What is day trading?

If the stats are to be believed, the last couple of years have seen a sharp rise in day trading in the UK. A 2021 survey by Consumer Intelligence for GraniteShares found that nearly 1.8 million UK adults dipped their toes into day trading during the pandemic. But while the idea of making “easy” money trading shares from the comfort of your living room might sound appealing, it’s rarely that easy in practice. Day trading is a risky business that’s best suited to experienced investors, and to have a chance of succeeding you need knowledge, dedication, fortitude, and a healthy bank balance. This guide outlines the key things you need to know.

What is day trading?

Day trading is the practice of buying and selling investment assets (or “financial instruments” as they’re formally known) over a very short time period in a bid to make a profit. Day traders might hold these instruments for anything from a few seconds to a few hours. Assets bought and sold can include stocks and shares on the stock market, currencies on the forex market, or bonds on the bond market.

How does day trading work?

When you day trade, each trading period is contained within a single day. You start purchasing at the start of the day and close out at the end of the day, starting from scratch the next day. The idea is to take advantage of tiny market movements by buying and selling multiple assets within the same day, sometimes more than once per asset. The profits you can make per trade will be small, but in theory, should add up over multiple trades.

What are the risks of day trading?

All forms of investing carry risk. Markets can be volatile, and the performance of companies that trade on the stock market can be affected by a wide range of factors. Many of them, such as the coronavirus pandemic, or even the weather, are outside of a company’s control.

Traditional investing strategies tend to rely on keeping your money invested for the long-term, to ride out any (hopefully short-term) volatility and give markets a chance to recover and grow. Day trading takes the opposite approach and relies on split-second decisions and razor-thin profit margins. Getting it wrong could result in you losing significant amounts of money in a short space of time – and the very nature of day trading means your investments won’t have time to recover.

Can I make money day trading?

It’s possible. But most people don’t, especially if they go in without having the skills, knowledge, experience, dedication and grit to succeed. Analysis by different sources suggests that between 70% and 100% of traders lose money. Only a handful of professional retail investors make day trading work for them on a consistent basis.

What are the costs associated with day trading?

Putting aside the capital you’ll need for trading, including any minimum initial deposits, you’ll need to pay certain fees to use a trading platform and to make transactions. These can include:

• Account/platform fees. These may be charged monthly or annually.
• Trading fees. Some platforms offer discounts for high-volume traders, such as day traders.
• Inactivity fees. Some platforms apply these if you don’t trade for a few months (unlikely if you’re a day trader) but have money sitting in your account.
• Withdrawal fees. Adding money to your account is often free, but taking it out can cost you.

Not every trading provider charges every one of these fees, and some even advertise “free” or “zero commission” trading. But you can be darned sure they’ll be making their money somehow, so scrutinise charges carefully to avoid getting caught out.

Do I pay tax on day trading profits?

That’s a very good question, and unfortunately there’s no clear answer. Every day trader’s activities are unique, and HMRC considers each on a case by case basis. It will depend (among other factors) on the market you’re trading in, the instrument you’re using to trade (are you using derivatives, or trading directly in assets, for example), and whether you’re registered as a sole trader or a limited company. And, of course, if and how much profit you make.

Your best bet is to contact HMRC to explain your situation. It will advise on the tax you need to pay. But it’s best to assume there will be some tax payable on profits, until you’re told otherwise.

How much money do you need for day trading?

Some platforms technically let you start trading from just a few pounds. Some need more (up to £1,000 in some cases). In practice, you’ll probably want at least £250-£500 to get started, as any less limits the number of trades you can make. Some markets may demand more capital than others.

Obviously, the more capital you’re able to commit, the more you can potentially make (especially given the small profit margins from each trade). And if, as we’ve outlined above, you’re treating day trading as a full time job, you may need to commit more than the minimum to have the chance of making a decent living. But, equally, the more capital you commit, the more you stand to potentially lose. Trading is high risk, so you shouldn’t commit any money you can’t afford to lose.

What markets can I day trade in, in the UK?

There are a few markets available for day trading in the UK. Keeping track of every market can be a big task, so many traders focus on just a single market. Some narrow down their focus still further – for example, someone trading on the commodities market may choose to focus only on oil.

• Stocks and shares. Buying and selling shares on the stock market is a common choice for those new to day trading, as there is a wide variety of shares to trade.
• Indices. These measure the performance of a group of shares from an exchange (such as the FTSE 100). Trading in indices gives you exposure to a larger portion of the stock market.
• Currencies. These are traded on the Forex market. You trade in currency “pairs”, based on the conversion of one currency into another, with profits and losses made on shifting exchange rates.
• Commodities. Trading commodities involves the buying and selling of physical assets, such as gold, oil, corn or coffee. There tends to be high volatility in these markets due to the constant shifting of supply and demand.

What do I need to start day trading?

You’ll be competing in the same arena as experienced, professional traders that have been operating for a long time and have all the tools of the trade (so to speak). To stand a chance of succeeding, you’ll need to properly equip yourself, metaphorically and practically. Here’s what you’ll need as a minimum.

1. Knowledge. Education is key. We’ve highlighted above that this is not a gig for novice investors. But even those who are experienced in traditional forms of investing will have plenty to learn when they’re starting out. You’ll need to get to grips with the factors that impact day trading, including the liquidity of markets, the volatility of assets, and trading volumes (how often assets are bought and sold in a given period). Consider taking an accredited course in trading and read everything you can. And, before committing any of your own capital, try out a demo trading account (offered by many trading platforms).
2. The right mindset. While day trading can be exciting, you’ll typically be operating alone. You’ll need to make decisions fast, and solo, so you’ll need to be prepared to do so without validation from colleagues. Those who decide to pursue day trading as a full-time career sometimes rent trading desks at shared office spaces, or join online groups of fellow traders. Bear in mind, though, that day trading can be a cut-throat, competitive industry – each trader’s success may come at the expense of another’s failure. Fellow traders may not have your best interests at heart, so be selective and take any advice with a pinch of salt.
3. A reliable Internet connection. The last thing you need is for your Wi-Fi to drop out just at the point you’re about to make a crucial trade. A cable-based connection to the Internet might be more dependable. You’ll want decent broadband speeds too, as having multiple trading web pages and applications open at once could slow you down.
4. A trading account. You can choose between big, established investment platforms such as IG, or opt for a newer, digital-only challenger such as eToro or Trading 212. It’s worth checking several and seeing what tools and assistance they have to offer, plus how much they cost, before making your decision.
5. Trading and charting software. Your trading account provider is likely to provide access to some pricing charts and market data. There’s also more advanced tools available, such as ProRealTime and MetaTrader4, aimed at experienced traders that use advanced technical analysis. You could also consider backtesting software. This runs a simulation of your trading strategy through historical market data using an algorithm, based on the market a few years ago. Obviously, markets change over time and there’s no guarantee that what might have worked 5 years ago would work now (and vice versa). But its a decent way to test a theory.
6. Capital. You’ll need enough money to make trades frequently enough to have the chance of turning a profit. It’s best to start small and focus on trading a few stocks, building up as your experience, confidence and, importantly, success rate grows. Don’t forget to account for platform and trading fees.
7. A trading plan. Lay out for yourself what you are hoping to achieve, some realistic targets, and what you can afford to lose. How much of your capital do you plan to put into each trade (the exact amount may differ depending on the risk of each trade)? Don’t expect immediate success, there’s a steep learning curve. You’ll also want a clear plan that establishes your triggers to buy and sell financial instruments. Sadly, gut instinct alone is unlikely to cut it. We’ve outlined a few day trading approaches below.
8. A risk-management strategy. It’s important to put measures in place to minimise potential losses by avoiding worst-case scenarios. We’ll explain this in more detail below.

How do I know what to buy?

When deciding what to focus on when trading, day traders typically look at 3 things:

• Volatility. How much the price of a given asset is likely to change in a day. The higher the volatility, the higher the potential gain or potential loss.
• Liquidity of the market. How easily and efficiently can an asset be converted into cash without affecting its market price. Markets are more “liquid” when there is a small difference between the expected price of a trade and the actual price (meaning that what a buyer offers and the what seller is willing to accept are pretty close). Liquidity is important in day trading, when fast purchases and sales are key.
• Trading volumes. These are a measure of how often an asset is bought and sold over a day. A high volume suggests high interest in the asset, and can be a predictor of a price change.

How do I know when to buy or sell?

Knowing when to buy and when to sell involves monitoring your chosen market closely, using real-time news services and trading and charting software, and applying a consistent strategy (or set of rules) for what triggers a purchase or sale.

What day trading strategies are there?

You’ll come across a number of day trading strategies, or “styles”, and sometimes the same approach can be known by different names. Often, approaches are based on entering and exiting markets based on certain pre-determined price triggers. It’s better to choose, and stick to, a consistent approach, as relying on luck alone is unlikely to be consistently successful.

Scalping

One of the most popular day trading strategies, this involves selling almost immediately after a trade becomes profitable. It focuses on small, frequent profits. While it may not make the biggest possible profits, it minimises the risk of missing the peak and losing money.

Trend trading

With this approach, you study whether asset prices are rising or falling, and buy or sell depending on the direction of the trend. You’ll buy when prices are clearly on their way up, and sell when prices are making a succession of falls. This approach isn’t unique to day traders, but day traders will close out at the end of the day regardless of whether they think an asset will continue to rise or fall.

Swing (or pivot) trading

With this kind of trading, you’ll be looking to take advantage of an asset’s daily volatility. The aim is to predict the lowest low of the day and the highest high of the day, and buy (or sell) at the next sign of a reversal.

Mean reversion

The theory here is that prices will eventually move back towards their historical average. It uses technical analysis to spot assets that are performing differently from their historical average, looking to take advantage of the return to normality.

Money flows

This uses a combination of volume and price to assess whether an asset might be overbought or oversold, by comparing the number of trades the previous day to the current day. Money flow traders sell when assets are overbought, and buy when they’re oversold.

How can I limit losses when day trading?

We’ve said it before and we’ll say it again, day trading is risky, and there’s a good chance you’ll lose money, particularly at the outset.

But there are measures you can put in place to keep the size of losses to a minimum. Risk management tools include:

• Stop-loss orders. These are instructions to your broker (or trading platform) to automatically execute a trade if the market price moves below a certain point. They limit risk by closing a position once it reaches a certain level of loss.
• Limit orders. These specify in advance the maximum price at which you will sell an asset, or the maximum price at which you will buy it.

Both of these measures have pros and cons, and because they’re applied automatically, there is the risk of you missing out on opportunities. But they can help minimise the worst losses and the risk of poor decision making on the spur of the moment.

If you don’t want to apply automatic rules with your broker or platform, you can set your own “mental” stops and limits and be ruthless about applying them. This is reliant on you being vigilant, and sticking to your own rules, though.

Another important way to minimise your risk is simply knowing when to cut your losses. Rather than allowing poor trades to run in the hope that things will get better, acknowledge when you made a poor decision and exit quickly, before losses get worse.

A good tactic is to set yourself a maximum affordable loss per day. If you hit this level, close out your positions and stop trading for the day. You won’t have long to wait till your next trading day.

What’s the difference between day trading and investing?

To coin a phrase, with day trading, you’re in it for a (hopefully) good time, not for a long time. That’s not to say you shouldn’t take it seriously. As we’ve already highlighted, day trading is a full time occupation. But you don’t hold any assets for longer than a day, at most. In some cases you don’t hold the assets at all, speculating instead on their prospective growth or decline (their “futures”). You rely on very short term market changes to turn small profits on many different trades, in a short space of time. To a certain extent, you’re reliant on the markets to be volatile, else there’s no money to be made.

Traditional investing, on the other hand, focuses on riding out short term market volatility by building up a diverse portfolio of assets that you hold onto for long periods, with the expectation of growth over time. Depending on your investment strategy, either you, your investment manager, or a fund manager, may buy and sell specific assets. But it requires far less ongoing vigilance. Most investors are looking to either gain an income through dividends, or to grow their portfolio to use at a date years in the future (for their retirement, for example). Long term investment is not without risk, as the value of investments can go down as well as up, but it’s considered a far less risky approach than day trading.

Bottom line

The difficulty, high risks and time commitment of day trading mean that it’s unsuitable for most people. Even if you have the time and investment knowledge, a solid trading strategy, and like a challenge, you need to have enough spare capital (once you’ve accounted for your basic living costs) to get started. You also need to be prepared, mentally and otherwise, for the chance that things won’t go your way. If you’re confident that you tick all these boxes and want to give day trading a try, use the guidance in this article to weigh up the pros and cons of different approaches and to get started on your journey.

Frequently asked questions

• What equipment and software do I need to day trade?

  You’ll need a decent broadband connection and access to charts and tools that let you closely monitor market prices and assess volatility, liquidity and trading volumes. Your chosen trading platform will provide a range of charts and tools that should be enough for many day traders. There’s also more advanced tools available, such as ProRealTime and MetaTrader4, aimed at experienced traders that use advanced technical analysis.

• Are there any day trading apps?

  Yes, many trading platforms offer mobile apps for day trading as well as their computer-based services.

• Is day trading legal in the UK?

  Yes, it is legal to day trade in the UK. However, as we’ve outlined above, that doesn’t mean it’s risk free. And you should make sure you trade with a provider that’s authorised and regulated by the Financial Conduct Authority. You can check a provider’s authorisation status on the FCA register.

• Can I practise day trading without putting my money at risk?

  Yes. Some trading platforms let you open demo accounts with a certain level of virtual funds (£10,000 for example). These demo accounts let you practise day trading with a range of financial instruments, such as stocks and shares, futures and cryptocurrency.