Day Trading What you need to know

The financial markets are largely unpredictable and volatile; making it difficult for traders to succeed. This has necessitated the need for every investor or trader to device a means or strategy to approach the markets in an attempt to preserve and grow their trading capital. Day trading is a common strategy employed by numerous investors who trade the financial markets. It is widely used in various markets including forex, CFD, and stock markets.

1. What is day trading?
2. Common day trading strategies
3. Advantages of Day trading
4. Risks of Day Trading
5. Tips that may help
6. Summary
7. FAQs 

Day trading is a strategy where the trader opens and closes trade positions before the market close on the same day. Unlike swing trading; where traders hold positions for days, day traders aim to capitalize on the small price changes within the day. Normally, day traders trade multiple times within the day in order to accumulate little profits.

Day trading focuses on short term strategies that can be used to generate trading signals throughout the day. Most of the strategies are based on technical analysis; which analyzes the price charts of tradable assets believing that patterns repeat itself with time.

Below are some of the popular trading strategies used by day traders:
 

1. News trading

In recent times, news dissemination takes only a few seconds courtesy of mobile app notifications, mass media, internet and social media. Traders’ psychology, rumours and statements have been proved to impact the financial markets. For example in February 2018, twitter user ‘Kylie Jenner’ tweeted how she doesn’t open Snapchat anymore. The market reacted immediately and Snapchat’s parent company shares were down by 6.1%. According to Bloomberg, that single tweet wiped out $1.3 billion of the company’s market value.

When negative news breaks, day traders rush to sell creating more supply than demand which reduces price. When positive news breaks, the reverse is the case. If the trader predicts the markets correctly, he or she can make quick profits but if the market reaction is the opposite, he suffers a loss. Sometimes, the timing poses a problem to the trader because the market reaction might be faster or much slower than predicted.

2. Trend following

A market trend refers to the price movement of a financial market asset over time. The trend can be upwards, downwards or sideways. The trend following strategy is based on technical analysis methods where the day trader identifies trends from the charts and places his or her trades accordingly. Usually they draw trend lines on charts and also make use of analysis tools provided on the trading platform.

Technical indicators like Moving averages, Bollinger bands, etc also assist traders in identifying and confirming trends. Most day traders focus on timeframes from 30 minutes and below. Trend following has the potential to be profitable because the traders are able to catch the trends from the beginning and can also cut losses early when the market reverses. But, a detailed knowledge of technical analysis is needed in addition to strict discipline. Also, be wary of false breakouts. 

The primary aim of every trader is to grow his trading capital, gain experience and optimize his trading time. There are various reasons why a forex or CFD trader will choose intraday trading.

Below are some of its advantages:

1. Convenient start-up requirements

Many newbies are fast to embrace a day trading strategy because it is fairly straightforward to open and close trades within a day. Forex and CFD traders usually trade on leverage which enables them to open large trade positions with much fewer funds but due to leverage, risk also increases. Beginner traders exploit this feature in combination with intraday trading strategies to possibly grow their funds and gain experience. Unfortunately, most times they end up blowing their accounts and losing their initial deposits.

2. Swap charges and gapping are not applicable

In forex trading, swap or rollover fees are charged from trader accounts that maintain an open position overnight. Gapping is when a financial instrument’s price opens above or below the price at which it closed on the previous day. Day traders completely avoid losses imposed by both gapping and rollover.

3. Flexible timing

One of the advantages of forex and CFD day trading is that it can be done at the trader’s convenience. Some forex scalpers only trade at night while others choose to trade when they have the time. Several traders rely on trading signals, forex indicators and other trading tools. These traders trade only when their trading tools generate signals which are usually at random.

4. Free resources

Internet has remained one of the greatest blessings of our generation. Numerous training resources abound on the internet to assist traders that trade most financial markets. There are several resources that can help a trader with trading signals, training videos, software tools and other resources that can be of importance to the day trader. Market news, technical analysis, daily analysis and a wide variety of trading aids are available on the internet to assist day traders.

The major risk confronting financial market traders is the risk of loss of funds. In CFD trading, most financial market providers assert that a greater percentage of retail traders lose their trading capitals while trading the financial markets. Day trading is no exception as the traders face the same risk in different forms.

Below are some risks confronting day traders:

1. Market risk

This is the risk inherent in the financial markets. If you look at the market charts, the prices of the trading instruments continuously go up and down. Sometimes, the price soars and other times it plummets. When traders take a position, they can only hope that there is no abrupt price reversal. But, irrespective of the trading strategies deployed, there are no guarantees.

2. Leverage

Forex and CFDs are traded on leverage where financial service providers allow traders to open positions worth more than their deposited capital. This is designed to help a trader to open more positions and possible make more profits. But, leverage also comes with the risk of magnifying losses when the trade reverses against the trader. Tyro traders are often excited about leverage but they end up increasing the risk and ultimately lose their trading capital.

3. Highly demanding

In order to identify a trading opportunity, several day traders scan the charts and end up sitting in front of the computer all day. This can be exhausting and time-consuming. Unless the trader uses some trading tools or signal generators, manual day trading can be highly demanding. 

We have already established the fact that day traders aim to capture the intraday price movements of the financial assets by opening positions and closing them before the end of the trading day. Though very risky, with some expert tips and best practices, it is possible to make the best out of the strategy. 

Below are some tips that can help day traders:

1. Education

The major reason why many traders fail, especially in forex and CFD trading, is because of lack of comprehensive education. A beginner trader should first invest his time in learning how the markets work, understand the basic trading terms and analysis methods. He will then practice how to trade with a demo account, familiarize with the trading platform and test out strategies. Training resources are abundant on the internet and adequate training is fundamental to the making of a skilful trader.

Do not jump into trades without proper planning and a defined strategy. A trading plan is a comprehensive technique which a trader uses to approach the markets. It defines what a trader is supposed to do, how to do it and when to do it. Each trader develops his own trading plan based on his trading goals, strategies, assets of interest, market analysis and money management style.

3. Money management

No matter how skilful a trader is, no one can avoid losing trades. There is no foolproof trading strategy and so, every trader must devise a plan to preserve his capital when the trade goes against him. It pays to always attach ‘stop loss’ and ‘take profit’ prices to every trade.

4. Trading Psychology

Emotional traders always lose out especially in forex and CFD trading. Since day traders normally open several positions a day, it is very important to check your emotions when trading. For example, assuming you have lost the first two trades today, do not rush into the next trade desperate for a win. Do not close a losing trade earlier than you should. Always stick to your trading strategies and be a disciplined trader.

Day trading is the strategy of opening and closing trade positions all within one day. Many traders have resorted to this strategy because it is convenient, rewarding and does not incur swap charges or gapping losses. But, the traders are exposed to market risks and leverage risk. However, with comprehensive trading knowledge, trading plan, good money management and the right discipline, day traders can mitigate risks and increase their chances of becoming more skilful.

R1investing is a reliable financial services provider that gives its clients access to trade multiple financial assets on the MT4 trading platform. The brand is operated by ‘R1Investing’ which is authorized and best by the Cyprus Securities and Exchange Commission (CySEC). Below are some advantages of trading with R1Investing :

• Over 300 assets are available for trading.
• Very fast trade executions within split of seconds.
• High leverage up to 1:500 for professional traders
• Training resources are available in form of video lessons, eBooks and articles.
• MT4 platform available on mobile, web and desktop. 

Making money through day trading is relative because most of the traders end up losing money. However, it is possible for day traders to make money but it takes a knowledgeable, skillful and disciplined trader who also has a huge trading capital.

Of course, the minimum amount required to commence trading depends on the financial service provider. Some providers require much more while some require much less than $500 to open a trading account. R1investing requires a minimum deposit of $250 to open a live trading account. With leverage, a trader can open trade positions much more than his account balance.

First, no matter how good or skillful you become, you are still taking a big risk and are still bound to open losing positions. But there are a few rules than can help you become a better trader. Below are some of them:

• Never trade without an elaborate trading plan
• Regard your trading activities as a business
• Always strive to protect your capital using money management strategies.
• Invest in knowledge, study the markets properly and never stop learning.
• Never trade with money that you cannot afford to lose.
• Be a disciplined trader and know when to opt out of a trade. 

Yes, already there are professional day traders who trade forex and CFDs. But, making a living out of it requires extra effort, discipline, knowledge, exceptional skills and a robust trading plan. It is a very risky business and past success does not in any way guarantee future success. 

Generally, almost all financial service providers affirm that a greater number of retail traders end up losing their trading capitals. Failure is quite common in the financial markets and day traders are no exception. Many traders rely on trading systems and signal generators without conducting further research.

Below are some of the reasons why most day traders fail:

• Inadequate knowledge and practice.
• Lack of a comprehensive trading plan.
• Impatience, indiscipline and greed.
• Too much reliance on trading tools, robots and signals. 

The information above is for education purposes only and cannot be considered as investment advice and past performance is not a reliable indicator of future results