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What is day trading and is it right for me?

What is day trading

In recent months, there has been a surge of people who want to grow their wealth through investing. If you’ve considered it, you’ve probably done some research and may have come across a variety of different ways to do so through a number of different investment apps and trading platforms.

Update: Read my Complete Guide to Day Trading for the most up-to-date information which supports this blog post, and includes which trading platforms are best for day trading.

What is day trading?

To put it simply, day trading is when you buy or sell financial assets (such as stocks, bonds, or other investments) within a single trading day in the hope of making a profit.

While normally day traders will hold onto their assets for up to several hours during the day, they often sell prior to the market close, in order to avoid exposing themselves to risk overnight.

An example of day trading would be buying 100 shares of a company at 10 am for £10 each. The price of those shares might rise to £10.50 at 10:30 am, at which point the day trader would sell for a profit of £50.

One key phrase to remember here is that when a day trader enters a position (sometimes known as “opening a position”) and then exits the same position (also known as “closing a position”), this is known as a “round trip”.

Day trading involves making a series of round trips during the day to make a series of small but frequent profits. While the act of buying and selling financial instruments on the same trading day can have significant risks, it can also be a good way to earn money.

A slightly more long-term strategy called swing trading involves holding positions for up to several days at a time. While swing traders can potentially see higher returns, this method also exposes them to more risk.

Is day trading illegal?

When you look up the term on Google, one of the first search results you may come across is “Is day trading illegal?” While it is arguably an unorthodox way of investing, that doesn’t mean you should worry, as day trading is perfectly legal in the UK.

However, it is worth noting that this strategy can come with a considerable amount of risk. That’s why you might benefit from seeking professional financial advice before you start trading.

How much capital do you need to get started?

If you’re looking to get started with day trading, you may have wondered how much money you need. As a general rule, there isn’t a hard and fast minimum amount of your own capital that you need to start day trading. However, if you choose to invest through a broker, they may have a minimum deposit that you have to pay.

Please bear in mind that day trading carries a considerable amount of risk and you shouldn’t invest more than you would be willing to lose. If you want to know more about the associated risks and the impact they could have on your wealth, you may benefit from seeking professional advice.

What do I need to be a day trader?

Typically, day trading is reserved for more experienced investors, due to the high risk and difficulty of doing it successfully. It’s easy to be a day trader, but difficult to be a successful day trader. If you want to succeed, there are a few important things you’ll need:

Reliable information

Like any investor, if you want to be able to reliably profit from day trading then it’s important to be able to make informed decisions with your wealth. Successful day traders are usually familiar with day trade stocks and stock exchange financial markets.

Knowing about the latest economic developments can be crucial for any professional day trader, as it will give you an idea of how assets will perform over the coming day.

A clear trading strategy

If you’re serious about day trading, it’s also important to have a clear and consistent trading strategy to grow your wealth.

While it can be tempting to make snap decisions, sticking to a reliable method for trading will reduce the risk that you’ll lose money. Understanding skills such as technical analysis can also help you to improve your chances of seeing a return.

Determination

Day traders expose themselves to a significant amount of risk, which means you may make a loss at some point. If you’re serious about day trading, it’s important to have a strong sense of determination to help you overcome these temporary setbacks.

What is technical analysis?

Technical analysis is a valuable skill when it comes to carrying out a successful day trading strategy. Typically, successful day traders rely heavily on a variety of tools to carefully analyse stock market data to build an accurate picture of potential investments.

This analysis can help you to calibrate your risk management tools as well as get an idea as to how an asset might move over a given day, how strong the movement will be, and how long the movement could last.

What is buying on margin?

One piece of investing jargon you may have come across is “buying on margin” but it isn’t immediately clear what this is.

To explain it simply, this involves using borrowed money to make your trades. When you use a margin account, you can use the assets you already own as leverage, meaning you can potentially borrow up to 50% of the value of the asset you plan to buy.

This can significantly increase your returns, but also comes with significant risk as your losses will be increased too if you make the wrong decision. Before you consider buying on margin, you may want to consider seeking professional financial advice.

What are some day trading strategies?

Trend trading

Essentially, trend trading involves studying the stock price history of an asset over a longer time frame to try to identify any long-term market trends.

Once you’ve found one, you can then revert to a shorter time frame on the same data chart to look for trading opportunities that follow the overall trend over the course of a trading day.

For example, if the exchange rate between two currencies trends upwards on a time frame of six hours, a pattern day trader may then switch to a market session of only 15 minutes to see if there are opportunities to take advantage of this movement.

Counter-trend trading

Somewhat similar to trend trading, this day trading style can be a highly demanding one but can offer strong returns. This strategy involves high risk tolerance, accurate data, and the ability to identify market trends and price movements over a longer time frame. Then, you can look for opportunities to place trades in the opposite direction in a shorter time frame.

The goal of this strategy is to attempt to identify the end of a market trend and then profit from the reversal. As you might imagine, this holds significantly more risk but can also come with greater returns.

Breakout trading

Successful breakout trading requires you to be able to identify when an asset has been in a period of consolidation, trading within a range between “support” and “resistance” lines that have been holding strong for some time.

Swing traders can then place trades on either side of this range, with the hope that the asset will “break out” and form a new trend. This strategy is usually the most effective when an asset’s price has been trading within a tight range.

Are there any tax issues I should be aware of?

If you’re trying to grow your wealth through investing, it’s important to be aware of any potential tax issues, which could eat into your returns.

One of the biggest issues to be aware of is that if you make a significant amount of returns as a day trader, you may be liable to pay Capital Gains Tax if you go over your annual allowance for it.

When it comes to day trading, it can sometimes be difficult to fully understand the tax implications of doing so, since each day trader’s activities are individual and specific to them. If you want to ensure that you don’t run into any issues, you might want to consider speaking to a financial advisor.

How can working with an advisor help me?

Day trading can be a very risky way to invest and so if you’re not careful, you could run into the possibility of losing money rapidly.

If you want to avoid this prospect, you may benefit from working with a financial advisor, who can help you to manage the risk.

Overwhelmed with how to invest?

Connect with a Financial Advisor near you for FREE.

Their expertise can help you to make well-informed decisions, which can help you to grow your wealth more effectively. By acting as a sounding board, they can help to reduce the risk of you losing money.

You may also want to consider working with online brokers from a brokerage firm, who can assist you in buying and selling.

Please note:

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

This article is for informational purposes only and does not constitute financial advice. All contents are based on our understanding of HMRC legislation, which is subject to change.

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