Looking to brush up on your knowledge of day trading? Find out what it is, how it differs from other types of trading, what the tax considerations are, and how you can get started today.
Day trading might sound pretty simple to some. It is just trading stocks, forex, crypto or other assets during the day, right? Wrong.
Day trading on international stock exchanges can be a great way to get involved in a variety of markets, but it differs from more traditional investing in many ways. So, what is day trading and how can you day trade in Australia? Read on to find out.
What is day trading?
Day trading is a form of investing in which you open and close positions on the same day. It can be looked at as the opposite of longer-term investment strategies. Day traders tend to try to take advantage of markets and assets that experience a lot of volatility or feature a lot of liquidity.
Day trading is legal in Australia, and same-day trading can be profitable for some. But, as with any investment strategy, it comes with its own set of risks. If you are going to be a day trader, you might want to think about some of its major features and requirements, including:
Time
Quick decision-making
Focus
Discipline
Risk-taking
- Time. Day traders need to be hands-on, as the windows in which they operate are relatively small. That means more time spent on trading platforms and tools.
- Quick decision-making. Because of these small windows, day traders need to be able to make buying and selling decisions quickly to take full advantage of market movements.
- Focus. This quick decision-making is combined with a strong focus. Capitalising on favourable market moves requires strong attention to detail.
- Discipline. Generally, day traders perform a larger number of actions with the goal of making a lot of small profits that add up over time. But it is important to remember not to make trades just for the sake of being active.
- Risk-taking. Any type of investing or trading has some level of risk, and day traders must be willing to take numerous risks each day.
How is day trading different from other forms of trading?
Day trading is different from other forms of trading in a few ways, many of which have to do with the overall strategy of day trading.
Instead of buying assets with the view of holding onto them for long periods of time before selling them (hopefully at a gain), day traders generally sell their assets the same day they buy them.
Day trading is very active which sets it apart from long-term investing that is more passive. Day traders are actively buying and selling and monitoring markets most days, while other investors will often only buy or sell occasionally.
Day traders also tend to use different tools to make decisions. Many rely on technical charts that show more intricate, minute, real-time changes in price. Longer-term investors will lean on more macro tools such as quarterly earnings reports and overall financial news and analysis for a more “fundamental” form of analysis.
How can you start day trading in Australia?
Here are some things to consider once you are ready to start day trading:
Have the right setup
Since you’ll be spending a lot of time actively trading, you want to make sure you have the right tools. Preferably two monitors, with enough real estate to have multiple windows with charts and your trading platform up at the same time is key. A comfortable chair is a good idea due to more screen time.
Find a strategy
There are plenty of day trading strategies out there, including popular ones such as buying the dips, fading, price averaging and scalping.
Start small
Even after you have taken some time to work on your strategy and you are ready to start using actual capital, it is a good idea to take it slow. Start with one type of asset, whether it is investing in stocks, exploring the crypto market or currencies investing. Also, consider sticking to one strategy to start with.
Start with sufficient capital
It is a good idea to have enough capital to start with to overcome initial losses. While you still want to stay disciplined and stick to your strategy, there is no guarantee you are going to see success early.
Be sensible
As with any type of investing, you only want to risk what you can afford to lose if things don’t go well.
Set a schedule
As we mentioned above, day trading is very time-intensive and takes a lot of effort and dedication. Having a schedule in which you set aside a chunk of hours each day is a good way to get started.
Choose a day trading strategy
Selecting a day trading strategy is an important step. Whichever strategy you choose, it should set boundaries to help guide your trading. These may include:
- When you trade
- The assets traded
- The amount of risk you are willing to tolerate.
There are many different day trading strategies to choose from, allowing you to find one to suit your trading style, personality and investment goals.
Some common day trading strategies include:
- Buy the dips. Using pullbacks as an entry point, day traders use this strategy in the hope that the asset value will rebound higher.
- Price averaging. Helping to potentially smooth out price fluctuations, the price averaging strategy sees day traders add to their trade in increments over a period of time.
- Scalping. Involving many trades per day, this strategy aims to take smaller, yet more frequent, profits. Day traders using this strategy require strict exit strategies to help reduce potential losses.
- Momentum. Focusing on signs of a trend reversal, day traders using this strategy look to invest in assets at the very start of an uptrend, selling as soon as the rally appears to be over.
Tip: Day trading is not easy and by no means a guaranteed moneymaker. Researching the market, strategy, and patience are all important elements.
Day trading crypto
In recent years, day trading cryptoassets has become more popular. How do you day trade crypto? It is similar to day trading stocks and other assets, in that you enter and exit positions on cryptoassets, such as Bitcoin (BTC) and Ethereum (ETH), on the same day.
So, why is day trading cryptoassets becoming more popular?
- It is a market that features a lot of volatility and liquidity. That means prices are constantly fluctuating, and there are a lot of people buying and selling.
- The crypto market is always open. It is not regulated like exchanges, so traders in Australia do not have to worry about time zone differences in the same way they would if they were trading on stock exchanges located in other cities around the world (more on that below).
Tip: Factors that affect the volatility of markets include the news cycle, economic data, and research reports. In the crypto markets, the same factors have an impact on cryptoassets.
How does day trading work on global stock exchanges from Australia?
Day trading in Australia on global stock exchanges shares a lot of similarities with day trading on the ASX. But there are a few important factors to bear in mind.
Time zone differences
Perhaps the main thing to remember when day trading on global stock exchanges from Australia is time zone differences. Popular international exchanges such as the New York Stock Exchange (NYSE) or the London Stock Exchange (LSE) have opening and closing hours that vastly differ from normal working hours here in Australia.
Currency conversion fees
Another thing to consider is currency conversion fees. For example, if you are buying shares from the US, they are purchased in US dollars. You will need to have a good handle on the exchange rates and any currency conversion fees incurred for purchasing and selling.
International investment differences
Finally, some of the benefits of investing in the ASX do not apply to investing in international shares. These include different rules regarding franking credits and dividends, as well as potentially different tax requirements.
What should you know about day trading and tax in Australia?
Taxation on day trading in Australia works much the same as taxation on longer-term investments in stock, forex, cryptoassets — even property. Day traders are considered “traders” for tax purposes, as opposed to “investors” who trade on a less regular basis and hold their positions for longer.
You are responsible for paying capital gains tax on any profits you make while day trading. However, day trading losses are tax-deductible. That means your amount of loss can be removed from your gains on your return. If you lose more than you profit while day trading, you most likely can claim at least a portion of those capital losses on your tax return.
Day trading activities can also be considered share trading as a business by the ATO. This is determined based on the goals of your day trading, your trade volume and how you organise your day trading.
If you have more questions, see if the Australian Tax Office (ATO) can help, or contact a professional accountant who specialises in day trading tax. You can also learn more about digital currency tax with our guide to preparing your crypto tax return.
What should you remember when day trading?
In the words of Warren Buffett, one of the world’s most successful investors:
If you want to invest like Buffett, keeping these principles at the forefront of your strategy can help you avoid emotion-based moves. If you are new to day trading or are simply looking to brush up on your skills, there are some other important things to remember each time you trade. These include:
Ensuring you are in the right frame of mind when you start trading
Day trading requires a high level of concentration, but if you are not in the right mindset to start with, you may find that your decisions are not as carefully considered as they may otherwise be. If you are not in the right frame of mind, do not be afraid to take a break.
Following the rules you have set for yourself
When seemingly good opportunities arise, you may be tempted to adapt your trading strategy to match them. However, it is important to stick to the rules that you set yourself.
Using strategies to help reduce your risk
There is risk involved in all stock trading, meaning that reducing any potential risk is key. Look to implement risk management tools such as limits and stop losses, and have the confidence to sell assets when performance is less than ideal.
Not letting the opinions of others influence the way you trade
Although you may see or hear other day traders discussing their recent wins and future predictions, it’s important not to let their opinions influence your approach. While they may have experienced some success, their choice of asset and trading strategy may not align with your own.
Having patience
You may be excited to trade, but you should avoid doing so if good trading opportunities are not available. Trading for the sake of trading is not a sustainable strategy.
Not being afraid to practise
It takes time to learn how to day trade so do not be scared to practise your skills. Look for a trading platform offering a free demo account, allowing you to develop and test your trading strategy before investing your own capital.
Day trading can be an exciting investing activity for those who have the right mentality and technical tools. But it might not be for everyone, especially those who are used to holding positions with a longer-term outlook. Most importantly of all, do not invest more than you can afford to lose.
Visit the eToro Academy to learn more about trading.
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FAQs
- What do you need before you start day trading?
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Before you start day trading with real money, you need to have strong knowledge of day trading terminology and technical analysis, and a strategy that is been backtested and proven profitable.
- How much money should you have when you start day trading?
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This all depends on your goals. Start by asking yourself what your trading income goals are. From there, you can use percentages of your account balance to make profit goals and risk parameters for your trading. Never invest more than you can afford to lose.
- Is day trading illegal?
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Day trading may not be illegal, but it can be risky. Before you start day trading, ensure that you weigh up the risks and consider your current financial situation.
This information is for educational purposes only and should not be taken as investment advice, personal recommendation, or an offer of, or solicitation to, buy or sell any financial instruments.
This material has been prepared without regard to any particular investment objectives or financial situation and has not been prepared in accordance with the legal and regulatory requirements to promote independent research. Not all of the financial instruments and services referred to are offered by eToro and any references to past performance of a financial instrument, index, or a packaged investment product are not, and should not be taken as, a reliable indicator of future results.
eToro makes no representation and assumes no liability as to the accuracy or completeness of the content of this guide. Make sure you understand the risks involved in trading before committing any capital. Never risk more than you are prepared to lose.