Day Trading – Know the rules?
Day trading is short-term investing, in which you buy and sell a financial instrument within the same day, one or more times.
It’s a way to capitalise on short-term volatility in the market or on stocks that are making substantial immediate gains but are unlikely to sustain that performance for longer than a few days or even a few hours, minutes or seconds.
When done at a professional level, day trading involves massive numbers of transactions which may be worth a very small amount each, but which can add up to huge profits in a very short period of time.
There are a few basic day trading strategies to choose from:
- Trend Tracking: Buy when prices are rising, sell when they begin to fall.
- Contrarian: Anticipate a reversal and buy just before prices stop falling.
- Scalping: Act quickly on momentary changes in prices created by others’ trading.
- News Trading: Buy when good news is announced, as prices typically rise.
Some basic day trading strategies are difficult to achieve without access to very rapid trading systems; for example, scalping relies on being able to buy and sell a financial instrument within the very short window of opportunity created by other people’s trading.
Top Tips for Day Trading
- Be prepared to lose. The fast pace of day trading can make it a volatile investment strategy, so risk only a small amount of your capital on each trade – as little as 0.5-1.0%.
- Take your time. Successful day trading is an accumulation of many, many individual short-term trades, and that can add up to a lot of admin time, not to mention the time spent waiting for an opportunity to arise.
- Focus on value. The smallest ‘penny stocks’ can be tempting but the likelihood of a substantial return is relatively low. It may be wise to look to more expensive but higher value shares instead.
- Plan ahead. Some of your trades will require you to move fast, but they should not be impulse buys – you should plan ahead so when that opportunity arises, you are ready to move on it.
- Combine your strategy. Put all of the above tips together for maximum success, with a clear plan, a focus on maximum value, patience when it is needed, and a portfolio that grows by maximising its wins and minimising its losses.
Hidden Losses in Day Trading
Don’t forget to factor in some of the hidden losses that will reduce your total return on successful day trading transactions.
These include transaction fees and other admin charges, currency fluctuations and exchange fees, and any taxes payable on your profits.
You should also keep track of any times when you miss an opportunity by waiting too long to buy or sell, or by moving too fast on a stock that has not yet peaked or reached rock bottom, to help hone your decision-making for the future.
A Specific Strategy
It’s good to be more specific in your day trading strategy, for example don’t just buy a stock because it is rising in price, but only buy if it previously fell to be undervalued.
There are all kinds of trends, from triangles to tramlines, that you can use to specify exactly the conditions under which you will buy a particular stock.
Knowing when to sell is equally important, and different investors have different preferences for this, from selling as soon as a profit is achievable, to when the price is rising at its fastest rate, to selling at the very peak of a reversal.
It’s a personal decision but remember that if you are anticipating losses on up to 50% of all transactions, then your profit on individual successful trades will need to be greater than your individual losses if you are to break even in the long term.
Develop your day trading skills
Day trading involves some very fast transactions but can also include a relatively high loss rate and small profits per trade – it is a long-term technique, not a quick return on investment.
All of these short-term trades should add up to a day trading strategy that gradually improves over time, without putting too much capital at risk in the early stages.
Stay disciplined and manage your losses from the start, and you can build larger profits as you gain greater understanding of basic and advanced day trading strategies.
Disclaimer: The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.