What is day trading?

Day trading

, also referred to as intraday trading, refers to a trading strategy that involves buying and selling of a financial instrument within the same trading day. Put differently, intraday trading is a trading strategy that involves the opening and closing of a trading position within a trading day or even multiple times during a specific day. A trade opened on one day and closed on the following day, is not considered a day trade. Typically, day trading is a speculative trading method used by day traders, intending to profit from small, intraday price fluctuations in order to accumulate a large profit over time. Day traders focus on the short-term price action of a security instead of its long-term potential.

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7 Best Tips For Day Trader Beginners in South Africa

1. ? Knowledge is power 2. ? Have enough funds available 3. ? Time available 4. Reliable hardware and software 5. Reliable and fast internet connection 6. Broker 7. Practice with a demo account

Day trading markets

There are numerous financial markets that provide day trade opportunities. Each market has its own dynamics and it will take time to learn and comprehend the ins and outs of each of them. Therefore, it is preferable, at least when you are a novice trader, to become acquainted with and start trading in one market. Eventually, your choice depends on what you are comfortable with, but also what you can afford. Nowadays, the most popular day trading markets are:

The foreign exchange market (forex) is the world’s most liquid financial market and requires the least capital to start trading.
Futures markets require more money than the forex market to open a trade position, but less than the stock market. Futures contracts involves the buying or selling of an underlying asset, such as a commodity or an index of stocks.
Stock markets are more capital-intensive. The deposit needed to start day trading will depend on your broker’s requirements.
Commodities markets where commodities like, among others, oil, precious metals, and industrial metals are traded.

Day traders would not be required to actually deliver the assets they traded or pay a cash settlement when futures contracts expire.

Day trading versus other types of trading

Swing trading

Swing trading

is a type of trading that is used by traders, attempting to gain profits on price movements of financial instruments over a short- to medium period of time. A day trader will close all trading positions at the end of a trading day, while a swing trader may hold his or her positions for a few days or even a number of weeks before selling. There are more opportunities to generate profits in swing trading than in day trading.

Traditional investing

Traditional investing

, also referred to as the buy-and-hold strategy, is widely acknowledged as one of the best trading strategies for building long-term wealth. Typically, a long-term investor will buy a security and hold it for years, regardless of what happens to the particular market.

Some requirements to become a day trader - Hopefully, a successful one

The improvement of trading technology has provided more day trading opportunities in recent years. Therefore, this article focuses on individuals, who are interested in day trading and intend to become day traders, assisting them to make well-informed choices. Day trading is a trading strategy that entails risks, as is the case with any form of trading. Hence, it is important to consider the following requirements prior to get going as a day trader. They may help you to answer the question: Am I ready for this?

Knowledge is power

Invest in yourself

from the beginning by using a range of sources to expand your knowledge of the subject. You can utilize sources such as the news media (printed, broadcast, online platforms), books, video tutorials, blogs, and forums. Also, do not be afraid to learn from your own mistakes. Sufficient market knowledge is a prerequisite for successful day trading. Successful traders never get self-satisfied and never cease to gain new knowledge in order to understand the markets. Although, as a novice trader you do not have to learn everything about day trading at once. For a start, gain as much knowledge as required to find one trading strategy, enabling you to open positions, setting stop losses, and taking profits.

Have enough funds available

Assess how much money you are willing to trade with and how much you are prepared to risk on each trade. Keep in mind that different types of financial markets require different minimum levels to start a trade. A general guide is that many successful day traders risk less than 1% to 2% of their trading account per transaction.

Time available

Day trading requires time to trade. The key question is how much time? There is a difference of opinion in this regard. On the one hand, there is the opinion that a day trader is required to spend most of his or her day on day trading. On the contrary, there is a viewpoint that you do not need to trade all day and that a day trader will probably find more consistency by only trading two to three hours a day. However, you need to be watchful and stay ahead of the market. In the final analysis, it depends on how much time you have available and how many trades you want to execute during a trading day.

Reliable hardware and software

A reliable computer or laptop with enough memory and a fast processor is essential to enable you to make the best use of the trading platform offered to you by your broker. In addition, you should have a cell phone with sufficient data as a backup in case you should lose your internet connection. There are numerous trading platforms available for day trading. Your broker will certainly offer you one to try out. If not satisfied, test some others, and pick the one that suits your trading style best. Bear in mind you may change your trading platform more than once within your day trading career. It is a definite requirement that the platform includes charting software.

Reliable and fast internet connection

Ensure that your internet connection is fast enough to allow your trading platform to update as quickly as possible and to prevent internet interruptions as far as possible.

Broker

A broker facilitates your trades and provides you with market date in exchange for a commission or fee. Choose a broker who is transparent and trustworthy, who charges reasonable fees, and who will be able and willing to support you when you experience trading issues.

Practise with a demo account

A demo account, usually offered by a broker on a trading platform, is a type account that enables a trader to practise his or her trading strategy with simulated money. Practise a strategy until you are comfortable with it. A demo account allows you to trade at any time of the day, even when the particular market is closed. Preferably, practise at least three months, or even more, before starting to trade with your own funds.

Tips for beginners

After you have put the requirements above into practice and are convinced that you are ready to start day trading with your own capital, the following tips could help you further on your way. Basically, a day trader’s task is to find a repeating price pattern and then make the most of it in order to generate a profit on the specific trade.

Suitable market

Decide which market you are interested in and can afford to trade.

Trading strategy

It is important to have a trading strategy that you are comfortable with when you start trading. One of the biggest mistakes a beginner can make is not to have a clear trading strategy. Stick to one that makes money before attempting to learn and master others. It is crucial to apply your strategy rather than try to chase profits. Do not let your emotions rule, letting you ditch your strategy. Keep in mind the maxim among day traders: ‘Plan your trade and trade your plan.’ As a novice, you have two choices. You can develop your own strategy, or you can make use of one that is already being actively utilized by other experienced traders. It is preferable that any new strategies be tested in a risk-free environment, such as a demo account. Some basic day trading strategies are:

Trend trading implies buying when prices of securities are rising or short selling when they decrease. Trend trading is executed on the assumption that rising or decreasing prices will continue to so.
Scalping refers to a trading style where a trader exploits small price changes to generate profits. This strategy is executed by entering and exiting a position quickly, within minutes or even seconds.
Trading the news is when a trader will buy with the announcement of positive news or sell when there is bad news. This can cause greater volatility, creating opportunities with higher profits or losses.
Contrarian investing is a trading strategy in which some traders intentionally go against current market trends, buying financial instruments when others are selling, and selling when most others are buying.

Risk management

You have to be aware of your level of risk aversion and trade accordingly. Volatility is crucial for day trading. Day traders rely largely on price fluctuations in the markets to earn their profits. However, volatility entails the risk to lose money. Losing money is part and parcel of the learning process, accept it. That said, to limit your losses is extremely important. You need to control risk. Ways to control risk, are, among others:

Never risk more than 1% of your trading account balance on a single trade, which is a proven guideline in day trading.
Using stop-loss orders is an effective way to limit losses on a position in a security. For short positions, a stop-loss can be placed above a current high, or for long positions, below a recent low.

Start small

For example, when trading with stocks, focus on one or two stocks during a session. This strategy will enable you to easily track and discover opportunities.

Choice of trading account

Part of your day trading strategy will include the choice of a trading account. Typically, there are two options:

Cash account (also referred to as ‘without margin’)

This type of account allows you to trade with the capital available in your trading account. This will limit your trading potential and eventually your potential profits. Conversely, it prevents you from suffering losses you cannot afford.

Margin account

Is a type of account that allows you to borrow money from your broker to trade. It is a practice also referred to as ‘trading on margin’. A margin account enables you to boost your potential profits, but also entails the risk of greater losses. Most brokers will require a minimum investment before you can open a margin account. And do not forget the dreaded margin call, where your broker will require a greater deposit to keep your positions open and to cover potential losses.

Timing

The level of volatility can change considerably during a trading day. It is essential to be acquainted with the characteristics of the time and sessions during which you trade and to strategize accordingly. Typically, the first 15 minutes of a trading day is quite hectic. Many orders placed by investors and traders the night before beginning to execute the moment the markets open in the morning, contributing to panic trades and price volatility. Therefore, it may be wise for a novice trader to avoid the first 15 to 20 minutes of a trading day. The middle hours are usually less volatile, with an increase in volatility toward the closing of the market for the day. The rush hours, when there are considerable price movements over a short period of time, offer many opportunities. However, it is safer for beginners to avoid them at first.

Keep calm and carry on trading

Day trading is not for the faint-hearted. There are times when a market, like a stock market, test your nerves. Keep fear and anxiety aside. Let logic and your trading strategy control your decisions and not emotion.

Utilize day trading charts and patterns

To determine favourable moments to buy or sell a specific asset, make use of, among others, the following trading techniques:

Volume - decreasing or increasing.
Technical analysis, comprising, inter alia, trend lines, support levels, resistance levels, and moving averages.
Patterns, for example, candlestick patterns, triangles, and wedges.

Note: This article does not intend to provide investment or trading advice. Its aim is solely informative.

Frequently Asked Questions

Do day traders make money? Some of them do. What is day trading? See our article Day Trading Explained for Dummies. Is becoming a day trader worth it? Keep in mind that less than 1% of day traders are consistently profitable. Who is the richest day trader? Paul Tudor Jones with net worth of $5.1 Billion (2020). Can you start day trading with $500? It will provide greater trading flexibility and more daily income than starting with $100.