How to Start Day Trading

Lisa MacColl is a writer, investor and former compliance consultant in the group retirement and individual wealth management fields. Lisa has written about personal finance for 14 years and currently writes about investing and investment providers for Wealthsimple. Lisa's past work has been published in Canadian Money Saver, Advisor’s Edge, CBC, and CreditCards.ca. She was a nominee for the 2015 Oktoberfest Women of the Year, Professional Category. Lisa holds an M.A. and B.A. from the Wilfrid Laurier University.

Luisa Rollenhagen

Luisa Rollenhagen is a journalist and investor who writes about financial planning for Wealthsimple. She is a past winner of the David James Burrell Prize for journalistic achievement and her work has been published in GQ Magazine and BuzzFeed. Luisa earned her M.A. in Journalism at New York University and is now based in Berlin, Germany.

Day trading can be lucrative, but it can also go all shades of wrong. Like any stock picking, it's risky. The kind of risky where you should only be doing it with money you're prepared to lose. Still curious to learn more about day trading? We've got you covered.

What is day trading?

In simple terms, day trading involves buying and selling stocks on within a trading day based on price fluctuations. It's “buy low, sell high” on energy drinks with a deadline. Day traders focus on liquid investments that fluctuate quickly. Buys are made in volume, and then sold as the price hopefully increases through the day. Day trading is about timing the market, and that requires experience, knowledge, a lot of luck and the understanding that it still may not work out. Day traders need nerves of steel. Day trading is a high-risk strategy and one that's not suited to most investors. While your investments could increase in value, they could also drop significantly. Many day traders have lost everything because they misread the market. Still not turned off? Alright then...

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How to start day trading

If you want to start day trading, you’ll probably need to do some research and planning. Here is some information to help you get into the day trading game.

1. Learn the market

Before you invest one dollar in day trading, make sure you understand what you are (literally) signing up for. It’s not enough to have a general understanding of the stock market; you need to understand how world events can affect volatility, how trades work, how different industries respond and how to anticipate fluctuations. Many day traders specialize in a specific industry.

2. Develop a strategy

There are many different day trading strategies, and there are courses and online references that can help you understand the process, methodology and risk/return. Start by studying actual trades and strategies. You might find a contrarian strategy or maybe trend following. Just know that all trading styles are based on speculation. You can find many free resources online that allow you to watch live trades, study stock charts and trends, and read financial analysis. How would you handle the trade? When would you sell, how much are you willing to risk, how would you make out if you employed your trading strategy?

3. Set up a demo account

Before you start risking real money, set up a demo account to learn the ropes. You can buy and sell in real time, but in a safe space as you learn more about reading the market, the trends and fluctuations, how much to risk and at what point. Practice, practice, practice. You can develop, hone and perfect your strategy in a demo environment that won’t cost you your house if you get it wrong. Keep testing your strategy until you are confident.

4. Set goals and know your limits

It takes time to learn day trading. Especially when you start trading with real capital. You need to trade while markets are open, which is during normal business hours. Missing a sell because you didn’t execute the transaction before the exchange closed could be a costly lesson if the stock/future/currency fluctuates over night. Most companies will not understand that you need to leave a meeting to execute a trade. Don’t give up your day job until your profits exceed your take home pay consistently. Commission-free trading is way to buy and sell stocks and ETFs and pay $0 commission fees per trade. It could save you tons of money as you hone your skills.

Especially at the beginning, you need to set a realistic limit on the money you are willing to spend on day trading. If it’s money you cannot afford to lose, then day trading may not be for you. No strategy or investment methodology will protect you from a stock market implosion due to an unforeseen event. Just like gambling, the lure of the win can be intoxicating, but it can also be a siren song to bankruptcy and foreclosure. Many’s the person who tried to trade their way out of a hole, only to panic, stop reading the market (or find they were unable to) and find themselves in a much bigger hole.

5. Find out the tax implications

Talk to your financial advisor, accountant or a tax specialist to find out how day trading profits are treated at tax time, so you do not have a nasty tax bill that eats up all your gains. In many countries, the tax treatment may depend on whether you are seen as an “investor” or a “trader” who does this for a living. There may be rules around the length of time between trades, how capital gains and losses are treated and what qualifies you to be a professional day trader. You should consult a tax professional who can assist you in determining where your activities fit, and what rates apply.

6. Choose a broker

Any day trading activity is conducted through an investment platform, so this is one of the most important steps you can take before starting to day trade. Not only will this broker be in charge of your account, but you will be executing your trades through their trading platform, and when timing matters, it needs to be reliable. Reputation and expertise matter, so take the time to find the right fit for you and your goals.

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How to choose a broker for day trading

One of the most important decisions you will have to make before you start day trading is choosing the broker who will handle your account. Here are some things to keep in mind:

Decide what you will be trading

Different brokers have different areas of expertise and a FOREX broker may do stock trading, or vice versa. Find a broker who deals in the area you want to specialize in.

Get recommendations

Talk to other day traders to see what stock trading platforms they recommend. Like any industry, reputation matters, but never more so than when it’s your money on the line. Check online reviews, discussion boards and social media content, ask your colleague for recommendations, and take the time to examine their website.

Ask for references or read reviews

Check the credentials of the trading platform with their regulatory agency to see if they have had any actions or complaints against them. How long have they been in business, how many employees do they have, and how long have they been handling day trading accounts? The last thing you need as a new day trader is a broker who doesn't abide by the rules.

Check fees and commissions

Nothing can eat away a profit faster than commissions and admin fees. Large volume trades could have thousands of dollars in commission fees. There are some stock trading platforms that offer commission-free trading which reduces the costs of trading significantly.

Investigate the technology

Day trading relies on quick actions and reactions. Is your broker’s trading platform up to the challenge? What trading platform do they use and what kinds of accounts do they deal with? Since day trading relies on timing the market, does the broker offer a real-time data-feed so you can track your activity easily? How quickly do they respond to trade requests? How many day trading accounts do they have, what kind of volume of trade do they typically handle and what kinds of safeguards and cyber-security measures do they have in place?

Find out if they offer Customer service

What kinds of tools and analysis do they provide to their clients? Are they strictly a clearing house for your activities or are they going to provide support to help you make the most of your trading activity? What is the process and what is their complaint resolution practice? What happens if their system crashes mid-trade and it costs you a fortune? If there is a keying error, what does the contract say about liability? People never read that section of a contract until it’s too late. (make sure you read the whole contract and ask questions to ensure you understand what you are signing.)

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Day trading strategies

Before we dive into the most commonly used day trading strategies remember—they are highly speculative. When you buy, you’re betting the stock will go up. There’s a seller on the other end of that transaction betting the stock price will fall. Nobody truly knows if the value of a stock will go up or down. As you may have guessed only one person in this buy/sell scenario will be right and there are many people that lose out when engaging in day trading strategies. That said, here are some of the most commonly used ones that day traders are reported to use.

Trend following: This might be the most straightforward of all the trading strategies. Basically, the aim is to buy an asset when its price trend goes up, and sell when its trend goes down, expecting price movements to continue.

Range Trading: With this strategy, traders work within a particular range by looking at the price and volume charts of a stock to identify typical highs and lows during the day. With this information, the trader simply buys low and sells high.

Contrarian investing: Do you like to go against popular opinion? Then contrarian investing might be for you. Basically, you buy and sell stock contrary in contrast to the prevailing attitude at the time. This strategy rests on the belief that crowd behavior can lead to overestimating or mispricing assets, and that going against popular opinion will result in better prices.

Scalping: This strategy relies on profiting off small price changes, generally after a trade is executed and becomes profitable. The attitude here is to make as many small profits as possible.

News Trading: News trading may be the most traditional of trading strategies. Instead of looking at a stock’s price as it rises and falls throughout the day, a trader will look at the news in hopes of finding information that will affect a stock’s price. This can be a company announcement about earnings or new products, a general economic news item about interest rates or unemployment, or just plain old industry rumours.

Price Action: Price action is a trading technique that focuses more on a stock’s recent and past price movements, upon which the trader then makes a selling or buying decision. This strategy relies a lot on technical analysis tools to discern pricing patterns.

Chart Patterns: Chart patterns refer to price formations represented in a graphical way. A trader uses these charts in order to analyze the market and make specific buying or selling choices.

Technical analysis: By using technical analysis to recognize trends in the market, a trader can use that information to make decisions on when to buy and sell. The premise of this strategy is that prices move in trends, and that those trends repeat themselves over time. By using existing information of price trends throughout the trading day, a technical analysis strategy attempts to predict future price movements.

Types of orders for day trading

When you want to buy or sell a stock, you execute an order. This is easily done online on your online brokerage account, but before you can go ahead you’ll need to choose what kind of order you want to execute. Here are the different options:

Market order: This is the most common and fastest type of order, which involves you usually going through a brokerage to buy or sell a security at the best available price in the current market.

Limit order: A limit order is an order to buy or sell a stock at a specific price or better. A buy limit order can only be executed at the limit price or lower, and a sell limit order can only be executed at the limit price or higher. If the price isn’t reached, then your trade might not be executed.

Stop order: A stop order, also referred to as a stop-loss order, is an order to buy or sell a stock once the price of the stock reaches a specified price, known as the stop price. When the stop price is reached, a stop order becomes a market order.

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How much money do you need to start day trading?

Day trading requires capital, and many day traders borrow funds to make the purchases, a practice known as “leveraging” or trading “on margin.” They make a series of trades to maximize their return, counting on selling at a profit that will cover the cost of the loan and still make a profit. If they misjudge the movement of the market, they could lose their profit and be on the hook for the loan. Professional day traders work with risk capital, investing only what they can afford to lose (often no more than 1% of their account balance.) Rookie day traders often learn this lesson the hard way, and some have lost everything trying to time a market they didn’t understand.

Day traders also need access to ready capital to react quickly to the changes in the market throughout the trading day. Different types of trading require different minimums.

If you are interested in trading in foreign currencies (FOREX), there is no legal minimum for a FOREX account. However, currency is traded in lots, and the minimum trading lot is 1000 units of whatever foreign currency lot you are interested in. You need enough in your account to purchase the minimum, without wiping out your account in the process. Like stocks, currencies can fluctuate wildly and are sensitive to world events. A knowledge of world politics and international trade is helpful if you want to get into FOREX trading.

If you want to be a day trader in stocks, you need a minimum of $25,000 in the U.S. If you day trade in Canada, there is no prescribed minimum, but your broker may require you to adhere to the $25K rule if you are buying securities that settle in the U.S.

If you want to day trade futures contracts, most brokers require a minimum account balance of $1000, but $8000-$10,000 is recommended by many providers. Most day traders won’t risk more than 1% of the value of their account on any one trade, and $1000 will not give you enough capital to make the trade worth your while.

The risks of day trading

You always need to keep in mind that high risk strategy and you could lose some of the money you put in, or even all of it. Because day trading requires a keen understanding of the market and benefits those with experience, it’s also generated many scams that promise enormous returns in a short period of time, and end up wiping your savings out instead. Day trading is not for everyone, and you should do a lot of research and make sure you understand what you’re doing before getting involved.

Alternatives to day trading

So maybe at the end of the day, there’s too much risk involved in day trading. There are other activities that you can do that can increase your profits without risking your house! Did you know, for example, that robo-advisors create a personalized investment portfolio for you so that you hardly have to lift a finger. One of the less risky strategies that still allows you to invest in the stock market is to buy stocks and hold them for a longer period of time. As you learn more about how the stock market rises and falls, you will gain knowledge that could help you day trade down the road. In the meantime, you could be increasing the value of your assets. You can also follow the market passively by investing in index mutual funds or Exchange Traded Funds with an automated investment platform. They generally seek to match the performance and return of a particular stock market index. You set it and forget it, and the algorithms do the rest, rebalancing your portfolio to stay within your investment direction and level of risk comfort you have.

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Frequently asked questions about day trading

What is a pattern day trader?

A pattern day trader is someone who basically makes day trading their full-time business. It’s an official designation for traders who execute four or more day trades during five business days’ time using the same account. Pattern day traders are automatically subjected to more regulations and oversight.

What’s the difference between active trading and day trading?

Active trading is a general term that refers to buying and selling securities for quick profit based on short-term movements in price. A day trader is a kind of active trader who trades frequently, executing dozens of trades in one day. While a day trader works during the trading day, there is no precise time measurement for general active trading.

How does swing trading differ to day trading?

While day traders make dozens of trades in one day, swing traders can take a couple of days or weeks while they attempt to identify price swings in stocks over a period of days. It’s less fast-paced than the frenzied day trading process.

What is margin trading?

Margin trading is a process in which stocks are bought with borrowed funds (so-called margins). By having more funds available, traders can maximise their leverage. In most cases, these borrowed funds are provided by a brokerage.

What is a margin call?

A margin call is the process in which a margin trade executed by an investor falls below the broker’s required amount. The broker will then require the investor to deposit additional money or sell securities in the account to bring it back up to a minimum value. Basically, it’s the broker calling to collect their debt.

What is a margin requirement in day trading?

The margin requirement is the minimum amount that an investor has to pay for with their own funds before they can borrow funds to purchase more. Depending on the market, this can be 50% to 60% of the purchase price.

Can you day trade penny stocks?

Yes, investors can day trade penny stocks, but it’s very risky. Penny stocks are very volatile and could produce quick profits, but also very quick losses.

What are the opening hours of the stock exchange?

The U.S. & Canadian stock markets including the New York Stock Exchange (NYSE), the Nasdaq Stock Market (Nasdaq) and the Toronto Stock Exchange (TSX) are normally open from 9:30 a.m. to 4 p.m on weekdays. They are closed at weekends and for some public holidays.

Last Updated June 12, 2020

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