Day Trading is the practice of trading the financial markets within the same trading day. All positions are, therefore, closed on the same day on which they are opened. You can day trade on a range of markets, from Forex and Stock Markets to the prices of Gold and other Commodities. You can also speculate in a variety of ways, including share trading, contracts for difference (CFDs) and financial spread trading.
Day trading can be a financial lucrative activity, however it is crucial that investors are aware of the hazards. With a typical account where you can trade stocks and shares, the value of your investments can go down as well as up. Therefore you may not get back all the funds that you invest.
CFDs, margined forex trading and financial spread trading are leveraged products and carry a high level of risk to your capital. With these products it is possible to lose more than your initial investment. These products may not be suitable for all investors, therefore ensure you understand the risks involved and seek independent advice if necessary.
Day Trading Tips
Many day traders and investors have a personal set of rules and guidelines they follow in order to maximise their trading profits. Below are a few of the common themes employed in the day trading markets.
Develop a Day Trading Strategy
A trading plan forms an integral part to many day traders' strategies. These plans will often include establishing what market on which you wish to day trade, setting up achievable goals and determining exactly how much money you can afford to lose.
Day Trade the Markets You Understand
Understanding what affects a market is an important part of day trading.
For example, should China tighten their monetary policy, the price of copper may fall as China is a large importer of the commodity. This might not only affect the price of the metal, but may also affect the price of mining companies.
Similarly, as coffee is priced in dollars, any strength/weakness in the US currency could have a knock on affect on the price of the commodity. A comprehensive grasp of the market and what will affect it forms an important part of any day trader's plan.
It is important, therefore, that you only day trade the markets you know.
Try a Demo Account
Many firms offer the opportunity to speculate on the markets using a demo account. This can give a trader who is new to investing in the financial markets the opportunity to speculate in a safe, risk free environment.
For example, if you're interested in trading CFDs, IG Markets offer a demo account which allows you to trade CFDs with virtual funds. Financial Spreads offers a similar platform for anyone who is interested in spread trading.
Don't Day Trade Too Many Markets
Be realistic when you are day trading. It's difficult, even for the most experienced of day traders, to keep tabs on too many markets. If you decided to trade 20+ markets, you probably won't have time to research the factors affecting your trades, and you won't be able to keep up to date with events (such as those mentioned above) that will affect your trades.
Try trading one or two markets at first, then perhaps move up to five once you feel you understand what it takes to keep up to date which the financial markets. Eventually you will get a feel for how many markets you can comfortably trade. Until then, limit it to just a few.
Know Your Limits/Use a Stop Loss
Certain areas of day trading, such as financial spread trading and CFDs, allow the use of stop losses.
Setting up a stop loss is an important aspect of risk management. A stop loss is an automatic request that closes your trade should the market move against you. It should be noted, however, that whilst regular stop losses are not guaranteed, they can still help limit downsides. Note that, if the market 'gaps', ie jumps between two prices, your stop loss is filled at the next traded price.
A guaranteed stop loss works in a similar manner to a regular stop loss, however should the market gap, your trade will be closed at your guaranteed stop loss level, rather than the next traded price.
Don't Let Emotions Control Your Day Trading Decisions
Investing money can be a very personal experience, and it is easy to trade with your heart rather than your head. However, this can play havoc with your day trading capital.
You may, for example, be tempted to move your guaranteed stop loss order if the market your are day trading in moves against you, as you feel that it will probably start to move in your favour. Lady luck will smile at you eventually, right? Wrong. There will be a reason you placed a stop order where you did. Don't try to chase your losses, limit them. Don't let your heart rule your day trading decisions.
CFDs, FX and Spread Trading are leveraged products and carry a high level of risk to your capital. It is possible to lose more than your initial investment. These products may not be suitable for all investors, therefore ensure you understand the risks involved and seek independent advice if necessary.