How to become a day trader

What is day trading?

Day trading involves opening and closing positions within a single trading day, aiming to profit from short-term price movements. You’d close all positions opened within the same trading session by day's end, starting anew the next day. Day traders generally use 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.

Key principles of day trading include:

How to become a day trader

Becoming a day trader requires developing both technical and psychological skills. Technically, you'll need to have a solid grasp of market analysis, understand various financial instruments and develop a keen sense of when to enter and exit trades.

Key skills for day trading:

1. Technical analysis proficiency

2. Risk management

3. Adaptability to market conditions

4. Strong decision-making

5. Strategic planning

Technical analysis proficiency

You need to understand how the markets work. This involves understanding market dynamics and different trading strategies, and getting comfortable with technical analysis. Key elements include recognising chart patterns, using indicators such as moving averages to analyse trends and momentum, and identifying overall market direction. Resources such as the online courses and webinars that are available in IG Academy can help you learn about how the markets work.

Risk management

All trading activity involves risk, eg market risk and the use of leverage. The likelihood of this risk resulting in unfavourable outcomes is amplified by the fast-paced nature of day trading. You can manage your risk by implementing strategies like setting stop-loss orders, which will automatically close out your trade if the relevant asset’s price moves beyond the parameters you've set. All things considered, it's about never risking more than you can afford to lose on a single trade, and always having a clear exit strategy in place before you even enter a position.

Adaptability to market conditions

Day trading requires you to be flexible, constantly adjusting your strategies to fit the ever-changing market landscape. This means staying alert to sudden shifts in trends, being ready to pivot your approach at a moment's notice, and never getting too attached to a single trading method. By embracing change and staying nimble, you'll be better equipped to surf the unpredictable waves of the financial markets.

Strong decision-making

In the fast-paced world of day trading, it's useful to be able to act quickly. This involves analysing information, trusting your instincts (backed by knowledge and experience) and acting decisively, even under intense pressure.

Developing strong decision-making skills is like building mental muscle – the more you exercise it, the stronger it becomes, enabling you to make split-second calls that could mean the difference between profit and loss in trading.

Strategic planning

Develop a strategy that works for you, and don't let emotions drive your decisions. Markets are dynamic, with conditions constantly evolving. Keep educating yourself, stay up to date with market news and be willing to adapt your strategies when necessary. You can use your demo account to test out strategies and get a feel for the markets before implementing your trading approach in a live environment.

Our analyst Axel Rudolph's tips on how to become a day trader

To become a day trader, you can start by choosing a broker and setting up an account that allows active trading. Some important factors to take into consideration when making your decision include the markets, hours and tools offered by the broker. With us, you can practise contract for difference (CFD) trading on a demo account using virtual money, without risking any real money.

To set yourself up to trade comfortably, you can use a powerful computer and multiple screens. Additionally, fast internet will help enable quick trade execution.
Once you've taken care of all of these, you can plan how you'll fit market analysis and trading into your schedule.

It's important to be prepared for challenges. For example, the short duration of trades can be mentally exhausting and small mistakes can become costly.

While you can mitigate your losses using risk management tools such as stop-losses, it's also important to keep learning from both profitable and losing trades. By drawing up a trading plan and refining your strategy when you see fit, you're increasing your chances of favourable outcomes.

You can also aim to mitigate your trading risk by deciding on a maximum percentage of your total capital to risk per trade, eg 3%.

That said, it’s important to keep in mind that day trading isn't for everyone. Longer-term investing, ie buying and holding, can be useful if you’d like to gain experience before diving into the fast-paced world of day trading – in general, it’s also less risky and less time-consuming.

Markets to trade as a day trader

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 5,400 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

Day trading strategies and risk management

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

1. Momentum trading: identifying assets that are moving quickly in one direction and trading in that direction

2. Trend following: buying when there's sustained upside movement in the market and selling when the price is above a certain level, and vice versa (going short)

3. Scalping: making numerous trades with the aim of profiting from small price changes throughout the day

4. Breakout trading: entering a trade when an asset’s price moves beyond a previous support or resistance level

5. Mean reversion: anticipating when asset prices that are moving away from their average will return to that average, enabling you to potentially profit from these often predictable fluctuations

6. Swing trading: attempting to capitalise on price fluctuations within larger trends with the aim of profiting from both upward and downward movements by identifying and trading reversals

Risk management is crucial for protecting against significant losses and helping to preserve your capital. Key strategies include, but aren’t limited to:

1. Set stop-loss orders: determine in advance how much you're willing to lose on a trade and set an automatic sell order at that point

2. Cap your risk per trade: decide on what percentage of your total capital you'd be prepared to risk on each position

3. Consider risk-reward ratios: try target a risk-reward ratio of 1:2 or higher, where the most you stand to profit is double (potentially more in cases of positive slippage) the maximum possible loss (when you set a guaranteed stop)

4. Diversify your trades: spread your risk across different stocks or markets

5. Use trailing stops: aim to lock in profits by adjusting your stop-loss if the price moves in your favour

How to trade online as a day trader

You can buy or sell stocks, currencies, commodities or other securities over the counter (OTC) using our award-winning flagship trading platform¹ that’s suitable for day traders. You’ll find advanced charting tools, real-time news feeds and customisable layouts on all our platforms.

Here are some steps to get you started:

1. Research the markets you can day trade

2. Decide on the strategy you want to employ

3. Create an OTC account – open a live trading account or start with a demo account

4. Search for your preferred market

5. Select your deal size and manage your risk

6. Open and monitor your position

How to become a day trader summed up

• Start by gaining a solid understanding of financial markets and trading strategies

• Use a demo account to practise CFD trading, without financial risk, using virtual money

• Develop a trading plan that includes how you'll manage your risk

• Choose a reliable live trading platform with tools that can support your trading

• Set a small percentage of your total capital to use per trade as the maximum that you're willing to risk and start trading with small amounts

FAQs

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.