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What is day trading? The complete guide for beginners

Published on: 05/11/2021 | Modified on: 27/01/2023

Day trading in the UK is a popular short-term strategy​. This approach has become increasingly popular for traders on the move or at home, thanks to technology such as mobile apps. In this complete guide to day trading for beginners, we explain what the strategy is and how it works, along with examples using stocks and forex. Continue reading to discover everything you need to know including how to get started.

KEY POINTS

  • Day trading involves entry and exit points on the same day
  • Most day traders focus on price action trading, which often uses data based exclusively on price movement, rather than wider long-term factors
  • A range of technical analysis tools can be used, enabling you to predict where you believe a stock’s price might go next
  • Profit is built through small short-term trades, which means less chance of a big win, but equally less chance of a big loss
  • Successful day traders need the ability to move quickly, but not panic, and remain disciplined enough to stick to their own rules

What is day trading?

As its name suggests, day or intraday trading is a short-term approach that involves the buying and selling of financial instruments and closing out of positions by the end of the day to profit from small movements in price. The more the asset moves, the more profit or loss you’ll make, depending on which way you trade.

Trading in such a short time horizon allows traders to profit from small price fluctuations while protecting themselves from negative price gaps that might develop overnight between trading sessions, although the strategy doesn’t come without risks.

This approach has increased in popularity over recent years in the UK. Technology has played a big part in this — thanks to fast broadband and mobile connections we have a wealth of real-time market information at our fingertips. This has led to many more people accessing the markets and placing trades throughout the day to try and profit from volatility as market prices go up and down.

What are the different types of strategies?

As you’d expect, looking for buying and selling opportunities requires a strategy. Here are some of the most popular day trading strategies that can be used by traders of all experience levels.

Price action trading

Price action trading​ is the foundation for all technical analysis, helping traders to identify trends, breakouts and reversals. The strategy involves looking at the movement of a security’s price over a period of time to determine trading decisions.

Scalping

Scalping is a very short-term strategy whereby the trader buys and sells an individual asset several times over the day, with the aim of making numerous small profits that can add up to a cumulative larger gain (although not always). Some scalpers will trade on the same asset hundreds of times a day — sometimes with only a few seconds’ gap between buying and selling. This strategy requires commitment, concentration and a sharp eye and understanding of short-term charts to make a meaningful profit.

Remember that if trading CFDs on stocks, you will incur a minimum commission fee each time you open or close a transaction, so placing several trades within a short timeframe on shares for a small amount of capital may not end up being profitable. When formulating your strategy, you also have to consider the costs and fees that may apply, to allow your strategy to become profitable.

Short selling

Short sellers target an asset they believe will decline in value, sell it at a high price with the intention of buying it back later at a reduced rate to make a profit in the difference. Therefore, short sellers are reliant on a drop in a security’s price, in contrast to traders who prefer to adopt a buy/hold strategy.

There is significant cost and risk that comes with short selling. If trading CFDs, any profits you make will be liable for capital gains tax, and commissions are also charged for share positions, meaning that you could end up spending a large amount on costs. There is also significant risk if, after opening a short position, the stock rises. The more it gains, the more you lose, which means there is potentially no limit to your losses.

Losses will affect your account value which might eventually drop below the standard close out level, triggering a close out (also known as liquidation). It is important for you to monitor your account closely when opening a short position and ensure you are using the risk management tools available on our platforms.

Momentum trading

Again, this strategy focuses on price action and movements rather than fundamental factors such as the state or overall future of a business (if trading on shares). The technical analysis around momentum trading looks at price projections based on historical price data. While it is all about the price, traders need to be aware of macroeconomic events such as news stories that might suddenly influence those prices.


See our debate on day trading vs swing trading​, a more medium-term strategy that is popular with traders.

How to day trade

  1. Choose your product. Spread bets and CFDs are two types of derivatives that allow you to speculate on an asset’s price action without directly owning it. Read about the differences between spread betting and CFD trading, including how they are taxed.
  2. Explore the variety of financial markets. We offer trading on over 12,000 financial instruments within the share, commodity, forex, treasury, index and ETF markets.
  3. Decide whether you want to buy or sell. Determine your entry and exit points based on whether you think the price of an asset will rise or fall.
  4. Keep up to date with news. Whether you are day trading stocks or forex, these markets can be impacted in the short term by major news or economic events.
  5. Utilise risk-management controls. Stop-loss orders can help to close out positions if the market moves against you, minimising your risk of capital loss.


If you’re feeling apprehensive about the potential drawbacks of intraday trading and want to experiment first, you can start with a risk-free demo account, which allows you to practise first with £10,000 worth of virtual funds. Once you feel ready, you may open a live account to get started.

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What are the costs?

Every trader pays fees to their broker. These vary depending on the product and market you trade, but most forms of trading are charged according to the spread – that is, the difference between the buy price and the sell price quoted on any given market.

For example, if your broker quoted you a spread of 99-101 and you bought at 100, you would only make a profit from 102 upwards. If you choose to short sell, this will cost more as you have to borrow the shares to sell and pay interest on them – this additional cost is factored in the overnight holding costs explained below.

Other potential costs to bear in mind include:

  • Holding costs – if you keep your positions open overnight. These can be positive or negative depending on the direction of your trade and asset you are trading.

  • Guaranteed stop-loss orders​ (GSLOs) – which exits a trade at a certain price point regardless of market volatility. This guarantee comes with a cost, known as the Premium. The Premium will be refunded entirely if the GSLO is not triggered.

  • Commission – this only applies to CFD trading but any transaction on a CFD on a share will be subject to minimum commission fees.

  • Rollover costs — Costs associated with rolling a position on a forward to the next available forward.

That also means there’s no specific answer to ‘how much money do you need to day trade?’. There is no minimum amount and your budget will largely depend on the markets you choose to trade in, as well as your own personal preferences. Each product carries different fees which are disclosed on our website (through the link below), in the Product Overview section of the platform, and also on the order ticket when placing a trade.

See an overview of our trading costs >

Indices

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Forex

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Commodities

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Shares

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Bonds

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Pricing is indicative. Past performance is not a reliable indicator of future results.

Example 1: day trading stocks

Say a day trader’s technical analysis suggests an upward pattern in a stock’s price. The trader places a buy bet for 1,000 shares at £10 each. Within a few minutes, the price has moved to £10.20 a share, and the trader sells, making 20p per share or £200 on the trade. The price has moved only a small increment, which is why day traders tend to do several trades per day in order to maximize their profits.

Meanwhile, the trader might also identify a stock whose price is also £10 but is falling and decide to short it. The trader borrows 1,000 shares and immediately sells them for £10 each for a total of £10,000. Over the next few minutes, the price falls to £9.80 a share. In response, the trader buys 1,000 shares back at this lower price for a total of £9,800, making a profit of £200.

On a CFD account, commissions on UK shares are 0.1% of the value of the trade, with a minimum of £9 per transaction. Here, the commission resulting from this trade would be £19.80. To get the net profit, traders need to subtract the commission from the total profit. In this case, the net profit would be £180.20. As this is a CFD trade, taxes may apply, but it is up to the traders to arrange their own taxes.

How can you find the right stocks?

Stock screeners​ are a useful tool for picking intraday stocks. You can filter based on criteria such as the following:

  • Daily average volume has an impact on the liquidity of stocks. A volume of greater than 1 million shares (or higher) would typically carry less risks than a market with low liquidity, as there will always be buyers and sellers present to keep the shares moving

  • Share price criteria, such as above $5 or £5

  • Indicators such as the average true range (ATR) or average true range percent (ATRP) can be helpful for finding stocks that tend to move a certain amount each day in terms of dollars/pounds or percentage

  • Listed on a specific stock exchange

Some stock screeners and trading platforms have chart pattern recognition. This can be used to find technical patterns on stock charts that may provide day trading opportunities. Learn more about using our chart pattern scanner​.

Top UK stocks to day trade

Here are some examples of stocks that are popular with UK day traders due to their average volume, liquidity and volatility within the stock market, according to statistics taken from Yahoo Finance.

CompanyAnalysis
Lloyds Banking (LLOY)High average volume, typically over 100 million shares per day and moderate intraday movement.
Vodafone Group (VOD)Daily volume is typically over 60 million shares and usually a pound or more of movement in the share price.
BP (BP)Active intraday movement and more than 30 million shares typically change hands each day.
Rolls-Royce (RR)Typically, a pound or more of price movement each day combined with a daily average volume north of 30 million shares.
Tesco (TSCO)Capable of moving several pounds a day and daily trading volume typically exceeds 15 million shares.

Example 2: forex day trading

Next, let’s imagine that the GBP/USD is falling in value due to political volatility and a forex trader spots the opportunity to short sell. When they open their position, it’s trading at 1.23015 so they decide to sell at 1.2301 as they think it will continue to drop further. They decide to open a short CFD position with a total position size of £500,000 or $615,050.

Their prediction is correct and the pound falls to 1.122015. They decide to buy back GBP/USD at the new buy price of 1.12202, closing the trade at $610,100. Because they sold at $615,050 and bought back at $610,100, they make a profit of $4,950.

Day trading forex doesn’t always involve large amounts of capital like the example above – it can also involve profits of £2, £10 or £100 depending on your position size, but as the trader repeats this process multiple times throughout the day, it can amount to large profits for some (or equal losses).

What are some useful indicators?

Day traders tend to focus solely on technical analysis and price movements rather than fundamental factors. They can apply a variety of trading indicators​ to help predict price movements, trends and reversals. There is no magic formula on how to day trade, only data, and each trader has their own rules and attitude to risk.

With that in mind, here are some of the most popular technical analysis tools used:

  • Simple moving average (SMA). This is the average price of a security over a certain length of time plotted as a single line on a candlestick chart, and is customisable over different time horizons.

  • Stochastic oscillator. This indicator highlights price momentum and helps to identify overbought and oversold assets.

  • Relative strength index (RSI). This gauges whether momentum is accelerating or decelerating and can potentially foretell reversals.

  • Bollinger Bands. These are based on a moving average with two trading bands above and below it, which move further apart in times of volatility. When the average touches the upper band it’s considered overbought, and if it touches the lower band it is oversold.

  • Mean reversion. This financial theory suggests that after an extreme price move, asset prices tend to return to normal or average levels.

Explore our day trading platform and mobile app

Traders can get started by spread betting or trading CFDs on our award-winning web platform and mobile application**.

  • Technical indicators, social trading commentaries and market analyst updates

  • Trading on forex, indices and commodities via MT4

  • Trade on-the-go on mobile or tablet via iOS and Android

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What are some tips to keep in mind?

As stated, every trader has their own priorities and goals so specific advice that works for one may prove disastrous for another. Here are some popular day trading tips and rules to follow.

  • Manage your risk. Risk-management is about limiting positions so if losses happen, you can afford to soak them up. It’s not about just about whether you win or lose, but by how much.

  • Use stop-loss orders. Be mindful that standard stop-losses can be prone to slippage when price gapping occurs, whereas guaranteed stop-losses will always close out positions at your chosen level.

  • Stay level-headed. Always try to remain calm and remember the rules you’ve set.

  • Act decisively but be flexible. Market conditions can change rapidly, and therefore you need to be prepared to be flexible and alter your trading strategy accordingly.

  • Patience is a virtue. Don’t trade for the sake of it – if you can’t find any viable opportunities, it may be better to wait for the right trade rather than impulsively betting on anything.

  • Make your own decisions. Try not to let other traders’ opinions unduly influence you – what works for someone else may not match your day trading strategy.

  • Monitor your stress levels. Intraday trading requires constant attention and motivation so if it gets too much, step away — you can always return to trading later. You can also contact our client services team​ for support via email or phone.

  • Learn from your experience. Write down your reasons for entering your trades and what you did and how, why and when, and this will help you to learn from your past trades.

  • Track your progress. Set goals of where you want to be. After you have been trading for a month, take time to evaluate what you’ve done and whether you achieved what you intended, and ask yourself if there is anything you’d do differently.

How to get started

To become a day trader and start spread betting or trading CFDs on more than 12,000 instruments within the financial markets, you can get started by opening a demo account with us. Make sure you understand spreads, margin rates, commission fees and overnight holding costs, which are all important things that should be taken into consideration before getting started within the financial markets.

You can also download our eBook below which gives step-by-step instructions on how to get started and the benefits, risks and other key points to consider when day trading.

Day trading for beginners

Learn how to day trade the stock market with our eBook for beginners.

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FAQs

What chart timeframe is good for day trading?

When day trading, it’s helpful to study a range of chart timeframes, rather than one single timeframe. For example, a day trader could study 15-minute, 30-minute and hourly charts for different purposes, such as overall trend and entry and exit points. Find out how to choose the right timeframe chart for your strategy.

Is intraday trading safe?

Intraday traders should have good knowledge of the financial market or asset being traded, in conjunction with the use of risk-management tools. When trading volatile markets in particular, the use of a stop-loss order type could be useful, to protect against the potential for making a larger-than-expected loss. See our range of execution and order types.

How much money do day traders make?

Day traders aim to make small but frequent profits based on the fluctuating price movements of an asset. These profits can add up over time if the trader is successful. Day traders, like all spread betters and CFD traders, are subject to spreads. Other trading costs may include commissions, for trading share CFDs, and a premium if using a guaranteed stop-loss order, which is refunded if the GSLO is not triggered. Learn more about our trading costs.


*Tax treatment depends on individual circumstances and can change or may differ in a jurisdiction other than the UK.

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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. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although we are not specifically prevented from dealing before providing this material, we do not seek to take advantage of the material prior to its dissemination.

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