What are the secrets behind successful day trading?

What is day trading?

Day trading involves buying and selling positions within a single day to profit from short-term price movements. All positions opened within the same trading session would be closed by the end of the day, starting anew the next day.

Day traders rely on technical analysis, market trends and leverage to make quick trades, often holding positions for minutes or hours. This trading style requires quick decision-making, discipline and a deep understanding of market dynamics.

How to become a day trader

Becoming a day trader requires developing technical and psychological skills. A solid understanding of market analysis, financial instruments, and a keen sense of when to enter and exit trades.

Key principles

• Frequent trades

Taking multiple positions per session helps capitalise on small price fluctuations, cumulatively resulting in significant gains.

• Short holding periods

Positions are rarely held overnight to minimise risks from after-hours events.

• Capitalising on small price movements

Focus on profiting from small, quick changes rather than waiting for large swings.

• Strict risk management

Implement rigorous risk management strategies with stop-loss orders, position size limits, and specific capital risk per trade to help protect capital in a fast-paced environment.

Key skills

• Technical analysis proficiency

Study market patterns and use tools like moving averages.

• Risk management

Mitigate risks with stop-loss orders and only risk what you can afford to lose.

• Adaptability

Stay flexible, adjusting strategies as markets change.

• Strong decision-making

Make quick, informed decisions under pressure.

• Strategic planning

Develop and test strategies before live trading.

Markets to trade

As a day trader, you'll have access to a wide range of markets. Each offers unique opportunities and challenges:

• Shares: trade over 12,000 individual company shares, including giants like Apple, Tencent and Lloyds

• Indices: access more than 80 global indices such as the FTSE 100 and S&P 500

• Forex: trade over 80 currency pairs, from major pairs like USD/GBP to exotic ones like SGD/JPY

• Exchange-traded funds (ETFs): choose from more than 5400 ETFs covering various sectors and asset classes

• Commodities: trade 35 different commodities, including gold, oil and agricultural products

• Bonds: day trade government or corporate bonds

• Interest rates: take positions on short-term interest rate movements

• Initial public offerings (IPOs): trade newly listed stocks before and after their market debut.

Tips from our analyst Axel Rudolph

To become a day trader, start by choosing a broker and setting up an account that allows active trading. Important factors to consider when choosing a broker include the range of markets available, trading hours, and tools offered.

For a comfortable trading setup, it is advisable to use a powerful computer with multiple screens. Additionally, a fast internet connection is crucial for enabling quick trade execution. Once these technical requirements are met, individuals can plan how to incorporate market analysis and trading into their daily schedules.

Day trading comes with challenges. The short duration of trades can be mentally exhausting, and even minor mistakes can result in significant costs. While risk management tools such as stop-loss orders can help mitigate losses, continual learning from both successful and unsuccessful trades is essential. Developing a sound trading plan and refining strategies can enhance the chances of achieving favourable outcomes.

To manage trading risk effectively, setting a maximum percentage of total capital to risk per trade, such as 3%, is recommended. However, day trading is not suitable for everyone. Longer-term investing, such as buying and holding, might be more appropriate for those looking to gain experience prior to entering the fast-paced world of day trading. It is generally less risky and less time-consuming.

Day trading strategies

Employing specific strategies and risk management techniques can increase your success probability in day trading. Here are some popular strategies:

• Momentum trading: identify assets moving quickly in one direction and trade accordingly

• Trend following: buy during sustained market upsides and sell when the price exceeds a certain level, or vice versa (going short)

• Scalping: make numerous trades to profit from small price changes throughout the day

• Breakout trading: enter a trade when an asset’s price surpasses a previous support or resistance level

• Mean reversion: anticipate when prices moving away from their average will return to it, potentially profiting from predictable fluctuations

• Swing trading: capitalise on price fluctuations within larger trends, aiming to profit from both upward and downward movements by identifying and trading reversals.

Risk management

Effective risk management is crucial for shielding against significant losses and preserving trading capital. Key strategies include, but aren’t limited to:

• Set stop-loss orders: traders should determine in advance the amount they are willing to lose on a trade and set an automatic sell order at that level
• Cap risk per trade: it is advisable to decide on what percentage of their total capital traders will risk on each position
• Consider risk-reward ratios: aim for a risk-reward ratio of 1:2 or higher, ensuring the potential profit is at least double the maximum possible loss when using a guaranteed stop
• Diversify trades: spread risk by investing across different stocks or markets
• Use trailing stops: lock in profits by adjusting the stop-loss if the price moves favourably.

Frequently asked questions

• Which markets are suitable for day trading?

Popular markets for day trading include stocks, forex, commodities and indices. These markets often have high liquidity and volatility, providing ample opportunities for short-term trades.

• What is day trading and how does it work?

Day trading involves opening and closing positions within a single trading day with the aim of profiting from short-term price movements. Traders use various strategies and technical analysis to identify potential opportunities and execute trades quickly.

• What do I need to start day trading?

To start day trading, you'll need several key elements, including:

1. A comprehensive trading plan that outlines your goals, risk tolerance and trading rules
2. A well-defined strategy tailored to day trading, including when to open and close positions
3. Opening an account with a reputable broker that offers the markets you want to trade
4. Sufficient funds deposited to cover potential losses as well as margin requirements and other trading costs
5. The necessary tools, including a reliable computer and internet connection
6. A trading platform, like ours, that offers real-time market data and price charts for a wide range of instruments.

A demo account enables traders to practice their trading strategies and become familiar with our over-the-counter (OTC) trading platform using virtual funds (starting with $20,000), without risking real money.

¹ Best platform for the active trader, best multi-platform provider and best trading app as awarded at the ADVFN International Financial Awards 2024. Best share dealing platform as awarded at the Your Money Investment Finance Awards, 2024.