What is Day Trading?

During the pandemic, North America saw a rapid rise in retail investors, as many individuals bored at home decided to participate in the stock market for the first time. Stocks like Peloton, Zoom and GameStop rose sharply due to a unique demand and a collective buyer’s interest. And day trading, a short-term investment strategy often practiced by experienced investors, grew in popularity.

Day trading is the practice of buying and selling securities in a short timeframe, often within the same business day and holding nothing overnight. But it’s important to understand that it’s not a random act of quickly buying and selling stocks. Investors must employ a comprehensive strategy to be successful when day trading, such as scalping, price action, swing trading and fading, in addition they must also monitor and manage risk exposure, trade frequency, and in some day trading strategies, margin and leverage.

What is day trading?

If you’re interested in day trading, the first thing you’ll need to determine is what you want to accomplish. Setting a goal is key to staying on track and making sure that you invest with a purpose. Some individuals’ day trade for a living while others do it as a hobby or activity, so decide where you fall on the spectrum. There are essential resources that you’ll need too, so we’ve created an in-depth checklist to help you start.

Day trading checklist

Capital:

How much do you have to invest? Day trading requires frequently buying and selling stocks, and therefore you will need capital to begin. Determine the amount of cash you have available to invest on a daily basis and what your limits are. It’s also key to know what profit and loss targets (typically a percentage gain/loss) you want to achieve, so that you have an entry/exit strategy and can stop day trading effectively.

Strategy:

What strategy are you looking to employ? There are different ways to make short-term profits when day trading. Momentum trading, scalping, and news trading are some of the most common day trading strategies. They each require risk management techniques, market analysis and devoted daily effort. It’s also important to determine what time of the day, you’ll be executing trades, as the market tends to be both more active and volatile during the opening and closing hours of each trading period. Create the right plan for your goals and stick to it. If a strategy is not working, take the time to make adjustments to improve it. There are no fool-proof day trading strategies. All day-trading strategies will have a losing trade at some point in time, so it’s important to understand that you won’t win every trade.

Platform:

Where will you be trading? Whether from your mobile device or laptop, you’ll want a fast and secure trading platform. The most common method is using a trading platform from your daily bank or brokerage firm. Most will provide a demo to allow you to test out your strategies using the platforms’ capabilities and features. For example, BMO offers BMO Active Trader which features real time streaming quotes, advanced technical charts and market insights on a fully customizable workspace to trade from any web browser. 

Day Trading Strategies

Having a comprehensive and trusted strategy is the key to being a successful day trader. There are several different and unique strategies that traders use to make a profit. Here’s a breakdown of the most common day trading strategies and how they work.

Scalping:  Is the practice of earning profits from small price changes, this can be used frequently throughout the course of a day and the goal is to earn small profits quickly in a low-risk fashion.

Momentum trading: Trading focused on capitalizing on existing trends in the market. Understand the market and follow the daily flow with your trades.

Price action: Study charts and price changes in recent history, to predict future asset prices to make impactful trading decisions.

Counter-trend trading: Trade against the current and broader trend to make small profits and gains.

Fundamental trading: Use fundamental analysis like economic indicators, income statements, balance sheets, and other commonly available data to buy and sell stocks.

News trading: Focus your approach by using trending news events as valuable information that can impact stock prices. Often used by day traders to make buy and sell decisions. 

Mean reversion: This strategy is focused on the idea that asset prices and returns will eventually revert to their long-term mean or average price, therefore invest with this in mind.

Swing Trading vs Day Trading

Summary

It’s important to understand that day trading is an advanced investment strategy with a higher level of risk. Do your research and due diligence before you begin day trading. Determine an appropriate risk level, how much capital you have to invest, and what your daily goals will be to stay on track. And the right trading platform to execute your strategy can make a difference. For additional help, you can also contact a BMO professional or book an appointment for an in-person consultation.