Posted in:

Is Day Trading Legal? A Guide for Beginners

© by iStock

Day trading implies making about 100 trades per day. Day trade transactions cannot be deferred even for a day. The sole exception is a price action signal. Day trading is popular among Forex traders, as not many persons use long-term trading methods. The overwhelming majority of traders (especially beginners) try to close the transactions during the day and see the result of their actions as soon as possible.

How to choose day trading tools?

The choice of trading tools depends on 3 key factors:

  1. The first step to become a day trader is to determine what to trade. For example, you can trade shares, ETFs, futures – the main thing is to choose a highly liquid asset. Thus, liquid instruments usually have high trading volumes, which allows traders to buy and sell a large number of units without significant changes in the price.
  2. The next factor to consider when choosing a trading tool is volatility. After all, day traders need price fluctuations to make money, while a lack of volatility and a long-term flat will hardly help you gain profit.
  3. The last of three main factors is a correlation with another instrument (such as commodities, index, or sector). And when the price of this related tool increases, the price of a single stock (ETF or future) increases as well.

Is day trading legal in the US?

US law requires that a brokerage firm or representative only obtain the consent of their clients to disclose their potential risks before using them in day trading strategies and investments. However, most brokers and dealers require registration and licensing.

Day trading can be risky and very volatile and comes with many restrictions. In addition, the income received as a result of day trading may be subject to the corresponding tax.

We recommend considering other markets (futures, cryptocurrencies) if you do not have a license or there are any restrictions.

Day trading strategies

The most important thing in day trading is to close all positions by the end of the day. There are two main day trading strategies: scalping and day news trading.

Scalping is the easiest, but quite an efficient method. It entails setting a specific threshold for closing a position. To make the chances of gaining a profit outweigh the risk of the opposite result, the trader uses technical analysis methods. In scalping, it is essential to choose the right moment to enter the market.

The second but no less popular day trading strategy is news trading. In this case, traders should closely monitor all financial and economic news that can stimulate the development of a trend (especially positive) using the stock market event calendar and the table showing the impact of these events on currency exchange rates.

Day trading allows using other strategies as well, but practice shows that they are less efficient. Moreover, they are suitable only for experienced traders who have already developed their own working style.

Statistics show that over 90% of traders from around the world prefer day trading, considering these transactions as the most accessible and profitable. Anyone can trade on a forex exchange since day trading means:

  • accessibility for beginners;
  • possibility of concluding transactions with a small deposit;
  • with a well-chosen strategy, it is very easy to make a profit;
  • closing of transactions in one day eliminates the need for further control.