What is day trading? Everything you need to know

Day trading has become one of the most popular ways for retail investors to make money off the ups and downs of financial instruments like shares, forex, indices and contracts for difference (CFDs).

If you're considering getting into day trading, as a beginner it's crucial that you have the information that you need to get started on your front foot and succeed. In this guide, learn what it is, the legalities, how it works, how to get started, strategies, and what you need to consider when getting started.

What is day trading?

Day trading is the process of buying and selling financial instruments within a single trading day - between 9:30am and 4pm when trading the Nasdaq index, for instance.

Day trading allows traders to make money from intra-day price movements, as opposed to speculating on long-term price increases or decreases. The exact amount of time for which the trader holds the securities can be anything from a few seconds to many hours.

Due to the short timespans involved, day traders rarely trade on fundamentals, instead basing their trades on technical analysis. This involves predicting when prices will go up or down with tools like oscillator indicators or moving averages, or trading based on business news releases, as opposed to using mid- to long-term analysis based on economic data, social trends or political changes.

In recent years, day trading has taken off as one of the most popular types of trading. Research cited in City AM in 2021 found that 1.8 million adults in the UK began day trading through the pandemic, with 60% motivated to do so due to poor cash account interest rates. Barclays research that same year found that 76% of retail investors wanted to continue investing post-lockdown, too.

Is day trading legal?

Yes, day trading is legal. It is also ethical; however, it does require investors have the right understanding and insight, given the fast-paced, active nature of day trading and the very real possibility of losing money.

As with any type of trading, as a day trading beginner, you need to do your research, understand your trades before you make them, and spend plenty of time training on a free demo account before you put your own money on the line.

It's also important that you trade with a broker that's regulated by the FCA, as this will ensure that they operate to strict standards that protect you while you trade.

How does day trading work?

Day trading works by buying a stock or opening a position at a point in the day, then selling the stock or closing the position later that same day before the market closes. Day traders aim to make money from these trades, buying low and selling high, or predicting the short-term movements of stocks. As such, day trading is very much a behaviour based entirely on price volatility.

Given how small intra-day price movements are, day traders make small amounts of money on each trade that nevertheless compound over time, trade substantial amounts of capital at once to magnify their profits, often buying on margin (borrowing money) to do so. As a result, day trading requires plenty of attention and a strong appetite for risk.

How do I start day trading?

Starting day trading is a step-by-step process - simply jumping in without knowledge or a plan will likely result in you losing money.

1. Learn to day trade - Using guides such as this one, our forex day trading guide, and stocks day trading guide, gain an in-depth knowledge of what day trading is, how it all works, and how to successfully do it using a range of strategies. If you don't have a good understanding, your chances of losing money will increase.
2. Open a demo account - A demo account lets you place trades and learn how to use trading platforms without risking any of your money. That makes it great for beginners to day trading. Once you know the ropes, create a free account.
3. Choose a platform - There are several day trading platforms to choose from, including MetaTrader 4 and Trading Station: learn which is best for you.
4. Select your instruments - By now, you should understand the different financial instruments you can trade, shares, forex, indices and CFDs. It can be good to specialise in one type so you can become an expert in a single niche, so consider picking one.
5. Choose positions and set goals and controls - To prevent spiralling losses, you need to set what your trading goals are when you choose your positions. 'Making lots of money' won't cut it here: have a clear number in mind when making each trade and, when value increases or decreases to that level, sell or buy as appropriate. Automated order controls like stop-loss and stop-limit orders can be helpful here.
6. Make your trade - Now that you have the right understanding and a clear plan, you can place day trades confidently.

What day trading taxes do you need to pay in the UK?

There are several potential taxes of which day traders need to be aware. It's important to note that everyone's tax situation is different, though, so to be completely sure of what your obligations are, consider contacting HM Revenue & Customs (HMRC).

Firstly, HMRC rules state that day traders may need to pay capital gains tax when they sell a financial instrument and gain money as a result. These tax implications apply to shares and investments that aren't held in an ISA or PEP, units in a unit trust, or bonds (though not premium bonds or qualifying corporate bonds).

Typically, capital gains are paid on all profits exceeding £12,300. If you are a basic-rate taxpayer (earning up to £37,500), you pay 10% on your gains. Higher-rate individuals earning £37,500 or more pay 20% capital gains tax.

When submitting your tax return, you can reduce your tax bills on day trading by deducting your losses and costs (such as stockbroker fees) and applying for any tax relief for which you may be eligible.

For a clearer idea of whether you need to pay taxes when day trading, use the government's calculator and, failing that, contact HMRC.

How do you make money from day trading?

Day traders make money by purchasing when prices are low, waiting for the value of their securities to increase, then selling them - all within the space of hours, minutes or even seconds. Of course, profits can't be assured but, to increase your chances of making money from day trading, there are a few things that you can do:

1. Planning - Before you start your trades of the day, you need a plan. Work out what you want to trade, the criteria for which you're looking, what buying and selling signals you wish to use, and whether you have any strategies in mind. An understanding of any economic events occurring that day (such as data releases) may help to inform your decisions.
2. Practice - Using a demo account to simulate your trades will let you try out different strategies across a wide range of market conditions. This will provide you with greater confidence when you place real trades later down the line. Using plenty of educational resources is also a great idea.
3. Scaling - Starting small is the best start for day trading beginners. Once you get the hang of things, you can increase the amount that you trade in line with your confidence.
4. Limiting - Even the best traders make a loss on some of their trades, so limiting their damage is vital. Using limit orders, you can cut your losses at a specific point, preventing your losses from spiralling out of control. Limits can also be used to enter the market, letting you quickly adopt a potentially fruitful position.

Do I need a day trading strategy?

Yes, you do need a day trading strategy if you want to help your chances of making a profit. No single strategy can guarantee a profit but certain types are better suited to different securities or situations, so learning a range of them is key:

• Trend trading - Using cyclical price movements and successive trend signals to make positions on the market. These can be due to real-world factors or based on technical analysis.
• Range trading - This is a day trading strategy that involves buying and selling financial instruments between the floor and ceiling of their price: the lower or upper limit of their value over a certain period. Working out these ranges based on historic data, traders can then predict whether a security is worth buying or selling.
• Scalp trading - This sees traders make trades over extremely short periods of time, taking many tiny profits which add up over the long run. Scalping takes advantage of volatile markets and small price movements.

Is day trading worth it?

Day trading can be worth it for several reasons.

First, it is an easy type of trading with which to get started, only requiring a trading platform, a broker account and knowledge of the security that you wish to trade.

Trades are resolved quickly, too, which can be beneficial for traders who don't want to wait a long time to sell and instead prefer to take advantage of short-term trends and pure volatility. Not having positions open overnight can also reduce the level of risk to which the trader is open.

Lastly, the ability to trade CFDs and engage in spread betting during a day means that day traders can benefit from leverage: borrowing capital to increase the size of their positions.

Day trading: things to consider

Before you consider making money day trading, there are some drawbacks to consider:

First, like any kind of trading, there is an elevated risk that you could lose more than you invest. That's especially true on highly volatile markets, where in-depth technical understanding is often required to turn a profit. If you can't invest the time to learn, you may not see success.

Day trading also requires plenty of attention and concentration, which can be stressful, particularly if you don't immediately see success in your trades. Chasing profits can also breed a fear of losing out, alongside doubt in one's positions. Controlling your emotions and sticking to your plan is critical.

Lastly, making margin trades (using borrowed leverage) also means that you could lose more money than you put in when day trading.

What do I need to start day trading?

To get started as a beginner day trader, you need a few things. First, there's no need for a huge amount of capital - indeed, a demo account lets you practice trading the real markets for free.

Next, open an FXCM account and gain exposure to the markets. From there, you can begin day trading some of the world's most popular currencies, indices and commodities, backed by superb support and a huge range of educational materials , including free daily market webinars.

Get started as a day trader today. For more information, check out our support section.