Day trading: what you need to know

During the pandemic, around 1.8m adults became ‘day traders’. While some were just looking to pass the time, others were aiming to make cash from short-term trades across financial markets. However, day trading comes with risks and potential pitfalls for the unwary. It’s vital to have all the information you need for a clear idea of what’s involved.

Of those people who took to day trading in the quiet hours of furlough, only 9% said they made “a lot” of money. Around 45% said they’d lost money or broken even – there were probably plenty more who didn’t want to admit their losses.

Day trading is about trying to make money on small changes in the price of securities rather than investing for potential growth over the long term. As the name suggests day traders don’t hold investments overnight and some may buy and sell in a matter of seconds. Day traders will often follow news articles or announcements or look at technical analysis to inform their decisions. Keeping up to date and monitoring your trades can be very time consuming and takes a lot of effort.

The most successful day traders will generally not try to operate across multiple markets. They’ll pick one or two markets they know well and monitor price changes. Within those markets, there may be several different approaches.

• Trading news: this is particularly useful for currency, interest rate or government bond trading strategies. These markets often move with changes in interest rate policy, for example, or guidance from central banks. Those meetings are scheduled in advance, so it’s possible to see when price action is likely to happen.
• Merger and acquisition activity: there may be anomalies in pricing when two companies come together. The share price of an acquired company may not match the bid price or may go higher in anticipation of rival bids. Either way, this price activity can present an opportunity for eagle-eyed traders.
• Scalping: aims to make tiny profits on lots of small price changes. This can be an ideal option for smaller traders as these opportunities often fly under the radar of institutional investors.

Range trading: uses technical analysis to look at trading patterns of individual securities which can follow certain trends that investors can learn. These strategies look for points of resistance and support to make buy and sell decisions.

The first thing you’ll need is a platform that can accommodate day trading options. That means the pricing structure needs to be able to support day trading: high costs can wipe out your profits, particularly if you’re hoping to make money from lots of smaller trades. It helps if that platform also holds plenty of information and analytics to help your decision-making – real time pricing, graphs, news feeds and data, for example.

You’ll also need sufficient capital. Liquidity is vitally important. Without it, traders can be forced to exit positions at the wrong time at a price they may not like. Successful day traders only tend to use capital they can afford to lose. This helps keep their decision-making on track and prevents emotional buying and selling. Traders need to take into account any margin calls –volatile markets can trigger margin calls at short-notice. Traders will need to meet these calls or be able to exit the trade quickly. 

The final ingredient is market volatility. Day traders rely on price movements to make money so thin, illiquid markets present few opportunities. This is why traders often gravitate to currency or futures markets, where there are plenty of participants and lots of activity.

Day trading conjures an image of frenetic activity as investors win big or lose painfully in a matter of minutes. However, this high adrenaline approach to day trading is unlikely to deliver successful returns. Successful day traders have a plan: they know the markets they want to focus on, and set price targets on the upside and downside for all trades. They will often automate those price targets to keep emotion out of their decision-making.They will stay disciplined in the face of volatile markets. Your risk strategy is as important as finding the right assets. A good day trading strategy  has checks and balances along the way. It’s unlikely to have unhedged exposure to individual securities. Day traders need a good understanding of the risks and what they can do about them if they arise.

If you want to learn more, through Fineco you can access webinars and videos about day trading from a range of experts.  If you’re serious about day trading, Powerdesk has the tools you need. It’s all part of Fineco’s premium platform offering for all kinds of traders and investors.