What is day trading?

Introduction

Day trading, as the name suggests, means trading in a single day or market session. Day trading can involve any short-term market strategies, and the only requirement for a strategy to be considered day trading is that you close your positions at the end of the session. An identical term is intraday trading, as opposed to interday. In day trading, positions are monitored constantly because the trader does not leave positions open overnight; in order to do this, the target take profit levels should be small, and so day traders tend to favour strategies that involve profiting of small market movements, especially scalping. Day trading strategies can be applied to any market, and are popular with CFD traders for stock, forex, commodity, and cryptocurrencies underlying markets.

Trading sessions

Day trading takes place in a single day, or in markets with clearly defined sessions, a single session. The stock market has opening and closing hours based on the working hours of the market where each exchange is based, creating a series of overlapping trading days on worldwide markets. Forex markets, by contrast, trade 24 hours a day, 5 days a week, so in this context day trading refers to the working day of the trader, with positions closed by the time they finish trading. The most important feature of day trading is that positions are continually monitored: the trader does not go to sleep leaving positions open.

Strategies for day trading

Day trading can take advantage of any short-term trading strategies, with the only limitation that they must be realised within a single session. This rules out some longer-term strategies popular with stock traders such as buy and hold, but most technical strategies can be used with a little adaptation. Both mean reversion and trend following strategies are popular with day traders, who use charts set to an hourly timescale or shorter.

Charts

The most important thing to remember when trading technically on a specific time frame it to be consistent. The small trends that take place within a session might be completely different to those taking place over months or years, so you need to set the timescale on your chart to a relevant period. Day traders use charts where the candle or bar consists of a range from a few minutes to at most an hour. A trade lasting an entire session might conceivably need a chart with an hourly candle period, but in most cases the period will be much shorter, often around five minutes. Candlestick patterns take time to form, and so you need sufficient time in the session to confirm the pattern formation, making longer candlestick periods inappropriate. Line charts, which can be set to one minute or even tick by tick time sensitivities, are also popular with day traders, although they are not ideal for identifying some technical patterns.

Scalping

Scalping refers to a group of technical strategies that aim to profit off short-term market fluctuations, often using mean reversion strategies. Scalping is especially popular with day traders because of the short timescales involved – positions are typically held from around 30 minutes to a few hours, which is ideal for day trading. An extremely fast form of scalping known as High Frequency Trading is mostly the preserve of professional traders in funds, due to the hefty hardware requirements to execute trades at the required speeds. Whatever the timeframe, scalping strategies rely on the tendency for trends to revert towards the mean as the trend weakens, often reversing in the form of a correction. Scalpers identify failing trends and position themselves against them, taking a small profit when the trade reversers. To do this they may use candlestick patterns in combination with moving averages or sometimes the relative strength index or other oscillators.

Trend following

Trend following strategies can work when day trading stocks or other asset classes. When following trends, traders try to identify the prevailing trend – ideally early when it still has far to go – and open a position in the same direction, so a long position in an uptrend and short one in a down trend. The great advantage of trend following strategies for equity CFD traders it is simple to profit from both upwards and downwards movements. Some analysts believe trend following strategies have a slightly higher success rate than mean reversion, but this may be biased by the long-term tendency of stocks to increase in value, and so of limited relevance to day traders.

Day trading across asset classes

Day trading can be applied to any asset class, and is popular in stocks, indices, cryptocurrencies, commodities, and forex. Each market has slightly different price characteristics and it’s important to be familiar with the assets you are trading CFDs on, even if CFD traders never take ownership of the underlying, because the specifics of the market will influence how prices move. A brief outline of different asset classes and their suitability for day trading is included below.

Stocks

Day trading stocks with equity CFDs is one of the most popular markets for day trading. The equity markets are limited to specific hours, so it is simple to open and close positions within them, but traders should take care around opening and closing hours as these are often associated with increased volatility. It is also important to close all stock CFD day trading positions well before market close to avoid the risk of being forced to maintain the position overnight. This can be frustrating if you are still waiting for a trade to reach a target price.

Forex

The FX market is another classic target for CFD day traders. Currencies can be traded around the clock so the only limitation here is the preferred trading hours of the trader. Forex CFD traders need to be aware of the economic calendar, since major announcements can cause waves of volatility in the currency markets. Be careful you manage your positions around key announcements such as Fed meetings or GDP results. Forex is ideally suited to the technical, chart-heavy strategies used by both scalpers and trend following traders, and accordingly is popular with day traders.

Commodities

Commodities can also be day traded, and major precious metals tend to trade like forex, with gold and silver seeing similar price action to safe haven currencies. Smaller industrial or agricultural commodities can have much wilder price action, with big swings seen during supply constraints or times of increased demand. For this reason industrial commodities are typically traded with tighter risk management constraints and less leverage than gold or silver.

Cryptocurrencies

ADSS Crypto CFD traders can access crypto markets in a few ways. First, they can go long or short with CFDs on cryptocurrencies Bitcoin, Bitcoin Cash, Ethereum, and Litecoin. In general though, all crypto assets can be traded as part of a day trading strategy, and since they experience considerable volatility there are plenty of trading opportunities within each session.

Day trading risks

Day trading is not inherently riskier than any other type of trading, but it is very different to long-term investment, where even market participants with limited knowledge can often profit over long periods. Some assets, notably stocks, have a bias towards positive returns in the very long term: for example, there are no 20-year periods of negative returns for the overall equity market in the US. For individual stocks, this is absolutely not the case, and outside of the equity market things look very different: crude oil prices have never equalled their 2008 highs of $147 per barrel, and the EUR / USD has never returned to its 1.58 highs in the same year. This is normal for markets that have no long-term positive bias, which include basically every market apart from stocks and the US Dollar.

You might be forgiven for wondering why this is relevant to intraday trading, but the idea that day trading is inherently riskier than other trading strategies is mostly believed because of this feature of long-term stock investing. When you trade on the short-term as a day trader you will not benefit from the long-term positive bias, for the simple reason that it takes years or even decades to happen. That means your trades have to work in the short term to be profitable, since they can’t be carried along by a rising tide of economic growth, as many retirement portfolios are. To achieve success in day trading, you need a strong technical case for each trade, an understanding of the underlying fundamental factors influencing your target market, and excellent risk management practices including appropriate position sizing and stop losses.

Day trading with CFDs

Intraday trading is uniquely well-suited to CFDs, and the retail success of these products is largely due to this market. Day traders need to take positions quickly and flexibly, going long or short as their strategy demands, and can’t wait for long settlement periods or to take delivery of underlying assets. For traditional traders this is only possible in the most liquid markets, but CFD traders are able to go long or short on any market available with their broker, maximising flexibility. Even if they don’t take ownership of the underlying asset, CFD traders need to have a good understanding of the price drivers of the market in order to trade effectively, as well as competent risk management procedures in place.

Conclusion

Day trading is a broad topic and touches on every asset class available. Day trading strategies can work on either mean reversion or trend following principles, with the only requirement that positions are closed at the end of the day. This is the preferred activity of CFD traders, and comes with many advantages, including avoiding overnight fees, volatility spikes around the open and close of markets, and the risk of major market volatility when you are asleep. To day trade effectively, you need to be knowledgeable about the market you are dealing in as well as skilled in interpreting charts, which should always be used on the appropriate time frame. Intraday trading is a skill traders learn by doing, but it is wise to practice strategies in a demo account before running them live. Because as with all trading, the wrong strategy means puts your capital at risk.

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