Day trading in the UK has grown in leaps and bounds in recent years. Statista Research Department released in-depth analyses detailing the average daily number of trades per month from January 2015 through the present day in the UK. A median trade line bifurcating the data indicates that total trading activity on the LSE (London Stock Exchange) consistently averages around 800,000 daily trades, with multiple spikes occurring during peak activity periods. These findings are in line with current trends which show a strong uptick in retail trading activity at a growing number of online trading platforms and brokerages around the world. While company valuations on listed exchanges have dropped in 2020, trading activity remains robust.
What is day trading and how do you get started?
Day trading is defined as the practice of buying and selling stocks within the same business day. This is often referred to as closing positions on the same trading day. Occasionally, trades can be carried overnight to the next day, although this is less common. The purpose of day trading is to profit off price movements during the business day. When positions are held overnight – equities, commodities, indices, forex, crypto et al – they become subject to uncontrollable, unmanageable, or unforeseen market fluctuations.
The influence of ‘price gaps’ often rears its ugly head when traders hold positions overnight. A stock may close the evening at one price, trade during after-hours market sessions, and again in pre-market trading sessions, before the same financial instrument is available during regular market hours the next day. Usually, day trading refers to stocks a.k.a. equities, but it can refer to other financial instruments which are traded in the same day.
What is the purpose of day trading activity?
All forms of trading are designed with one overarching purpose: profit generation. Whether you short an asset (take a bearish perspective) and anticipate the price to drop after you have purchased it, or you go long on an asset (taking bullish perspective) and anticipate the price to rise after you purchased it, you are engaged in day trading. Traders will not purchase an asset with zero expectation of price movement in any direction. Price must move in order for profit to be realised.
With day trading, the focus is on incremental profits, not outsized profits. Owing to the fact that traders open multiple day trading positions at any given time, the sum total of profits generated from each trade are added together to yield a significant return. That is the expectation. There are several ways to achieve your pre-determined objective of increased profitability, notably:
- Conduct extensive market research into your preferred financial instruments. Consult credible resources such as official financial statements, financial news reports, investor assessments, competitor activity, et al.
- Select a trusted trading platform and brokerage with rapid executions of trades, a full suite of trading features, functions, and resources (real-time pricing, charts, graphs, stop loss, take profit, low account minimums, high account maximums, seminars, webinars, trading tools, stock screener tools, paper trading).
- Take emotion out of the equation – everything must be based on logical decision-making.
Can you quit your regular job and become a full-time day trader?
The merits of immersing oneself in a singular purpose or activity should always be measured against the opportunity cost thereof. Your individual circumstances should determine what is best for your needs. If you have extensive experience in trading, or you are keen to expand your knowledge through a rigorous, dedicated, and intensive stocks trading regimen, you may ultimately be in a position where you can day trade for living.
Be advised that the vast majority of novices with high expectations from their trading activity ultimately fail. Perhaps they don’t conduct the necessary research, they fail to initiate buy and sell orders in a timely fashion, they don’t manage their budgets effectively, or any other combination of potential pitfalls. Failure happens. It is not the end of the road however.
The fact of the matter is that anyone can become a successful day trader, but you have to have an insatiable appetite for learning about the financial markets. This learning never stops. Expert traders are always uncovering new tidbits of information to help them in their day trading activity. Whether it’s a trading strategy, technical expertise, or a better understanding of fundamental analyses, the learning never stops.
What is ‘margin and leverage’ and should you engage in this type of trading activity?
Once you register at a trading platform and/or online broker, you may be presented with the option to trade a bigger position size than the available funds you have in your account. This is known as margin trading. Margin trading effectively allows you to multiply your returns. It is a form of leveraged investing activity. You’re using the broker’s money to buy financial instruments. If you purchase 50 shares of a stock at £50, the total cost to you is £2500. However, your broker may offer you an additional option to purchase 50 shares of that same stock at £50 with borrowed funds. Therefore, you now have a total exposure of £5000 (50 shares at £50)X2.
If the stock rises by 10%, you will realise gains of £250 on 50 shares + an additional £250 on the other 50 shares, for a total gain of £500 on your initial outlay of £2500 which translates into a return of 20%. Now, if the stock depreciates by 20% in price, those 50 shares will no longer be worth £50 each, they will be worth £40 each. Therefore, your total return is negative, and you are on the hook for 100 shares X £40 = £4000. You are now in the red to the tune of £1000, and you are legally required to repay the funds you borrowed from the brokerage + interest. Note that margin can multiply your gains, but it can also multiply your losses.
Casual traders are discouraged from trading stocks on margin. It is far too risky. Many brokerages have margin requirements in place so that if your the trade is moving out of your favour, you will be required to deposit additional funds to keep the position open. If you fail to deposit funds, they will close out your position. This is known as a margin call. Fortunately, many reputable brokerages do not actively promote margin trading, since it is risky.
What are penny stocks and how do you day trade them?
Penny stocks are a unique form of financial instruments which are typically priced in the range £0.01 – £1.00. In the United States, penny stocks are priced under $5, according to the rules of the Securities Exchange Commission. Put differently, penny stocks are low cost stocks with a low market capitalisation, and high growth potential. Trading the right penny stocks at the right price can yield outsized returns for traders, if good fortune is on your side, and the right decisions are made.
Penny stocks come in many different tiers, but the ones you are encouraged to trade, are those in The Tier 1 and Tier 2 Category. These are simply listed stocks which are subject to the rules and constraints of the regulatory authorities. Tier 3 and Tier 4 penny stocks trade at fractions of a penny, and are typically not listed on exchanges, and therefore not subject to intense scrutiny.
Due diligence is a prerequisite when trading penny stocks, given the highly volatile nature of this form of trading activity. A penny stock’s value can rise or fall dramatically during the price of a trading session. If there is breaking news, or a listed company takes an interest in a penny stock company, prices can skyrocket.
This may result in a frenzy of buying activity, followed by a ‘pump and dump’ scenario where traders take profit, thereby sending the price of the penny stock into freefall. This pattern can result in a phenomenon known as buying the dip, with traders again rushing to purchase the stock as its price is falling, propping up the price and readying it for a second wave of price appreciation.
What’s the next step?
This introductory guide to day trading serves as a blueprint for the most important points you need to know. Naturally, you will be required to make a deposit to trade for real money. Some trading platforms offer a paper trading option, which simulates real market trading conditions at zero risk of loss to yourself. Markets are typically operational between the hours of 9:30 AM and 4 PM for US bourses.
Of course, certain trading platforms like E*TRADE present traders with the option for pre-market and post-market trading activity too. But there are many other reputable trading platforms available which you can certainly consider – Interactive Brokers, TD Ameritrade, Charles Schwab, Fidelity and others.
Once you have selected a reputable broker, you will want to practice as much as possible. This is a time intensive process, and significant learning needs to be done. You will learn about important concepts such as support levels and resistance levels – floors and ceilings – and what it takes to break through either. Charts and graphs are useful visual aids in determining trends (the trend is your friend), and speculating on reversals. It is wise to understand how RSA, Bollinger Bands, stochastic indicators, SMAs, and EMAs play into the picture.
While you are learning the proverbial ropes, stay focused on the big picture. Don’t make any hasty decisions, or lifestyle changes in anticipation of dramatic gains. Day trading is a process of accumulating incremental returns over a long period of time. That’s the secret to your success!