Day trading is a popular technique, and can be a useful way of earning profits over a short space of time. But what exactly is day trading, and how can you use it safely and responsibly? Read on to get the basics, in the first of a two-part series from Learn 2 Earn.
What is day trading?
Simply put, day trading is the act of buying and selling financial instruments within a single day- this typically means that all positions are closed before the market closes. These financial instruments include shares, indices, forex and cryptocurrencies, and day traders often buy and sell multiple assets throughout the day, multiple times a day. The forex and stock markets are popular choices for day trading, owing to the high liquidity of the forex market and the wide variety of shares to trade on the stock market. Cryptocurrencies are also gaining in popularity as an option, due to the low barriers to entry and increased retail access to crypto markets.
While day trading is a technique with a lot of potential, there are some things you will need to know before you start. Day trading is legal in the UK, but it is also important that you use a trusted and regulated provider. If your broker is regulated by an authority in the US, you will be required by the pattern day trader rule to have at least $25,000 in your margin trading accounts on any given day. Brokers regulated by authorities outside the US are not subject to this rule. The way you trade will have an impact on how it is taxed- HMRC classifies day trading as either speculative (and free of income, business and capital gains tax), self-employed (and subject to business tax) or under a private investor (and subject to capital gains tax). Day trading is typically associated with markets that have fixed daily closes, but it is also possible to trade on markets that are open for 24 hours, such as cryptocurrency.
Types of day trading
There are a number of different ways to day trade, with different approaches to analysing financial data and strategies behind making trades. These include:
Trend trading, appropriately enough, is the practice of observing movements of asset prices in the market and buying or selling depending on the market trends. The general process is “buy assets when markets are trending upwards, sell when they’re trending downwards,” but other modes of analysis and methods of buying and selling exist, and some may be better catered to your trading sensibilities. Some traders even trade against the trends, to try and profit from the reversal of market trends.
Where trend trading focuses on observing long-term market trends, swing trading is more concerned with short-term fluctuations in price, attempting to spot small reversals in a market’s price movement ahead of time and capitalising on them to make profits.
This strategy is another one focused on short-term fluctuations in price, with a focus on exploiting small price gaps and taking multiple small but frequent profits over the course of the day’s trading. Mean reversion This strategy focuses on the historical means of any given asset in a market, and observes any significant deviations from the historical means, predicting and taking advantage of returns to the global average. How can you benefit from day trading? In the right hands, day trading has the potential to be a highly lucrative method of trade, taking advantage of multiple small fluctuations in price with the potential to make a lot of money in a short space of time. Another benefit is you avoid any overnight risk– as your operations close with the end of the day, your money is not exposed to any unexpected risks caused by socio-economic developments. However, with the high rewards also come high risks. Capitalising on market trends requires an intimate understanding of how the markets work, and the best laid plans of mice and men can be completely undermined by an unexpected fluctuation in the market. These are the basics on day trading, but how can you optimise your experience to maximise profit? Check in next time for tips on how to make the most of your day trading experience, and manage any potential risks