Day trading

This type of trading involves opening and closing a small number of trades in the same day.

Positions are not held overnight, eliminating the exposure to large overnight moves when it could be difficult or impossible to get out of the trade – eg if you’re in bed, or the underlying market is closed. Instead, day traders generally prefer to monitor the markets throughout the trading day waiting for the ideal conditions to enter, and then exit, their positions.

This means day trading tends to be a very time-intensive activity, often requiring traders to check market prices, news and data regularly looking for entry opportunities and exit strategies. So, if you’re a very busy person or have a full-time job, you’ll need to consider whether you can devote enough time to monitoring and analysing the markets to be successful using this approach.

Day traders tend to rely on technical analysis more than fundamental analysis, as emerging chart patterns and indicators can often provide strong short-term signals to trade. However, if you decide to trade using this style, it’s still very important to know which major economic events are coming up each day, as these frequently cause market volatility and significant shifts in sentiment and momentum.

Question

True or false?

Day traders don’t like to hold positions overnight.

• a True
• b False

Reveal answer

True or false?

Day traders tend not to use charts, preferring instead to analyse the fundamental reasons behind why markets move.

• a True
• b False

Reveal answer

True or false?

Day trading involves checking the markets just twice a day, once in the morning and once in the evening.

• a True
• b False

Reveal answer

True or false?

Traditional investing is a form of day trading.

• a True
• b False

Reveal answer

Scalping

Scalping is the shortest-term style of trading and involves placing dozens, sometimes hundreds, of trades per day. Each trade is usually held from between just a few seconds, to a few minutes at the most.

The principle behind scalping is to open a trade and then exit it as soon as the market moves a certain small amount in your favour – so making a slight profit on each trade. If the market moves against you at any time, you close the trade and take a small loss.

The idea is to pick a market trending in a particular direction so you end up winning more trades than you lose. If the trend changes direction, you change the direction of your trades as well.

Scalping is an extremely intense form of trading requiring high levels of concentration over an extended period of time. It is essentially just a faster-paced version of day trading and, of course, you don’t hold any positions overnight. This means your risk per trade is by far the smallest of any of the styles, though the potential rewards are lower too.

The best time to trade is generally when the market is trending strongly up or down and there’s a lot of liquidity. This enables you to place trades in the direction of the trend then get out of them quickly as soon as the market moves.

When scalping you need to be particularly disciplined and not get distracted by chasing large profits or letting losses run. No one trade will be especially profitable, so you need to place a huge number of trades if you want to make significant gains.

For this reason, scalping is the most time-intensive style with traders often entering and exiting positions for several hours at a time, every day.

Due to the very short-term nature of the trades, scalpers tend to use technical chart analysis almost exclusively to identify trending markets. However, you still need to be aware of which economic announcements are scheduled for that day, as any surprising data could cause markets to gap, or trends to reverse.

Question

True or false?

Scalpers like to make a large number of trades per day.

• a True
• b False

Reveal answer

True or false?

Scalpers often only hold on to positions for a few seconds.

• a True
• b False

Reveal answer

True or false?

Scalpers need to be patient and wait for their trades to become profitable.

• a True
• b False

Reveal answer

True or false?

Scalpers like taking their time to analyse the overall state of the markets before entering into a trade.

• a True
• b False

Reveal answer

Sticking with it

You should now have a fairly good idea about which style of trading will suit you best, based on:

• Your personality
• Attitude to risk
• Amount of time you can commit to trading

After choosing a style it’s generally considered sensible to stick with it for at least a few weeks to determine whether it’s right for you. Continually changing your style whenever you have a losing streak means you can’t adapt and improve your trading plan effectively and can also lead to a loss of discipline.

Remember that all traders will endure a painful losing streak at some point. What separates successful traders from those that get wiped out quickly, is how they prepare for that inevitable streak, and how they react after it.