Unless you’re a professional, you’ll have to fit your trading around your daily schedule, particularly your job which will be your primary source of income. You may not have enough free time to day trade. But you may be uncomfortable taking on the amount of risk which may be required to run longer-term positions. So, let’s have a look at what day trading involves to see if it is something that appeals.
Day trading means opening and closing trades within a day, or a single trading session. This avoids both the funding costs together with the added uncertainty that comes with holding a position overnight. In fact, some day traders may only run a position for a few hours or even minutes.
Day traders are constantly on the look-out for short-term opportunities. They rarely pay any attention to fundamental analysis as this can be ignored by investors or take a long time to play out. Instead they concentrate on technical analysis, looking for obvious levels of support and resistance and using specific indicators to help identify trading levels. They tend to trade frequently and act when they consider a market to be oversold or overbought. Then they jump in to buy or sell in the hope of turning a quick profit.
A day trader will typically have a tight risk/reward ratio. That is, they may be happy to risk £50 to make £50, although a 1:2 risk/reward ratio is more common and indeed more sensible. Day traders often use charts with short timeframes (5 minute, 15 minute and hourly) to identify intermediate areas of support and resistance and trade accordingly. Day traders tend to work on the assumption that markets overshoot and undershoot specific price levels and then quickly correct.
Day traders must use tight stops to avoid losing money if a market breaks out of its short-term trading range. They must be extremely disciplined in choosing their entry and stop levels. They must be prepared to take a series of small losses and always have a profit target for every trade.
Day trading won’t suit anyone who hasn’t got time to keep a close eye on the markets throughout the trading session.
