Day trading: Learn how to day trade

Day trading is hugely popular among retail traders – although it comes with significant risks. So can you day trade successfully? Find out here.

• What is day trading?
• How does day trading work?
• Why day trade?
• 5 day trading strategies
• How to start day trading in the UK
• Day trading example
• Costs of day trading
• Day trading FAQs

What is day trading?

Day trading is an approach to the financial markets where you avoid holding any positions open overnight. Each day you start afresh, with no open trades or orders – and by the end of the session you close all your positions.

This puts day trading at the other end of the spectrum from longer-term investment strategies such as swing trading and position trading. However, it isn’t the shortest-term style you can use – scalpers and high-frequency traders both keep positions open for even less time.

How does day trading work?

Day trading works by capturing the intra-day movements of financial markets, instead of the broader trends that play out across weeks, months and years. You’re focusing on the short-term volatility that plays out across every session.

Of course, markets don’t tend to move as much in a day as they do over longer periods. Because of this, day traders tend to make use of leverage, which enables you to open large positions with only a fraction of their total value. However, your profit or loss will still be based on the positions’ full value, meaning that using leverage can increase your risk.

It isn’t the only risk of day trading, either. You’ll be attempting to capture small profits from minor movements, which means your gains can be quickly wiped out by a loss. Plus, short-term movements can be highly unpredictable. Just because the S&P 500 is on a long-term rally, doesn’t mean that it will rise in a single session.

That doesn’t mean, however, that day traders can’t be profitable – just that they need to be ultra focused and disciplined for the time that they are active. To day trade successfully, you need a comprehensive trading plan that you stick to.

Why day trade?

At this point, you might be wondering why you’d choose to limit yourself to intra-day trading.

The approach does come with numerous benefits, chiefly that by closing your positions by the end of the trading day you avoid the risks and costs associated with longer-term styles. When you trade with leverage, for example, you’ll pay an overnight financing fee each time you keep a position open beyond the end of the session. With day trading, you negate this cost entirely.

Day trading can also be extremely flexible. You decide how much time to dedicate to the markets, and fit it around your schedule. Then, when you’re not trading, you don’t have to worry about any open positions that could be losing you money.

5 day trading strategies

The only rule of day trading is that you never keep a position open overnight. It doesn’t dictate how you find opportunities, or which markets you trade. So, most day traders will also use a strategy as the basis for their overall plan.

Not every strategy works for day trading – some require more time. However, here are five that are suitable.

1. Trend trading

Trend trading is as simple as the name implies. It involves finding markets that are strongly trending and taking advantage of as much of the movement as possible.

Day traders might seek to profit from a small section of a wider trend or find smaller countertrends that run over the course of a single session. Either way, you’ll use momentum indicators like the RSI or stochastic oscillator to identify highly trending markets and open your positions accordingly.

2. Closing gaps

Many technical traders believe that when a market suddenly ‘gaps’ from one price to another, it will shortly reverse back to the original price – ‘closing’ the gap. This has led to a popular day trading strategy in which you find markets that have gapped overnight and trade the subsequent closing move.

You’ll need to be careful, though, because not every gap will close. In fact, big gaps can often mean the beginning of a new trend, which can send your market skyrocketing in the opposite direction to what you’d hoped.

3. Breakout trading

Another popular short-term strategy is to search for breakouts. These occur when a market surges beyond a known level of support or resistance, and often kickstart a new trend in the direction of the breakout.

For day traders, breakouts can signal useful mini trends to capitalise on. You will, however, need to pay attention to your risk management – as ‘fakeouts’, where the trend fails to materialise, are common too.

4. Mean reversion

Mean reversion is a theory in trading which states that prices will usually stick to their average levels over the long term. If a price deviates from this mean, it should ‘revert’ back in due course. So, if you can find a market that’s deviated from its mean, you might be able to trade the reversion.

It can be a trick strategy to employ for day traders because you can’t be sure when – if ever – the reversion will take place. However, day traders can still look for short-term reversions, such as extreme moves up or down without the fundamentals to back them up.

5. News trading

So far, most of the strategies we’ve covered here are based on technical analysis. News trading is a common example that looks outside of a price chart, seeking to capitalise on the volatility that can often land around major market-moving events, such as economic releases.

This strategy isn’t for the faint hearted. Markets can move very quickly when unexpected news strikes, and the fallout won’t always be what you expect.

How to start day trading in the UK

To start day trading in the UK, you’ll need to follow these five steps. Below, we run through each in a bit more detail.

1. Decide which market to trade
2. Chooses to day trade with CFDs or spread bet
3. Open and place your first trade
4. Manage your day trading risks
5. Close and review your trade

Decide which market to trade

Day traders tend to look for two things first and foremost when choosing a market to trade: liquidity and volatility.

Liquidity means that a market is easy to buy and sell, with high volume when you’re planning on trading. It ensures that you can enter and exit positions quickly – crucial when with the exact timing required for day trading – and keeps costs low. Which, again, is important given the smaller margins involved with this style.

Volatility means a market makes large price swings, and is constantly on the move. If you choose an asset that only moves a few points each day, then there isn’t much potential profit from your short-term positions. So day traders look for markets that are moving a lot, which enables them to capture gains over smaller timeframes.

Remember, though, that volatility also increases risk.

You can day trade almost any asset class, but most people tend to stick to forex, shares or indices. Why? Because these markets often offer the most liquidity and volume. However, not every asset is equal. EUR/USD and Apple might both be highly liquid, but an exotic pair or unknown stock probably won’t be.

Choose to day trade with CFDs or spread betting

With City Index, you have two options for how you’d like to day trade: CFDs or spread betting. Both are leveraged forms of trading, but they work in slightly different ways:

• With a CFD, you’re agreeing to exchange the difference in an asset’s price from when you open your position to when you close it
• With spread betting, you’re betting a certain number of pounds per point on whether your asset will go up or down

The end result with both is the same. The further the market moves in your chosen direction, the more profit you make. The further it moves against you, the greater your loss.

They do, however, come with slightly different benefits. Learn more about the differences between CFDs and spread betting.

Open and place your first trade

If you’re new to day trading, we’d always recommend starting out with a demo account before upgrading to live markets. Demo accounts feature the same pricing as live ones, but you trade with virtual funds instead of your own capital – so they are great for testing the waters before diving in.

You can also use your demo time to plan your day trading plan – as we’ve covered, this is pivotal to success. With a demo account, you can see which strategies, markets and times work best for you.

At this point, you might also want to consider which platforms you’re going to use. With City Index, you can access:

• Our award-winning web trading platform, with SMART Signals and Performance Analytics
• Our mobile trading app, which also features SMART Signals and Performance Analytics, plus one-swipe trading
• MetaTrader 4 and TradingView

Once you’re ready to trade for real, you can open a live account. It is completely free to open an account, although you’ll need to deposit some funds before you can start trading.

Manage your day trading risks

As we’ve seen, managing risk is hugely important if you’re going to day trade successfully. So at this point, it’s worth covering some basic steps you can take to manage your day trading risks.

The core of any risk management strategy is the stop loss. This is a type of order that you attach to open positions, and it will close your trade if it reaches your maximum level of loss. By using stop losses, you can ensure that you know how much risk you’re taking on any given position.

In volatile markets, you might want to consider upgrading to a guaranteed stop, which can’t be affected by slippage.

You can also use limit orders. These work like stops but close your position once it hits your profit target – helping protect against reversals.

Close and review your trade

After you’ve closed your first trade – whether it was early, at your maximum loss or at your profit target – it is a good idea to review how it went. Write down why you chose this opportunity, whether it was successful or not, how long you were in the market for and more.

This way, you can tweak your plan based on how you’re performing in the market and adapt as you go.

Day trading example

Any trade can be a day trade, as long as it isn’t held open overnight. You could, for example, spot that Barclays shares have gapped from 145p to 150p overnight, and open a short CFD trade to try and profit from a possible reversal.

If Barclays drops back to 145 in the session, you’ll earn a profit. How much? That depends on the number of CFDs you sold. If you sold 100, you’ll make £5. If you sold 1000, you’d make £50.

As ever, you’d want to attach a stop loss in case Barclays rises instead of falling. You could set your stop loss at 155, ensuring that you can only lose 5p on the trade per CFD.

The costs of day trading

You might avoid overnight financing when day trading, but there are other charges you’ll encounter. Chief of these is the spread, which is the difference between the buy and sell prices you can see on any market.

Since you always buy at the higher price and sell at the lower price, the spread will lower your profits – or increase your losses – on any given trade. This is typically how you pay for a leveraged position when you day trade forex, commodities or indices.

The exception is if you choose to day trade stocks with CFDs. Here, you’ll pay a commission – so the buy and sell prices are much closer together.

Day trading FAQ

What is the best time to day trade?

The best time to day trade depends on your chosen market and plan. Liquidity and volume are typically higher at the beginning and end of sessions, though, so these times can often be more popular among day traders

• See the best time to trade stocks
• See the best time to trade forex
• See the best time to trade indices

Is intra-day trading the same as day trading?

Yes, intra-day trading is the same as day trading – it is just a different name. Intra-day refers to the positions you take, which aim to capitalise on intra-day price movements.

How much money do you need to day trade?

You don’t need huge amounts of capital to start day trading. It is often a good idea to start small, making one or two trades a day with minimal risk exposure, so you can gain confidence in your plan before risking more money.

At City Index, we recommend a minimum starting balance of at least £1,500. You might also want to consider employing the 1% rule, where you only risk 1% of your total balance on any single opportunity.

Can you make money day trading?

Yes, you can make money day trading. However, it isn’t for everyone – for the time you spend on the markets, you’ll have to stay disciplined, focused and build a comprehensive plan. If you’re looking for a less active way to trade, you might be more suited to position trading or swing trading.