The rapid growth of day trading in the UK is attributed to the widespread liberalisation of online trading platforms. In the UK, continental Europe, and the Americas, legislation is firmly in place to facilitate retail and institutional trading across the board. In the UK, it is entirely possible to buy shares and sell shares at your leisure. Of course, day trading is not limited to shares – and encompasses all manner of financial instruments such as forex, commodities, indices, funds, and other options.
Irrespective of your chosen financial instrument, it is possible to day trade any number of assets provided they are supported by your trading platform. Day trading involves buying and selling of financial instruments within the course of a trading day. In other words, positions must be closed before the market closes on the day. It is possible for a day trader to hold positions overnight in the UK, although this is less common.
Implement Diversification in Your Day Trading Portfolio
While you’re learning to day trade, you are strongly encouraged to read this guide and implement the advice it contains. Knowledge truly is power in the trading arena. Resist the urge to allocate more than 1% – 5% of your available budget to any single trade. That’s simply disingenuous. Set a budget and stick to it. You’ll be so glad you did. As with any investment portfolio, it’s all about distribution and variety. The broader (more diverse) your asset base, the better.
Experts routinely advise traders to practice day trading with a demo account. Paper trading mimics real-money trading, except that no real money changes hands. It is the single-best way to follow market movements with any number of financial instruments, apply trading tactics and strategies, and monitor your performance accordingly. When using a paper trading account, you are strongly encouraged to keep a journal. That way, you can track your performance effectively.
Far too many traders wrongly assume that day trading is a sure-fire way to get rich quick from a couple of trades. Nothing could be further from the truth. As a professional vocation, day trading requires patience, understanding, and professionalism. The secret to the success of many top tier trading professionals is best summed up in two words: incremental gains. Day trading activity can be a painstaking process where attention to detail, careful selection, and decisiveness factor prominently into the equation. Timing is everything. Successful day traders understand that a moment missed is an opportunity foregone, at least until the next trade!
Day Trading Shares in the UK – Traditional Stocks + Penny Stocks
In the United Kingdom, day trading is available on a number of different markets, including indices, cryptocurrencies, forex, and shares (stocks in the US). Each asset type presents opportunities for day traders. The most commonly traded securities are shares. Many of these are listed on the FTSE 100 index, but it’s possible for you to trade penny stocks that are available OTC, or as pink sheets in other markets too. When you close your share options on the same day, you are avoiding a common problem known as gapping risk. This occurs when there are differences in prices between the share price at the end of the market day and the share price at the beginning of the next market day. Tremendous volatility is possible – that’s why day traders close their positions out on the same day.
Day Trading Forex + Cryptocurrency in the UK
Of course, you can trade currency pairs like the GBP/USD, GBP/ZAR, GBP/EUR, or GBP/JPY, et al at your leisure. Forex trading is different to shares trading, since there are leverage and margin elements to consider. Cryptocurrency like Bitcoin (BTC), Litecoin (LTC), Ethereum (ETH) and Ripple (XRP) are commonly traded digital currencies. The differences between digital currencies and traditional currencies includes regulatory constraints versus a largely unregulated market, and much higher levels of volatility with cryptocurrency. Once again, overnight market conditions with forex (foreign exchange) can be just as devastating as holding shares overnight.
Day Trading Indices in the UK
Indices trading is similar in many ways to shares trading. Indices include the FTSE 100 index, the FTSE 250 index, the CAC 40, the DAX 30, the Dow Jones Industrial Average, the NYSE, the S&P 500 index, and Nikkei 225 Index. Unlike shares trading where a day trader takes a short position, or a long position on a financial instrument, indices represent large groups of shares. For example, the NASDAQ is an index for tech stocks, while the S&P 500 index represents the top 500 companies by market capitalisation, et cetera. An index provides broad-based market coverage, and you get much greater exposure to a bigger chunk of the financial markets.
What Are the Best Strategies for UK Day Traders?
Trading strategies are wholly dependent on the underlying assets being traded. During times of volatility, different types of trading strategies are recommended. Among the most popular day trading strategies are the following: Scalping, Trend Trading, Swing Trading, Mean Reversion, and Money Flows. Perhaps the easiest day trading strategy is trend trading. You simply watch what the market is doing and trade accordingly. Recall – ‘The Trend Is Your Friend’ – so trade along those lines. In a bullish market, buy long. In a bearish market, sell short.
Many new traders are uncertain how to profit off bearish markets. The answer is selling short. This effectively means that you borrow the financial instrument from the broker, and buy it back at a later time when it is cheaper than it is now. The difference is your profit. Of course, if a financial instrument that you decide to sell short actually appreciates in price, the difference between the present price and the future price represents a loss.
Scalping is another useful trading strategy employed by UK traders. By taking incremental profits over time, you don’t have to places many trades, and the profits accumulate. You will need to set definite take profit orders and stick to them. With scalping, you actually are following trend trading practices, but you are making multiple trades along the trend. Swing Trading focuses on the short-term. As prices rise and fall, swing traders profit accordingly. Timing is everything with these day trading strategies.
As a case in point, consider the one-week performance of the FTSE 100 index (pictured above). Based on the data, the FTSE 100 index has been bullish, rising from a level of around 6,325 to its current level around 6446 the week before Xmas. The trend mapping strategy would indicate bullish expectations. Yet it is possible to follow other strategies as well such as scalping, and swing trading. A snapshot of the market always represents past performance. It is absolutely essential to conduct due diligence to understand the appropriate strategy at any given time.
Money flowsis a useful day trading strategy to follow as well. It involves looking at a financial instrument and determining if it is inoverbought, or oversoldterritory. If an asset is overbought, with a reading of 80+, you are strongly encouraged to sell because the asset will likely sell off as traders take profit. By the same token, if the asset reads 20 -, it is oversold, and traders will pile into that stock causing it to rally. Focus on the 80-20 rule for money flows and profit accordingly. You can use the Relative Strength Index (RSI) to determine which way the momentum is going. This technical indicator clearly demonstrates when an asset is overbought or oversold.
Understand Your UK Day Trading Definitions
Trading parlance is just as important as understanding how the platform works. The words that are used are important, insofar as they indicate what it is that you’re trying to do. For example, support levels are considered floors, and resistance levels are considered ceilings, vis-a-vis the pricing of assets. Margin and leverage, although discouraged with day trading can be used to increase the size of your position, without increasing your initial capital outlay.
Be advised, the greater the leverage of your funds, the greater your liability if the trade doesn’t move in your direction. Fees are another important consideration with day trading activity. Some brokers have high fees, low fees, or no fees to consider. The lower the fees, commissions, and charges, the bigger your profits, and the better for you. Be sure to choose a reputable trading platform that offers feature-rich trading with low or minimal fees. As a day trader, you will likely be engaging in multiple trades daily, so you want to keep your fees to a bare minimum.
Get Educated Before You Start Day Trading in the UK
Many traders believe that the pursuit of a lucrative portfolio is the objective of day trading. Nothing could be further from the truth. The pursuit of knowledge, education, and understanding of the financial markets is where it’s all at. With the right mindset, you can leave emotion out of the equation and trade with logic. There is no sentiment when it comes to buying shares and selling shares. The objective is the implementation of the right strategy. Once you understand how the market works, the proof of the pudding will be the profits that you are generating.
There are many inherent benefits to day trading, not least of which is financial independence. Once you have established yourself as an informed day trader, you will invariably see the results of your hard work paying off. By setting your own goals, you get to decide how many hours you wish to put in to your workday. It takes discipline to leave the office and work for yourself, but the results can certainly be worth the effort. A solid education provides you with a detailed understanding of what drives market behaviour. Many different factors determine your day trading success, but a positive frame of mind certainly goes a long way towards that objective!