Day trading guide
Day trading is a popular short-term trading strategy that involves the buying and selling of financial instruments, with the aim of closing out of the positions by the end of the day to profit from small movements in price.
As a day trader, you can be your own boss. You can trade from home, from an office or even while travelling – thanks to advances in mobile technology. But day trading is not for everyone, and there are some things you should be aware of before you start day trading the financial markets. In this trading guide, we discuss day trading in the UK and cover some popular trading strategies. We also cover the psychology of an experienced day trader and review some key strategy tips
What is day trading?
Day trading is a short-term strategy that traders use to buy and sell financial instruments with the aim of closing out positions by the end of the day. The idea of day trading in the UK has increased in popularity over recent years.
Technology has played a big part in this – thanks to fast broadband and mobile connections we have a wealth of real-time market information at our fingertips. This has led to many more people accessing the markets through day trading, in other words, placing trades throughout the day to try and profit from volatility as market prices go up and down.
But what strategies can you use? Should you keep it simple, or use something a bit more complicated?
How to use technical analysis for day trading
Many day traders use technical analysis by analysing price charts, such as candlestick charts, and would recommend a ‘clean’ approach to their trading strategy. These traders prefer not to load their charts with lots of different indicators in order to try and second-guess direction. Rather, they will focus solely on price; this is often referred to as ‘price action trading’. When trading in this way, you still have some key reference points based on what has happened previously, to help you plan future trades.
For some day traders, the previous day’s high and low are important levels to watch when it comes to planning a strategy for that day. This is actually quite logical: yesterday’s high marked the point where sentiment changed and the sellers came back into the market, pushing the price lower. The market consensus, therefore, was that the price was too high. And of course, the previous day’s low shows where the buyers regained confidence as they felt the market was undervalued – they voted with their wallets and bought. These levels could be important if they come into play again, and can provide the cornerstone of a day trading strategy.
Day trading strategies
Day trading strategies can differ from longer-term trading strategies, in that they focus more on profiting from shorter-term movements in the market, as opposed to moves that take place over a number of days or weeks. Day traders need to be continuously focused, as markets can move suddenly in the short term. Short-term strategies are particularly effective in volatile markets, such as for oil trading.
No strategy works all the time, but even a simple day trading strategy can help a trader try to pinpoint low-risk, high-reward trades at important points throughout the day. Some traders would also use the failure of one trade as an opportunity to set up another. If the level breaks, it can signal a new trend is starting, presenting another opportunity to try and profit. Successful day trading on a futures exchange can often lead to investors being granted a funded day trading account, if their profits match up to more than the daily requirement.
How to day trade
- Open an account. A live account will grant you automatic access to a demo account, where you can practise with virtual funds.
- Choose your product. We offer spread betting and CFD trading, which are both derivative products. In particular, spread betting is tax-free in the UK*.
- Browse our range of financial markets. We offer trading on over 10,000 financial instruments within the share, commodity, forex, treasury and index markets.
- Decide whether you want to buy or sell. Determine your entry and exit points based on whether you think the price of an asset will rise or fall.
- Keep up to date with news. If you are day trading stocks or forex, in particular, these markets can be impacted in the short-term by major news or economic events.
- Utilize risk-management controls. Stop-loss orders can help to close out positions if the market moves against you, minimizing your risk of capital loss.
Day trading example: GBP/USD
On the morning of 22 April, the UK day trader could look at the previous day’s high and low in the popular GBP/USD forex pair. During the previous day, when the price dipped back to the 1.4300 level, the buyers came back in. Of course, there was no way of knowing what would happen on 22 April, but there was a reasonable chance that 1.4300 could end up being an important level for that day’s trading. The expectation would be for buyers to step back in again ahead of that 1.4300 mark.
Day trading tips
Follow your own rules
Discipline is one of the most important attributes that experienced traders have in common. Keep a watchful eye on your bad habits, and look to resolve them as soon as possible. You are trading in a disciplined way if you decide on a carefully considered set of rules to govern your trading decisions, and then follow them. Find ways to stop yourself from breaking your rules and look to address it if it is becoming a problem. As a day trader, it’s a good idea to re-evaluate your rules at the end of each month, due to the shorter time frame of this style of trading.
Manage your money
Money management is essential when day trading. In fact, it is one of the essential elements of trading over any time frame. Certainly, if you are planning to trade for many years to come, you are going to need to apply successful money management strategies. There are whole books dedicated to this topic, containing many different approaches, and you need to take the time to find a method that you’re comfortable with. The risk/reward ratio is important. Remember, it doesn’t matter if you win 90% of the time if your losses are much larger than your wins. What’s important is that your wins are larger than your losses.
Always use risk management
Never forget to use stop-loss orders to manage your risk when you are placing your orders to enter the market. This is your insurance. You need to be aware of exactly where your stops should be prior to entering the trade. This is a good habit to have and will help protect yourself from trades that go against you. Standard stop losses can be prone to slippage when price gapping occurs, however, guaranteed stop losses will always close out positions at your chosen level.