Day trading – the basics

There was a time when day trading was reserved for only the most elite investors. Those who had the means to act quickly on a hunch. That is no longer the case. With the rise of discount brokerage platforms and free trading apps, day trading is made available to most investors. However, before you decide to go all in, here are a few strategies that could help you trade easier.

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What is day trading, exactly?

If you buy and sell (or sell and buy) a security within the same day, you are day trading. Day traders leverage fluctuations in an asset's daily price with a goal of turning a profit. It is quite common for day traders to buy and sell the same security a number of times a day.

They base their decisions on knowledge of the market and current trends.

While stocks are the most common, traders in Canada have the choice of trading US stocks, Exchange-Traded Funds (ETFs), and options. There is no minimum investment amount required to start day trading, however discount brokerages may set their own trading minimums and margin requirements. 

Day traders vs. active traders

Day traders differ from active traders who trade frequently but not always within the same day. Active traders focus on short-term opportunities but may hold a position for multiple days. It's safe to say that all day traders are active traders, but all active traders may not be day traders.

Day trading strategies to consider

While this is by no means a comprehensive list of day trading strategies, we've included six common tactics to help you get started. 

  1. Price action: A simple trading strategy that involves the study of charts to identify patterns and predict the direction of an asset's price. 

  2. Scalping: This combines fundamental and technical analysis to take advantage of small price changes in the market. These positions can last mere minutes or seconds. The goal is to sell a position quickly at a profit, so having an exit strategy is a must.

  3. Trend following: This strategy includes simply following trends and riding market momentum. Day traders use trends, momentum, and volume indicators to go long when prices are rising or go short when they're falling. 

  4. Counter-trend trading: This involves deliberately placing trades against current trends. It banks on an asset’s value reversing its direction or settling to a price point that is more stable.

  5. Fundamental trading: This approach includes using fundamental analysis such as the study of key economic indicators and financial figures to arrive at a buy or sell decision.

  6. News trading: For day traders, a news event can be a source of valuable data and any information that can affect stock prices is highly valued. This can include everything from a new product announcement to industry rumours. Day traders use this information to help make strategic decisions.

The risks and requirements

Any activity that offers potential for gain, comes with an equal amount of risk. Day trading is no different.

  • To find an angle or approach you may need to spend a few hours in research each and every day. Day trading requires a time commitment, and you may have to log up to 40 hours a week as a full-time trader.

  • You will probably have to pay a commission on each trade. If you plan on executing multiple trades a day, the fees can add up. 

  • Day trading, if done incorrectly, can significantly impact your finances. Therefore, it’s a good idea to know what you are investing in.
  • The potential for quick financial losses can make day trading extremely stressful. It is certainly not for the faint of heart.

Day trading – tax implications

As a day trader, you will need to calculate your total income or loss for the year. The process is similar to filing business income. In fact, any assets you own are treated as inventory until sold.

Your income from day trading is fully taxable at your nominal tax rate. That is because it is classified as business income. Your day trading losses are fully tax deductible against employment income as are certain related expenses. It is always important to consult with a tax professional.

It may be a good idea to consider currency conversion implications. Do you have any losses in U.S. Dollars? They will need to be calculated in Canadian Dollars for tax purposes. Also, if you're claiming any tax deductions, you will need to present receipts. 

Is day trading legal?

Yes, it is. You do however need to make sure that your discount brokerage firm is regulated by the IIROC (Investment Industry Regulatory Organization of Canada). It regulates investment dealers in order to protect investors.

Getting started with day trading

You can work toward achieving day trading success by following these steps:

  1. Choose an online broker, also known as a discount brokerage, based on criteria that's important to you.

  2. Open an account. Both cash and margin accounts offer added flexibility.

  3. Read up on different trading strategies.

  4. Make informed decisions by staying current, following the news, and gathering data.

  5. Curate a list of securities to track.

  6. Use screeners to identify opportunities.

At TD Direct Investing, we offer innovative tools, education and support to help you work toward your trading and investing goals. 

In conclusion

More art than science, day trading requires a deep understanding of the market. There is a level of risk involved. Make sure you know what you're doing before you get started. If you like the excitement and feel you can handle the risks, day trading may be just the thing for you. 

Ready to start investing on your own?

With robust platforms and advanced tools, we're here to help make identifying and tracking trading opportunities easier. Log in to WebBroker to register or open an account if you're not an existing TD Direct Investing client.

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