How to Start Day Trading: Everything You Need to Know
Most investment advice you hear promotes a long-term buy-and-hold strategy for trading stocks. The idea behind such advice is that markets constantly fluctuate in value, making it impossible for the average investor to predict market returns over the short term.
Adopting a long-term mindset eliminates the guessing game and helps avoid the stock market’s short-term volatility. Instead, you can ride out the ups and downs and generate market returns over several years.
But while the buy-and-hold strategy has served investors well for generations, some investors believe they can achieve much higher returns over short periods through day trading.
But what is day trading, and how does it work? I’ll answer these questions in this article and explain the risks involved.
What Is Day Trading?
Day Trading is an investment strategy that involves buying and selling stocks and other assets during the trading day to take advantage of short-term price fluctuations. Most day traders use technical analysis to identify potential gains and employ various trading strategies, which I’ll cover below.
What Investments Can You Day Trade?
When most people think of day trading, they think of buying and selling individual stocks or exchange-traded funds. But many types of securities are included in day trading strategies:
Futures: A futures contract is an agreement to buy or sell securities (usually shares or commodities for a specific price but paid for at a later date. Experienced day traders will buy and sell futures contracts on the same trading day.
Forex: Foreign exchange trading involves trading foreign currencies across global markets. Forex day traders benefit from the high volume, liquidity, and long foreign exchange currency market hours.
Cryptocurrency: With the large number of cryptocurrency exchanges that exist today, it’s never been easier to buy and sell crypto at a low cost throughout the trading day. Sophisticated investors have taken advantage of the increased liquidity and trading volume to profit from day-trading coins such as Bitcoin, Ethereum, Litecoin, and many more.
Commodities: Commodities include oil, gold, grain, minerals, and natural gas. Day traders attempt to profit by trading these assets across international markets.
Three Types of Trading Orders
Day Traders can use three main trading orders when executing trades: Market orders, Limit orders, and Stop orders. Let’s take a closer look at how each one works.
A market order is the most common type of stock trade. When you place a market order, you bid to purchase or sell shares at the best available price. Day traders will place a market order when they want to execute the trade immediately and believe that the current price is the right value for the stock.
When you place a market order, you’ll see the current price as well as the bid and ask prices. The current price is the last price the stock traded at and doesn’t necessarily reflect the price you will pay. The bid represents the price a buyer is willing to pay, and the ask price is the amount the seller is willing to sell at. When you place a market order, you don’t control the exact buy or sell price.
A limit order refers to buying or selling a stock at a specified price or better within a specific period. When you place a limit order, you don’t want to trade at the current price, but you believe that the price may move toward your desired price. If it doesn’t move, your limit order may not be executed.
Here’s an example. Let’s say that Alphabet Inc. (Google) shares are trading at $100, but you believe they will drop and are only willing to buy them if they reach $92 or lower. You can place a limit order of $92 and specify how long the order will be good for, e.g., the remainder of the day, the current month, etc.
If GOOGL drops to $92 during your set timeframe, your trade will be automatically executed at that price or better. This way, you don’t have to monitor price fluctuations constantly, although you do need to maintain enough available cash to ensure the trade goes through.
By placing a stop order, you agree to buy or sell a stock at the market price once the stock has reached a specified price, known as the stop price. A stop order isn’t executed unless the stock reaches your target price. If it does, you will buy or sell the stock at the market price. Stop orders are often referred to as stop-loss orders.
Here are two scenarios where you might want to place a stop-loss order:
Let’s say a stock you purchased at $100 has now risen to $115 a share. You don’t want to sell the stock at the current price, but you want to protect your gains. So, you set a sell-stop order for $112.
Conversely, you can place a stop order on a stock you don’t currently own but think may begin to rise. By setting a buy-stop order somewhere above the current price, you can buy the stock before it gets too expensive.
Popular Day Trading Strategies
Most day trading strategies are too complex to explain in one article fully, but here are some basic explanations of popular day trading strategies:
Scalping: Scalping is a high-risk day trading strategy, largely due to its use of margin. Scalpers use technical analysis to try and profit from small price gains in stock throughout the trading day. Scalpers monitor candlestick charts to identify short-term price fluctuations.
Ichimoku Kinko Hyo Indicator: Attempts to use technical analysis to identify market momentum. A Japanese newspaper journalist developed the strategy, which includes five key technical components. Once you understand “Ichimoku,” you should be able to identify trading opportunities quickly by looking at the data.
Market Opening Gap: This strategy assumes that the market will fill a small opening gap in the price of a stock (versus its closing price the day before), whereas a large opening gap may continue to trend in the same direction.
Contrarian Trading: With this strategy, day traders look to sell stocks many investors are buying, and buy stocks many sell.
Range-Trading: Investors employing a range-trading strategy believe that a stock will change in price over a relatively short period, and they then buy and sell the stock within that range. For example, if a stock is at $50 and you believe it will rise to $60, you would buy and sell it as it fluctuates between those two prices.
High-Frequency Trading (HFT): High-frequency traders use complex algorithms to make decisions on large numbers of trades within short periods. They faster they can make decisions, the more profitable high-frequency traders tend to be. Large investment firms conduct HFT trading rather than individual investors who lack the computing power to execute this strategy.
News-based Training: News-based traders use changes in an industry or the overall economy to make trading decisions.
What Are the Best Day Trading Platforms?
In Canada, you can day trade using any online brokerage. But because of the nature of day trading, which involves making several trades over short periods, it’s best to choose the lowest-fee platform possible.
While most U.S. discount brokers now offer commission-free trading, that’s still not the case in Canada. With that in mind, the three online brokers I recommend are Questrade, Wealthsimple Trade, and Interactive Brokers. Here’s a brief overview of each platform.
Questrade is my top pick for an online broker here at MapleMoney, mainly due to its low trading and account fees. There are no trading fees for ETF purchases, and you can purchase individual stocks for as little as $4.95 per trade, which is much lower than the big bank brokers.
Wealthsimple Trade is a stock trading account from Canada’s largest robo-advisor, Wealthsimple. They offer no-fee Canadian stock and ETF trades. You will need to sign up for their Plus Plan for $10/month to access U.S. stocks, but it waives the foreign exchange fees on US trades.
Interactive Brokers (IBKR) is a massive U.S.-based online broker also available in Canada. IBKR is the best platform for day traders who want access to global markets. Day traders will benefit from some of the lowest trading fees in Canada, low-margin loan rates, and the ability to place trades on global markets from a single trading platform.
For example, Forex traders can fund their accounts and trade assets in 26 currencies. Learn more in our Interactive Brokers Review.
What are the Risks of Day Trading?
To be clear, most investors should not participate in day trading. Stock markets fluctuate in value, and your principal investment is not guaranteed. Many day traders lose money.
This risk is compounded when you attempt to profit from short-term fluctuations. The most knowledgeable investors struggle to outperform the market over several years, let alone days or weeks.
Day trading can be especially risky when margin accounts are involved. If you borrow money to invest and your investment drops in value, you will magnify your losses.
Day Trading FAQs
Is day trading legal in Canada?
Yes, day trading is legal in Canada, and there are fewer regulations around day trading in Canada versus the U.S. That said, you should know how income from day trading is treated by the Canada Revenue Agency (CRA) before you begin day trading.
Can I use a TFSA for day trading?
Because you can purchase many different securities, including stocks, in a Tax-Free Savings Account, it is possible to day trade inside your TFSA. However, you should be aware that by trading too frequently, the CRA may determine that you are using your TFSA as a day trading business and make you report business income for tax purposes.
While you are not required to report your trading activity to the CRA, investment companies must provide them with reporting, so they may notice the activity in your account.
What is the Pattern Day Trader Rule?
The Pattern Day Trader Rule is used in the U.S. It states that a trader who opens more than 4 weekly trades on a margin account must always maintain a balance of at least $25,000. The U.S. government established the rule to protect people from losing all their money day trading. The rule does not apply in Canada; however, be mindful of the CRA’s ability to tax day trading profits.
Are day traders the same as active traders?
Many DIY investors are considered active traders, but that doesn’t mean they are day traders. That means that they will place a large number of trades; however, active traders will usually hold their position in a security for at least a few days or more. Day traders tend to move in and out of multiple positions during the same trading day.
What is swing trading?
Swing trading is a stock trading strategy involving taking positions for a few weeks or months in anticipation that stock prices will increase or decrease in that timeframe. Swing traders are looking for a quick profit by getting in and out; it’s not a buy-and-hold approach.
The Bottom Line on Day Trading in Canada
Remember that day trading is highly speculative and not advisable for beginner investors. If you want to day trade stocks, you must take the time to educate yourself on the risks and the various day trading strategies. Once you’re ready to trade, you’ll need to open a discount brokerage account like the ones I mentioned above. I also recommend checking out different stock screening tools to help you find the right stocks to trade.