Day Trading

Although I do not consider myself personally to be a “day trader” as such, I did have the honour of once being mentioned as a day trader in the Money section of the UK’s Sunday Times newspaper.

It’s probably a fair bet (no pun intended) to assume that most first-time spread bettors will start out with the notion that they will be “day trading”. It sounds so glamorous, doesn’t it? And with many of the spread betting companies shouting from the rooftops about their fast execution and tight spreads, there is seemingly nothing to stop you having a go.

So do have a go, and good luck with it, but be mindful that the spread betting companies only make money – via the bid-ask spread – when you open and close positions. The more you trade in and out, the more money the spread betting companies make, but of course it’s not a problem for you if you are also making money on those trades.

The other problem with day trading is that you are up against the professional full-time traders, their trading algorithms (computer programs), and – dare I say it? – their inside information. So it’s difficult to compete with them if you’re also trying to hold down a full-time regular job that prevents you from being glued to your computer screen all day. I do have that luxury, but I’m guessing that most of you don’t.

Having set you expectations at a suitably low level, now let’s look at what day trading is.

Day Trading Explained

Day trading means opening one or more trades during the day and then closing them at the end of the trading day for whatever profit (or less) has been accrued during the day. A day trade could last for just a few seconds, several minutes or even hours, but no longer than a day.

The benefits of day trading are:

• You notch up some profit (and hopefully not a loss) each and every day, so you can say “Hey, I made £100 today!”
• Because you hold no trade positions overnight, you incur no overnight financing costs and cannot be adversely affected by overnight price gaps on your trades.

The downsides of day trading are:

• You trade more often, which means you lose out more often on the bid-ask spread, but at least you don’t pay an additional “dealing fee” each time you open or close a trade as you would with traditional share dealing.
• Your profit is limited to whatever profit you can accrue in a day, so you won’t get any extra benefit if the FTSE 100 index (for example) goes even higher tomorrow.

Oh, and just to be clear: when day trading you don’t have to wait until the end of the trading day if you want to close a trade early at a good profit.

Day Trading Example

The following chart demonstrates a successful day trade. The trader opened a long spread bet at the first signs that the price of Skyepharma shares was stirring on the morning of April 20 2012. When the UK market closed that day at 4.30pm, the trade was closed for a profit of 40 points – which equates to £40 on a £1-per-point spread bet and a more respectable (for a day’s work) £400 profit on a £10-per-point spread bet.

Skypharma Chart courtesy of Google Inc. (annotated)

Note that this day trader could have eked out an additional 10 points of profit, i.e. 25% more profit, by closing the trade manually before the end of the trading day. However, we can deduce what he “should have done” for an even greater profit only with the benefit of our perfect hindsight.

If this day trading example has made you feel like you want to rush out and start day trading yourself, then a reality check is in order. What if the price had gone the other way, leaving you tens or hundreds of pounds down at the end of the day? You will read later how such trades must be protected, for example using a stop order.