How to Start Day Trading: Understanding the Basics, Risks, and Strategies

Day trading involves the rapid purchase and sale of securities within the same day, often within minutes or hours, aiming for quick profits. It attracts those drawn to the potential for substantial gains but also comes with high risks and demands swift decision-making.

What is day trading?

As mentioned, day trading is the rapid buying and selling of stocks within a single trading day, aiming to capitalise on short-term market movements. 

Unlike long-term investment strategies that focus on buy-and-hold principles, day trading requires active engagement and quick decisions to profit from minute-to-minute fluctuations. Typically, day traders focus on highly liquid stocks to facilitate rapid entry and exit from positions, navigating the volatility to harness potential gains amidst the inherent risks. 

This method demands a profound understanding of market mechanics and a solid strategy to manage the significant risks involved.

>> MORE: How to buy and trade stocks in Singapore for beginners

Getting started with day trading

Venturing into day trading involves not only the allure of quick profits but also significant risks. To effectively navigate this fast-paced trading environment, it's crucial to approach with a clear strategy and an understanding of the associated risks. 

Here are essential steps and tips for beginners aiming to dive into the day trading world:

• Choose the right platform: Begin by selecting a robust day trading platform. Look for platforms that offer quick execution speeds, competitive trading fees, comprehensive market access, and efficient charting tools. It's also extremely vital to choose a broker regulated by the Monetary Authority of Singapore (MAS) or another reputable international regulator to ensure safety and compliance.

• Set up a trading account: Once you have selected your trading platform, the next step is to set up a trading account. You will need to provide personal identification and address verification, such as a Singapore National Registration Identity Card (NRIC). This step also involves filling out details concerning your investment experience and goals, which will help tailor the trading experience to your needs.

• Fund your account: After your account is activated, fund it to start trading. Funding can typically be done via direct bank transfers or debit cards. Some platforms may offer additional payment options like online payment services, including GrabPay. If available, using an SGD-denominated account can simplify the process for Singapore residents by reducing exchange rate complications.

>> MORE: Best brokerage accounts for online stock trading

For those new to the trading scene or looking to gain experience without financial risk, paper trading is another excellent starting point. This method involves simulated trading where you can experiment with buying and selling stocks using virtual money, providing a practical insight into market dynamics and trading strategies without actual losses. 

Most brokerage platforms like Moomoo and Webull offer these simulation accounts, allowing you to test their systems and your trading acumen. This approach not only helps familiarise you with various trading tools and features but also allows you to assess your potential profitability in real-world trading scenarios.

Choosing the right day trading strategy is also crucial to navigating the fast-paced environment of the stock market. 

Whichever strategy you choose, it's essential to adapt and refine your approach continuously. Markets evolve, and what works today may not work tomorrow. Successful day traders often start with one strategy but remain flexible, learning and adapting as they gain experience and as market conditions change.

Day trading stocks: Key factors for success

Since day trading is a strategy that demands attention, quick decision-making, and an understanding of market mechanics, here's a breakdown of the fundamental aspects that day traders need to consider before jumping into the fray:

1. Liquidity: High liquidity in a market means that trades can be executed rapidly without a significant impact on the price. This is vital for day traders who need to enter and exit positions quickly to capitalise on market movements.

2. Volatility: Day trading thrives on volatility. The rapid price changes can create numerous opportunities for profit, but they also increase risk. Understanding and anticipating volatility levels can significantly influence a day trader's strategy and success.

3. Trading Volume: The volume of trades for a stock or asset is a strong indicator of its liquidity and volatility. High trading volumes mean more frequent buying and selling opportunities, essential for executing day trading strategies effectively.

The ideal assets for day trading generally share these characteristics:

• High Liquidity: Enables quick entries and exits at predictable prices.

• Moderate to High Volatility: Provides enough price movement to make profits from short-term trades.

• Substantial Trading Volume: This reflects a robust interest and participation in the market, facilitating easier trades.

Furthermore, day traders often have to rely heavily on technical analysis to make trading decisions. This approach involves analysing "trading activity's quantitative patterns, encompassing price fluctuations and volume metrics, rather than the intrinsic value of the stocks. Technical indicators help traders predict future movements based on past trends.

It's also important for traders to stay informed on news that might impact the markets. Sudden market shifts, driven by economic data, corporate earnings, and breaking news, create dynamic trading landscapes with both profit potential and heightened risk.

>> MORE: How to trade options in just 4 simple steps

Developing a day trading plan

Creating a solid day trading plan is crucial before diving into the rapid waters of the financial markets. A well-defined strategy not only sets realistic expectations but also prepares you for the volatile nature of day trading. Here’s how to structure your trading blueprint:

• Define your goals: State what you aim to achieve through day trading. Understand that massive profits will not come instantly, and there is a learning curve involved.

• Choose your analysis method: Will you prioritise fundamental or technical analysis? Fundamental analysis might revolve around news events, economic indicators, and company earnings, impacting how and when you trade. Conversely, technical analysis will have you scouring price charts and using various indicators to predict future movements.

• Market timing: If trading Forex, for example, know the market hours. The EUR/USD pair, for instance, sees high volumes and volatility when European and American markets overlap, typically between 8:00pm and 12:00am Singapore time. Understanding these patterns can help in planning when to trade for the best possible outcomes.

• Develop entry and exit strategies: Detail how you will enter and exit trades. This involves setting up clear parameters for when to enter a trade and when to exit, either at a profit or a cut loss.

Managing risks in day trading

Effective risk management is pivotal in day trading, where the high speed and frequency of transactions amplify both potential profits and potential losses. Here's a structured approach to safeguarding your investments:

• Set stop-loss and take-profit points: Establish clear exit points for each trade. A stop-loss will automatically close a losing trade at a predetermined level to prevent further losses, while a take-profit point locks in profits.

• Understand risk-reward ratios: Aiming for a higher risk-reward ratio, such as 1:2, can compensate for a lower win rate. This means that for every dollar risked, you aim to make two in return.

• Use risk management tools: Tools like stops and limits are vital for maintaining control over potentially rapid market movements. They help execute your exit strategy automatically without needing to monitor the market constantly.

• Tax considerations: Be aware of the tax implications of day trading. In Singapore, for example, profits from day trading are not subjected to stamp duty but could be taxed as income depending on various factors like frequency of trading and intention behind the trades.

Risk management in day trading is not just about preventing losses but also about maximising efficiency in your trading strategy. By carefully managing risks, you can preserve your capital and remain in the trading game long enough to become profitable.

Tips for safe day trading

When venturing into the fast-paced world of day trading, prioritising safety is crucial. Consider these essential tips to help manage the risks:

• Trade within your means: Only use funds you can afford to lose for day trading. This minimises financial stress and keeps your essential finances secure.

• Start small: As you learn the ropes, keep your trades small. Mistakes are inevitable, and smaller trades mean smaller losses as you gain experience.

• Maintain your primary income: Maintain your current employment concurrently with trading activities. This approach ensures financial security and facilitates objective evaluation of your trading methodologies across varying market scenarios.

• Limit emotional trading: Setting clear, emotion-free trading rules helps avoid impulsive decisions based on temporary market movements.

Is day trading right for you?

Day trading provides an active and engaging way to participate in the stock market, yet it isn't the right fit for everyone. This approach requires a strong commitment to continuous learning, a readiness to embrace substantial risks, and the financial stability to absorb possible losses. 

If you're considering day trading, it's crucial to assess your risk tolerance to ensure you're comfortable with the volatile nature of this activity. Additionally, you should only trade with funds that are not required for your day-to-day expenses—reserve your trading to surplus funds earmarked specifically for speculative ventures.

Furthermore, day trading necessitates continuous education and adaptability to evolving market dynamics, including cyclical trends, regulatory changes, and technological advancements. For those favouring a less actively managed approach, long-term strategies like investing in diversified index funds may be more suitable. 

Here are some resources that will help you:

• How to start investing in Singapore (2025): Beginner’s guide

• Investment strategies for new investors

• How to invest S$10,000 in Singapore | Short & long term options