential for overnight movements or gapping, it is fast-paced, time-consuming and can be stressful