Day trading guide

As a day trader, you can be your own boss. You can work from an office or at home, or even while travelling – thanks to advances in mobile technology.

But day trading is not for everyone and there are some things you should be aware of before you start day trading the financial markets.

How is day trading different from longer-term trading?

Technically speaking, the only difference between day trading and other forms of trading is the timeframe. Instead of taking positions for weeks or years, day traders typically hold positions over one day, exiting those positions before the market closes. Day traders need to be continuously focused, as markets can move suddenly in the short term.

Things to remember when day trading

Follow your own rules

Discipline is one of the most important attributes that successful traders have in common. Keep a watchful eye on your bad habits, and look to resolve them as soon as possible. You are trading in a disciplined way if you define a carefully considered set of rules to govern your trading decisions and then follow them.

Find ways to stop yourself from breaking your rules and look to address it if it is becoming a problem. As a day trader, it's a good idea to re-evaluate your rules at the end of each month, due to the shorter time frame of this style of trading.

Manage your money

Money management is essential if you want to become a successful day trader. In fact, it is one of the essential elements of successful trading over any time frame. Certainly, if you are planning to trade for many years to come, you are going to need to apply successful money management strategies. There are whole books dedicated to this topic, containing many different approaches, and you need to take the time to find a method that you're comfortable with.

Risk-to-reward ratio is important. Remember, it doesn't matter if you win 90% of the time if your losses are much larger than your wins. What's important is that your wins are larger than your losses.

When trading on leverage, your losses can exceed your deposits.

Always use risk management

Never forget to use stop losses to manage your risk when you are placing your orders to enter the market. This is your insurance. You need to be aware of exactly where your stops should be prior to entering the trade. This is a good habit to have and will help protect yourself from trades that go against you.

Standard stop losses are prone to slippage when price gapping occurs, however guaranteed stop losses will always close out positions at your chosen level.

The psychology of day trading

Once you have developed an informed opinion – try to act decisively.

Stay calm. You should always try to remain calm. This is especially true when you are faced with a loss. Maintain a calm disposition and react in accordance with your rules. Mentally rehearse your worst-case scenarios so that, if they do occur, you are prepared and can keep a level head. Remember that when trading on leverage, your loss can exceed the amount you have deposited.

Don't let other traders' opinions influence your trading. Sometimes other traders will offer their views on the market and give advice without considering your trading methodology. If you want advice you should consult a qualified professional who will be able to appreciate your style of trading and give their thoughts accordingly, without throwing you off course.

Be patient. Emphasis needs to be placed on the importance of patience when trading. If you can't find any viable trading opportunities, don’t trade for the sake of it. As you get to know a market you may find that knowing when to trade becomes easier. Your intuition is something that sharpens as you become more experienced as a trader.

Be aware of your stress levels. Day trading can be stressful as it requires constant attention and motivation. You can counter this by taking time to think about your priorities. Get some perspective on trading and its place in your life. Increased stress levels can have a negative impact on your trading decisions so, if you feel like your stress levels are rising, it's probably a good time to step away. You can come back to trading later when you are in the right frame of mind.

Have a flexible approach. When you're trading it's also necessary to be flexible with your positions. Market conditions can change rapidly and so you need to be flexible in your approach. You need to be ready to adapt to changing market conditions all the time if you want to stay ahead.

Stick to your chosen market and a particular timeframe. These are two parameters you can control in an environment that can change very quickly.

Never be afraid of realising your profits. If you find that you have exited a trade at a profit but the trend continues, don't regret your decision. You have made a profit, start looking for the next opportunity. If you worry that you are frequently exiting too early and are missing out, you could design and test a re-entry technique.

Keep detailed trading records

When you are running a particular trade you could write down your reasons for entering it. This will help you later when you wish to evaluate your past trades in order to learn from them. By keeping good records and writing down precisely why you entered the trade you can increase your learning curve.

You also need to have a clear picture of whether you are where you hoped to be for the day, week or month. After you have been day trading for a month, take some time to evaluate what you have done. Look at your trades and ask yourself what you would do differently if you could do the trade again. This can help you to become a more consistent trader in the long term.

​CMC Markets is an execution-only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.