Day trading is the buying and selling of a financial instrument to make a quick profit. You might hold a trade for a few seconds or a few hours, but the span of the trade does not exceed your trading day.
If you hold a position until the next trading day, it doesn’t qualify as a day trade. Day trading requires quick and accurate analysis and decision-making. It is a very high skill to be able to execute a trade at the best point to maximize your profit.
Instrument Qualities
What attributes should you look for when you are considering a market to trade?
- Liquidity – Ease of buying and selling. Are enough people trading the market that you can easily buy or sell and not get “stuck”?
- Volatility – Price fluctuation. Does the market have enough price movement, to create good profit opportunities? All markets go through phases of expansion and consolidation. You want a market that has enough periods of expansion to make trading worthwhile. If a market doesn’t have enough up and down movement or is “flat” most of the time, it is not a good candidate for day trading.
- Low Transaction Cost- Markets with lower market costs, lead to greater profits for you.
- Leverage – Lower capital levels required. With leverage, you can trade amounts greater than the cash you have on hand. Leverage is a two-edged sword, in that if the market goes against you, you may face a margin call.
- Market Information – You want a market that has enough information about it. Markets often move on major news events, so choose a market that gets a good amount of attention.
Day Trading Instruments
The following instruments all meet the above criteria and offer a good fit for day trading.
Forex
Foreign currency exchange markets are available 24/7. They offer high liquidity, high volatility, low capital costs, and low transaction costs.
Bonds
Bond CFDs offer high liquidity, high volume, and very low transaction costs. Bonds offer a very good way to reduce risk across your investment portfolio.
Indices
Index CFDs are some of the most liquid and highest-volume trading instruments. Perhaps not as volatile as some other instruments, nevertheless they provide a solid option for day traders. Stock Index indexes generally show the greatest volatility during the session of the market they represent. For instance, if you live in Asia or Australia, trying to trade a US index likely means much less volatility than trading an index closer to home
Commodities
Commodity CFDs like crude oil or gold make for good day trading. These commodities are widely traded around the world, which makes for very liquid markets. They are also highly volatile markets. They are choice for experienced investors, but new investors should trade with caution, as their volatility can spike very quickly and it can be easy to get stopped out.
Studies have shown that, although there are more men day traders than women, women tend to make better day traders. Women tend to trade longer time horizons and take fewer risks. Women are less inclined to over-trade. Stay-at-home moms can turn into excellent traders.
