Day trading: how does it work?

Today, traders use different strategies - from the simplest ones, which consist in buying assets and holding them for a medium to long term, to more complex financial manipulations, involving the use of various derivative instruments for short-term trading.

One of the ways to speculate on the market on short-term is day trading. But this strategy is also associated with a high risk of losing capital. Let's talk in detail about this type of trade.

Day trading: what is it?

Intraday or day trading is the work with short-term transactions on the exchange, which are concluded and closed during one trading session.

They are held during one trading day and are not transferred to the next, regardless of the result. The trader himself makes sure that the exit is completed before the end of the session.

With this trading method, the bet is not on significant price fluctuations but on a significant number of different changes in it. For this reason, the number of transactions of a trader who uses an intraday strategy can exceed a hundred.

Compared to other strategies, day trading reacts more sharply to sudden market changes — news, political circumstances, reports, and statistics. The influence of these and other factors can affect the psycho-emotional state of intraday traders.

For day trading, the type of assets chosen are distinguished by high volatility and high liquidity like currency pairs (see the USD/EUR derivative price chart here). Typically, intraday trading involves the use of shares of leading issuers, futures for various popular assets, and currency pairs.

Starting trading intraday: how it should happen

Intraday trading is carried out in stages:

1. Opening a brokerage account — it is worth cooperating with a regulated broker.

2. Selection of suitable assets.

3. Definition of a trading strategy.

4. Start trading.

5. Following the chosen plan and tactics and recording the results daily.

6. Improving your skills to minimise risks.

The plan is to get the maximum income during the trading day, which is why day traders target the most volatile assets or those well-known for having bright trends. Significant fluctuations promise higher profits but, equally, great losses.

Day trading tips

How to trade intraday? To do this, you should follow some basic tips:

Study all the time

The exchange market and trading are constantly evolving. Often, some strategies become obsolete and do not work, and then they are replaced by new ones.

Therefore, it is essential to constantly improve your knowledge. For this purpose, you can read special books and reliable blogs and practice trading on a demo account.

Realistically look at the state of things

A beginner does not need to hope for big profits at the beginning of trading.

First, you need to learn at least not to lose all capital at once. With a small investment, you also do not need to count on a significant income. The average earnings of experienced traders are around 5% monthly sometimes up to 10% of their initial investment.

Make a clear plan of your actions and strictly follow it

Before opening a position, you need to think about the time to exit it and understand how the stop loss will occur when you need to fix income.

Choose the right trading instruments

One or two assets could be a good start for day trading. This will allow you to efficiently search for entry points on the charts and monitor your assets properly. If you select more financial instruments, it will become more difficult to keep track of them.

Set aside some time

Before choosing this strategy, it is worth assessing whether you have the ability to devote enough energy to trading. It will only be effective if the trader can concentrate. Therefore, it is important to eliminate distractions and allocate a good amount of your time.

Don't give in to emotions

Many traders, suffering losses, try to recoup. Often this behaviour entails even greater losses. Greed in day trading is also superfluous.

Some traders leave the position open for too long, trying to get another 1-2 points, hoping for economic or political events to impact the price in their favour. But the price chart can go in the opposite direction than the one initially predicted and, subsequently, bring losses.

Control the accuracy of the information received

Sources should only be used if you are confident in their reliability.

It is better to make your own forecasts (even without experience) than to rely on information from different "gurus." News should be received from well-known sources using reputable financial experts. This will avoid fake news leading to more mistakes.

The risk is justified

Since intraday trading is associated with high risk, you should not invest more than 1-3% of your disposable capital in one transaction. In the event of a loss, the losses will be small, allowing you to keep your emotions in check and conduct more efficient trading in the future.

Choose time for trading wisely

In the morning, when trading sessions start, the volatility of instruments is very high.

It is better for beginners to refrain from making transactions for the first hour and a half. In case they do, they should employ risk management tactics like setting stop-loss prices.

Strategies for intraday trading

There are different day trading strategies. Let's highlight the most popular.

Scalping

Scalping is an effective intraday trading method that is based on multiple short-term (up to 20 minutes) orders.

The entry point is determined using technical analysis. More often, a position is opened with a confident trend movement. In this case, it quickly reaches the desired level and closes. A trader can also set a stop loss and move it if necessary, following the direction of the trend.

News trading

The strategy involves tracking all the news in the world of finance and economics that can provoke a trend movement, in particular, a positive one. To do this, you should use the calendar of significant events in the market and a table showing their impact on exchange rates.

This strategy has a lower load. You need to focus only on the release of specific news. More often, you can find out about it in advance from the economic calendar.

The day trading truth

This type of activity is becoming more and more appealing to risk-prone rookie traders as seen in the latest social media trends. Many of them earn capital using this strategy but, the truth is, that the vast majority of them do lose more than they are investing.

Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. The vast majority of retail client accounts lose money when spread betting and/or trading CFDs.

You should consider whether you understand how spread bets and CFDs work and whether you can afford to take the high risk of losing your money.

Marketing for CFDs and spread betting is not intended for US citizens as prohibited under US regulation.