Mass unemployment, a global pandemic, market volatility – yep, sounds like the perfect time to start day trading!
Levity aside, there is logic to this mindset. With tech innovation exploding, biotech presenting a gargantuan opportunity, and increasing consumer awareness of corporate activity, it’s no wonder day trading activity has exploded in 2020. Not only that – Millennials and Gen Z’ers see the world differently to the way their parents and grandparents did. Many don’t have savings or “jobs for life”, and the 9 to 5 struggle that afforded previous generations houses, cars and comfortable pensions is seeming, unsurprisingly, somewhat less appealing.
FIRE (Financial Independence, Retire Early) is a term that’s filtering down from dot com millionaires and early finance retirees to younger generations. With fortunes more likely to be made on TikTok than by punching a clock, young people are turning to what they know best in pursuit of an alternative income: apps.
A day trading account takes less than 5 minutes to set up, allows you to start with any amount, and promises huge rewards if done correctly (and aided by healthy doses of both luck and self-regulation). Big-player platforms are making it easier and easier for curious new beginners to enter the markets – no financial expertise required.
Sound attractive so far? Let’s help you get started.
What should I know before I start day trading?
A great first step, and one that should be relatively quick, is making sure you’re au fait with trading terminology. Know the difference between investing and trading (a core difference being that day trades are executed in one day, whereas investing is longer term). Learn your abbreviations (CFDs, ISAs, ETFs), and familiarise yourself with various indexes like the FTSEs, S&Ps, Nasdaq, and Dow Jones. Remember as a CFD (Contract For Difference) trader you are not buying the underlying asset, but speculating on fluctuations in price.
Know the difference between bid and ask. Understand the difference between a bear market and a bull market (we’ll give you a hint – a bear swipes up, a bull swipes down). You don’t have to bury yourself in finance books – YouTube has a vast amount of educational and entertaining material on this subject.
What tools do I need to start day trading?
In terms of physical equipment, a smartphone is good, a tablet is better, and a desktop or laptop is ideal. The bigger the screen, the easier it is to watch patterns and use tracking and predictive tools. Equally as important, a good wifi connection can be the difference between life or (financial) death. A lagging execution or missed price alert can dramatically alter the course of a transaction, so ensuring a reliable connection is crucial.
Next, choose a platform. This is the fun part. These will be the honeymoon days of your love-hate relationship with your trading app – shopping around, testing the functions, those friendly welcome emails, that first green plus sign in your portfolio. Check trading forums for reviews on execution speed, transparency, user experience, and any hidden fees.
Many trading platforms are now free. But as with all competing tech, each platform comes with its own evangelicals. Experienced traders might roll their eyes at anyone not using Trading 212; Freetrade and it's pink, friendly, “everyone’s welcome” vibe has an affectionate following amongst amateurs and midweights; and eToro are pioneers in ‘social trading’, catering to extroverted traders who wish to share, comment on, and even ‘copy’ other users’ trades (seriously, this is a built-in function). They also have Alec Baldwin as their hype man – need we say more?
Have fun experimenting, but as a beginner, you won’t have an established trading style yet. Don’t stress too much about choosing the “right” platform – it’ll become clearer as you move along.
How do I choose a market for day trading?
All budding authors are told, “write what you know”. The same rule applies here – trade what you know. The more you know about an instrument specifically and it's market generally, the less likely you are to be caught out by a negative earnings report, corporate conflict, or change in direction.
You might be suited to forex (currency pairs) or crypto trading if you’re good with numbers and up to speed on global politics. Futures trading (think oil, gold and silver, and commodities such as coffee) might suit you if you’re quick to spot trends, and again, have a keen awareness of global events. Stocks are probably the most recognisable category to the novice trader. You don’t need to be an expert to garner a decent understanding of movements within corporations like Apple, Tesla, Microsoft, etc. Keep an eye out for earnings reports, new product launches and conferences to know when to jump in.
What resources do I use for day trading?
These days, with a bit of time and an internet connection you can learn (almost) anything. Which online resources you’ll need will depend on the stage of your journey. If you’re just starting out, Reddit has an abundance of pointers in subreddits such as r\Daytrading and r\HowToTrade. From there, you’ll find recommendations for YouTube channels which many use as the cornerstone of their education. Listening to experienced traders and undergoing visual learning of things like candlestick charts is probably the most thorough and responsible way to set yourself up.
Next, check out the practice functions on apps like Trading 212 and eToro, where you can trade to your heart's content with practice money and zero risk. And when you’re ready to dive in, news stations and Twitter will be your new best friends in keeping a watchful eye on the markets.
How do I protect myself when day trading?
There are three ways you can protect yourself from spiralling losses, and they are:
- Set a stop loss
- Set a stop loss, and
- Set a stop loss.
Pick your entry point, and set a stop loss at -1%. This essentially means your position will automatically become closed if the value starts to drop suddenly. You will experience an almost overpowering urge to dig your heels in and tell yourself “it will go back up!” but a) it could take weeks or months, b) if it drops low enough to trigger your margin call and you don’t have enough funds in your account, your position will be closed and you’ll lose everything and c) it might not go back up. Liquidation and bankruptcies happen and they can happen unexpectedly if a company was sly enough in concealing its difficulties.
It’s impossible to be a successful trader without losing some money at some point. Your only way to trade safely and profitably is to mitigate risk.
There is another way to protect yourself against plummeting profits (and your own impulse), and that’s to have a set of conditions for selecting a trade. These might be things like if trading volumes are over x amount, if a stock has consistently increasing values over the past 3 months, and if seller percentages are less than 3%. These things may sound like jargon to you as a beginner, and if they do, they’re great things to teach yourself before you begin. Having a checklist of conditions, and sticking to it no matter how tempting the trade, will prevent you from trading emotionally or “on a hunch”.