4 Tips For Day Trading

What is day trading?

Day trading consists of opening and closing a trading position over a very small amount of time. Ideally a few minutes, hours or across a trading day. In practice this also means trading which is performed over a few days too. The idea is that you make a small profit of 5-10% of what you invested, and repeat this action multiple times.

Although you can start with as little as a couple of hundred pounds, your returns will be small if you are buying and selling individual stocks. This is due to the various fees you will incur. These fees are typically a flat commission fee to be paid to the broker (typically around £10) and some form of tax, which is usually a % of the overall value of the trade.

As a result, this pushes many day traders to use leverage products such as CFDs and Spreadbetting. The benefit these offer, is lower costs compared to traditional brokers and due to the leverage, increased profits, which make it worthwhile for you time-wise. The main disadvantage is that due to the leverage, you can lose a lot of money. Potentially more than you put in.

Our 5 tips for day trading

We appreciate there are many more tips you might need, or maybe even think are more important, but these 4 are ones which we have not seen mentioned before. They will not make you rich, nor will they avoid you losses, but they will reduce your losses and increases your chance of success.

1. Trade lower risk assets

If you are day-trading, you are very likely to be using some form of leverage. Typically this is provided by your broker. As a result, you have already taken a considerable amount of risk. No need therefore to go and trade something which at the top of the risk scale, such as Crypto.

This also applies to Forex trading, which is incredibly risky, just check out what happened to the EURCHF in 2015 when the Swiss National Bank suddenly removed their peg against the Euro. This caused an immedidate 20% appreciation in the CHF, wiping out many traders and even brokers.

One over-looked area, is indices, such as the S&P500 and FTSE100. Although these are volatile, they are potentially less risky than trading a Forex pair. This is due to the potential losses involved. If a currency pair and an indiceses were to move 20% then the loss on the indices would likely be smaller than with the currency pair.

Also as a rule no-one really knows where Foreign exchange rates are going or what the price of crypto will be. Whereas with an indices you have some visibility of what the underlying government and economy is doing.

2. Stay the course

Face it, you will lose money when you start, and the likelihood is that it will be painful. Anecdotal evidence suggests that many new traders quit after only 3/4 months. This is typically after they have sustained a large loss, which has scared them off.

Therefore, be prepared to commit to 12 months and accept you will lose money at some point. Learn how to deal with a (large) loss and analyse why it happened. In due course you will learn to take less risk (which does not mean less profit) and to cut positions earlier. Remember, the first cut is often the cheapest and a risk-adjusted return is

3. Build your own risk model

This will not be obvious to those you have little trading experience, but is essentially comparable to building a business model. Your risk model should include how much capital you are prepared to risk, at what point when things go wrong, do you have to sell ('get out' - no excuses or compromises) and whether you can afford to trade a particular asset class.

You should also have a figure in mind by which you start reducing your positions as you have reached your maximum risk.

4. Check those costs

If you are using a derivatives of some sort, such as CFDs or spreadbets, there will be some cost for you to bear. These will include overnight funding costs (for providing you with leverage) but also adjustments related to the indices you are trading.

An example is in relation to dividends. If you are shortening an indices during a period when it is paying a dividend, you are liable for that dividend. That means the broker will charge you the value of the dividend. These can easily become quite large and wipe out any profit you hope to make. Therefor either be very aware of when they are or trade an indices such as the S&P500 or the Dow Jones Industrial Average which pay considerably less dividends than other markets.

Conclusion

Apart from the tips for day trading that we have provided, above all you should be ready to learn. That means being prepared to change your mind from any preconception you previously had when you started trading. You are not likely to be successful straight away.

You will start to be consistently successful after a period of time. Typically when you have faced one major loss. This will teach you discipline and learning to prioritise risk over profit.