This guide will introduce everything you need to know about day trading, especially for the Australian day traders.
Without further ado, let’s begin our topic.
Day trading involves the buying and selling of tradable financial assets within regular trading hours (RTH), such that all positions are opened and closed in the same trading day. Essentially, day traders speculate in different markets; options, stocks, currencies, and CFDs, with the aim of profiting from small price movements. Day traders can therefore be called speculators, as opposed to being investors.
The day trader is able to lock profits with each trading session. This means that they can compound gains incredibly fast. They are able to turn the previous days’ profits into compounded capital therefore making more profit from prior gains. Regrettably, losses in a day trade come just as fast.
By day trading, speculators close their positions within the same trading to avoid undesirable price differences that may occur between the current trading day’s closing price and the next trading day’s opening price. Day trading also avoids unmanageable risks and negative holding costs. Holding fee is the cost charged on all open positions held at the close of market (4 pm Australian eastern standard for the ASX). It can either be positive or negative, depending on the applicable holding rates and the direction of your position.
Day trading is fundamentally different from your typical securities investing. Day trading typically calls for availability of significant funding. As such, day trades involve the use of high amounts of margin leverage in order to capitalize on small price movements. The long-term investor isn’t concerned with small price movements, rather they look to gain from more substantial movements in the long run.
An important decision the day trader has to make is which market they wish to participate in. Most day traders focus on one or two markets. This specialization allows them to familiarize themselves with the opportunities and risks existing in the market.
The most common markets for day trading include the stock market, forex, and the financial futures market. Indices, Options, CFD, and cryptocurrency trading markets are becoming increasingly popular among day traders.
Day trading in the stock markets is particularly common among nascent traders. Here, traders buy and sell company shares. Day trading stocks often look to capitalize on share price movements during a given trading day. All positions are closed before the market closes to avoid gapping risk.
Termed the largest market in the world, the forex market is the most accessible market and the most preferred for day trading. Here, traders exchange one global currency for another in a currency pair. The forex market is popular among day traders because of its vastness and high market liquidity. Day traders in the forex market exit their positions within the same day so they can escape negative rollover charges.
The futures market involves the buying and selling of contracts centered around stocks, indices, and even precious metals and commodities. The futures contract is an agreement between a trading party to buy or sell the underlying asset at a particular price, in the future.
Futures are attractive considerations for day traders because they are low cost, and are pretty straight forward to understand. Nevertheless, day trading futures successfully takes a lot of knowledge, experience, and discipline.
Day trading indices is somewhat similar to day trading in the stock market. The indices depart from the stock market only because traders speculate on the performance of a group of shares. The FTSE 100, S&P 500, and Dow Jones are popular examples of indices. Day trading indices can be executed by deploying lesser capital. It is an attractive opportunity because it exposes traders to a broader portion of the stock market.
The options market is a popular choice for swing traders (swing trade positions may last a couple of days or weeks) and is particularly becoming a favorite among day traders. Trading options is pretty straight forward. You trade by purchasing contracts. Options contracts give you the right to buy or sell the underlying asset at a predetermined time called the expiration. The options market is a derivative based on stocks, indexes, currencies, and commodities.
Contracts for Difference (CFD) is a less known derivative market. Rather than trading the stock by buying or selling it as an actual asset, CFD trades speculate only on the price movement of the underlying stock. This means that when trading CFDs, you will never own any shares. This is a rather fascinating way of participating in the securities market. Due to the absence of day trading restrictions, day trading CFDs is quickly becoming a popular opportunity.
If you want to know more about CFD day trading in Australia, please check more on mitrade.
The cryptocurrency market is a popular choice for many day traders who wish to speculate on the rise and fall of digital currency prices. There are no holding charges or any costs for overnight funding, making it an attractive option if you’ll be holding positions over longer periods.
Whichever markets you choose to trade will ultimately depend on your financial capacity, trading strategy, personality, and individual interests.
There is a marked distinction between day trading and other forms of investing in the securities market. The decision-making process involved, capital requirement and trading strategy employed are vastly dissimilar. As such, traders participating in long-term investment trading, and those that are actively day trading poses different personality traits and characteristics.
Your average day trader is well-researched, knowledgeable, and well-funded. Below we discuss these characteristics of the day trader.
Knowledge and experience
Knowledge and experience help the day trader formulate a strategic trading plan and risk management tactic. An excellent trading strategy is considered carefully and perfected over time. The more the day trader participates in the market, the more experience they acquire and the more their strategy becomes better suitable for their chosen market and positions.
As a day trader, you will enter and exist more than a hundred positions every day, depending on the market conditions. All these positions must be within your set strategy and entry approach. You have to be disciplined as to follow your set strategy to the later. You are not disciplined if you enter a promising position that didn’t meet the minimum threshold required to enter a trade. You’ll also likely have to brace yourself as an unfavorable movement keeps rolling as long as it doesn’t meet your threshold for exiting the position.
You cannot have your cake and eat it too. Simply, you SHOULD not day trade with your daily or monthly utility money! You need this money to live by, so why risk it as capital to fund your day trades? As a day trader, you MUST be able to anticipate loses. A few losing trades shouldn’t put you off. To continue trading even after a long losing streak, the day trader must be well funded.
Day trading strategies help you exploit the frequent, small price movements in the securities market to maximize gains. These strategies must be honed continuously until they yield consistent desired results -increased profits and reduced losses.
A dependable strategy typically requires an in-depth analysis of the market, utilizing a wide range of indicators to predicts the future direction of the underlying stock price movement.
There are two kinds of analysis a day trader will adopt when approaching the markets:
Fundamental analysis, and Technical analysis.
Fundamental analysis examines the financial environment, company management, industry-specific conditions, and the overall economic feel. As a fundamental analyst, you’ll be expected to study a company’s expenses, appointments, mergers & acquisitions, etc.
Technical analysis does not concern itself with the intrinsic values of underlying securities. Instead, they use charts and other trade instruments to identify patterns and trends that suggest how the prices of the underlying asset will move in the future.
Scalping takes advantage of the initial price movement to make a small profit from the small price change. This is a common trading strategy with nascent day traders. The scalper believes that most securities will continue its initial movement and complete the first stage of the movement, after which, the next direction becomes unclear.
Scalpers are very disciplined traders and have strict entry and exit guidelines. Missing the exit window may result in a huge loss that may wipe out previously accumulated smaller earnings. Because scalpers take advantage of only the initial small price jumps, the use of trading tools such as live market feeds help pin the exact entry and exit points required to lock profits.
Arbitrage is the trading strategy that takes advantage of market inefficiencies. It is a low risk strategy that lets the trader exploit price differences of similar assets listed on different markets. Consider this simple arbitrage example. Shares of company ABC trade at $15 on the London Stock Exchange (LSE) while trading at $15.10 on the Australian Securities Exchange (ASX) at that exact moment.
Buying the stock from the LSE and simultaneously selling the same stock at the ASX will earn you the difference, 10 cents per share. This window could remain open until the underlying stock prices are adjusted and the opportunity is wiped out.
The strategy tries to determine stock price movement following an announcement related to the underlying. The news can either be good or bad, relative to the market’s expectations. Traders using the news playing strategy often buy when “good” news is announced and short sell if the news is considered “bad”. Such news often triggers mixed reactions and create massive volatility in the market.
For the day trader, this is an excellent opportunity to lock quick profits (or realize losses, fast). News prediction is relatively simple. You’ll, however, need to spare more time analyzing, practicing, and reading about the mechanisms behind trading the news.
Contrarian investors intentionally trade against the prevailing market sentiments. In this investment style, you buy when others are selling and sell when most traders are buying. The contrarian investor looks to score a profit from distressed stocks or by shorting stocks in a bull market that is affixed on “hot” stocks. They assume that markets that move in any one direction steadily will later start its journey in the reverse direction. The belief is that a hyped market will trade as a crowd creating misprices that can be exploited.
Price action trading strategy is concerned more with the price movement. Very little regard is paid to the use of market indicators when making trade decisions. An upward movement in the prices is a bullish sign, and vice versa. Depending on how aggressive the upward trend moves, the price action trader will tell whether the trend can continue.
Budding traders often get too excited at the prospect of considerable profits to be gained. Seasoned traders, on the other hand, pay more attention to the losses they could potentially realize.
It is inevitable that some of your trading positions will not go as planned. This sets you up for a losing result. But if you prepare for such situations -and maintain your trading discipline- you should be able to achieve your long-term success plan even with a couple of losing outcomes.
Here are some of the ways you can manage risks to safeguard your winners and minimize your losers.
The One-Percent Rule
This is a common risk management strategy among budding traders. The rule is simple, you should not use more than 1% of your capital at any one trade. Depending on the size of the account, some traders may use as much as 3%.
Owning a significant account balance will have you trade at less than 1% and make a good profit, say, $100 or more. But, it’s rather hard not to use more than 1% per trade with a small account, $100 -$500, and expect to gain a fair amount of profit.
Calculating the expected return
Determining your expected gains allows you a systematic way of comparing various trades and executing only the most promising and profitable trades. Expected returns can be determined using this formula
[(Probability of Gain) x (Take Profit % Gain)] + [(Probability of Loss) x (Stop-Loss % Loss)],
where the probability of gain/loss can be determined by analyzing historic SR (Support and resistance) performance.
Results from calculating the expected returns can be analyzed alongside other opportunities to determine favorable and profitable trades to execute.
The protective collar strategy
When the market starts swinging wildly, the protective collar strategy might come in handy to briefly protect your trade from downside movement. This strategy also allows you to take profits when the market moves upwards.
The protective collar consists of purchasing a put option that hedges against the downward fold, and writing a call option that will finance the put option. It is essentially a combination of a covered call plus long put position on the stock.
A hedge is an investment you make to protect an asset that is exposed to risk of adverse price movement. Hedging typically consists of taking an offsetting position in the related security. It is analogous to taking out an insurance policy against the losing trade of your active position.
Diversify trades & portfolio
To make the most of day trading investments, you’ll need to consider spreading your trades across different markets. Putting all your capital in a single market or asset can set you up for an epic loss.
Diversifying your investments across industry sectors, brokers, market capitalization, and even geographic regions help you manage risks as well as opening your account to more opportunities.
Most day traders note that the hours towards opening and closing of the market are the best times to trade. You will also want to be sure that you trade consistently during the same time every day to make the most money day trading.
During the hour the market opens, from 9:30 a.m. ET, and the last hour of regular trading hours before market closing, at 4 p.m ET the market is said to be the most liquid and most volatile. These are excellent signs most day traders look for. And, while there are no “BEST” trading times, per se, you can sure score better trades during these times than at any other point between.
With these narrow, 1-hour time window, day traders are able to make 10 or so profitable trades. Trading actively through the day, you might make a couple of hundred trades, easily. This of course depends on your strategy. The frequency of attractive opportunities is also a crucial determining factor.
To start day trading, you’ll certainly require a few tools, including a computer, a stable internet connection, a trading platform, and a broker.
Start day trading in three simple steps.
Step1: Choose a market
Most budding traders assume that day trading can only be in the stock market. On the contrary, you can day trade in virtually any market available in the securities exchange. However, the most popular markets have been discussed in this guide, in a topic above. You’ll see that you have broader opportunities day trading in the different markets including forex, options, futures, derivatives, and cryptocurrencies.
The market and financial instrument you choose to trade in will determine your choice of broker.
Step 2: Find best day trading broker
A key consideration you will have to make as a day trader is the choice of broker. Not all brokers offer excellent support for day traders. The quality of trading platform provided will certainly impact price quotes, execution speeds, and data feed, which are desirable to a day trader. Some features that are appealing to long-term traders may be unnecessary for day traders.
Because you will be carrying out high-frequency trades -taking advantage of even the smallest price movement- you’ll need the best broker for day trading.
When day trading, you’ll generally start all your days with no active positions, open several positions throughout the day, and end the day with no active position. This means that a lot of transactions will have taken place between the time the market opens and the close of the market.
The best day trading broker to support this trading style must guarantee, speed, reliability, and low cost. Commissions, margin and leverage rates, and minimum deposit requirements must also be of concern to the day trader. Of course, finding a regulated broker with excellent customer support is a plus.
Mitrade is a reliable broker offering competitively priced trades and other attractive benefits you’ll need as a day trader.
Regulated by ASIC
Competitive and transparent trading costs
Transaction as low as 0.01 lot
Leverage up to 1:200
Step 3: Open trading account
Now that you are well-read, you know which market you wish to participate, and have chosen a reliable broker to support your day trade, the next step would be to set up a trading account.
This step is pretty much straight forward for many brokers. Since it’s your first time participating in the securities market, it would be wise to start with a demo account so you can practice all that you’ve learned about day trading.
When you set up an account with Mitrade, you’ll be able to control a demo account with up to $50,000 bonus to test the Mitrade products and practice without having to deposit any real money. It is the best way to start day trading forex, options, precious metals, commodities, derivatives, and cryptocurrencies.
※ Risk Warning: CFDs are a leveraged product and can result in the loss of your entire capital.
Day trading offers great earning opportunities. You can participate in virtually all markets, giving you better chances of taking some profits home. It is however a very involving affair. You will need to research your asset and monitor the market continually in order to familiarize yourself with the day trading environment.
While day trading is considered a very lucrative approach to the securities market, it is not without its share of risks. You’ll want to develop a suitable risk management strategy that will safeguard your profits while minimizing losses.