How to Pick the Right Day Trading Market

Wed Apr 7, 2021, 03:18 pm | by Caitlin McCormack | No comments

People occasionally tout the massive profits they reap from lucrative, same-day bets made on stocks, but this practice can also go all shades of wrong. The stock market is the most popular day trading field, but traders can also participate in options, futures, and foreign exchange (forex) markets.

Whether you’re day trading as a full-time career or part-time hobby, it’s important to understand that these markets work differently. By picking a day trading market, you’ll decide which financial market to channel your energy and resources.

Here’s a rundown of the different day trading markets and how each may suit your individual goals, needs, and strategies.

Stock Market

The stock market is what most of you think about when day trading is at stake. Stocks let you have a stake in the ownership of a company. When day trading stocks, you simply buy shares of a company when the market opens and close all your positions before the trading day ends. You can’t hold your positions overnight.

To day trade stocks in the U.S., you must maintain an equity balance of $25,000 in your trading account at all times, otherwise, your broker will flag you as a pattern day trader. You’re identified as a pattern day trader if you execute 4 or more trades within a 5-trading day period. Being flagged as a pattern day trader may result in further restrictions, including a 90-day period when you can’t trade.

Day trading follows the U.S. stock market hours; from 9:30 a.m. to 4 p.m. ET. You can also place trades in the hour preceding the market open, known as pre-market. With approximately 7 hours on a trading day, you should identify the best times to trade in order to reap higher profits. The best times to day trade stocks are 2 hours into the market open (from 9:30 a.m. to noon ET) and in the last hour before the market closes. These hours provide the volatility and volume that traders need to reap huge profits.

An advantage of day trading the stock market is that you probably have thousands of stocks to choose from. For instance, you can trade stocks listed on the world’s leading indices including:

  • S&P 500 index, which lists 500 of the widely traded stocks in the United States.
  • The Dow Jones Industrial Average contains 30 of the largest companies in the U.S.
  • Nasdaq composite lists some of the world’s tech titans.
  • FTSE 100 contains 100 of the largest companies on the London Stock Exchange

On the flip side, the capital requirements for day trading can be a turn-off for many. Day trading may be a pipe dream for traders who can’t maintain the $25,000 minimum balance, though you may choose to only trade within the PDT rule.

Day trading the stock market is best suited for traders with sufficient capital reserves and those experienced enough in the stock market.

Options Market

Traditionally, options trading and day trading have been two different schools of thought. However, there’s a paradigm shift owing to the fact that options have a higher rate of return and lower initial capital requirements.

For starters, an option is a contract that gives you the right to purchase or sell a stock at a specific price within a certain period. The two popular option categories traders can execute include:

  • A call option. This option gives you the right to buy a stock option from a seller by a predetermined date, for a specific price. The value of your call option will increase when the underlying stock’s price increases.
  • A put option. This option gives the holder a right to sell a stock at an agreed-upon price before the expiry date.

Similar to stocks, U.S. options are also subject to FINRA’s pattern day trade rule — you can’t place more than 4 trades within a 5-trading day period if your trading account doesn’t hold at least $25,000. Violating this rule will see you flagged as a pattern day trader, and trading restrictions may follow depending on your broker.

Day trading options has several advantages. For starters, options trading is a low-cost investing strategy since it costs less to buy an option than the underlying asset outright. Buying an option may give you more control on an asset over a comparable number of shares. Day trading stock options also has greater reward benefits. If a stock moves from $20 to $40, you’ll have a 100% gain in shares. However, if your call option moves from $1 per contract to $5 per contract, you’d reap a 500% gain. Options can provide more profit in less time. You can also maximize returns by using the leverage stock options offer.

Day trading options isn’t without its drawbacks. When compared to stocks, the bid-ask spreads for options are wider, often due to lower liquidity levels. This may result in orders not being fulfilled quite as fast.

Forex Market

With about $5 trillion changing hands daily, the forex market is the largest and most accessible market in the world. The forex market is synonymous with currency pairs where you exchange one global currency for another. Trading is done 24 hours a day and some brokers let you get started with as little as $100. While there are no strict day trading rules governing the forex market, traders are advised against allocating more than 1% of their account on one trade.

Day trading the forex market can be beneficial to individuals with little capital. Most brokers don’t impose minimum investment requirements, and if they do, it can be as low as $100. You also don’t need to worry about market hours since trading runs for 24 hours a day.

Even so, not all times are ideal to day trade the forex market — the currency pair you hold determines the best time to trade. For instance, the GBP/USD pair is best traded from 4 a.m. to 6 a.m. and 8 a.m. to 11 a.m. ET. The EUR/USD pair is best traded during the 9 a.m. to 2 p.m. ET period.

Although the forex market is accessible to both rookie and experienced traders, beginners should probably focus on the GBP/USD or EUR/USD pairs since they have sufficient price movement and trading volume to provide income to day traders.

Futures Market

The futures market is another viable option for day trading. Futures are an agreement between a buyer and seller to purchase or sell a specific amount of an underlying asset at a future date. The idea is to profit from price fluctuations that occur between opening the contract and when a position is closed. Futures contracts often center around commodities like precious metals, oil, agricultural products and more.

Although there’s no legal minimum amount needed to day trade futures, you can easily start trading with much less capital than you’d need with stocks. Obviously, more money gives you more flexibility in your trading decisions. The official market hours differ among futures contracts, so you must keep a close eye on your trades to ensure all positions are closed by close of the trading day.

Most brokerages tend to impose specific requirements for the approval of a futures trading account, which may discourage new traders. The S&P 500 E-mini (ES) is one of the best and most popular futures contracts to day trade.

How to Choose the Right Day Trading Market

The first step toward successful day trading is choosing the right market, bearing in mind that market characteristics, structure and quality vary largely. Here are factors to consider when choosing the right day trading market.

  • Funds available. The amount of money you have will determine the day trading market you can access. At the most basic, you’ll need at least $25,000 if you plan to day trade stocks every day. Otherwise, you’ll need to fall back to futures or forex markets that don’t need much capital.
  • Personality/risk tolerance. Your risk tolerance is also an important aspect to consider when choosing a market to day trade. If you can accommodate a higher trading risk, then the options and forex markets may be a good play since they offer higher leverage. For instance, leverage of 100:1 is available in forex markets.
  • Time available to trade. Successful day traders have mastered the optimal time to day trade different markets. For instance, the best time to day trade stocks is 2 hours into the market opening and the last hour before close of the trading day. You should also allocate at least 6-12 months to learn, master and perfect your day trading skills and strategy.
  • Trading style. Your trading style will also determine how fast you rack up profits or losses. Some traders use large position sizes to catch the slightest price movements while others focus on larger price movements. The number of trades you can place per day will depend on your trading style.

Final Thoughts

You shouldn’t treat day trading as a get-rich-quick scheme. Similar to any other form of trading, you need a solid strategy to see you through. Day trading markets vary by capital requirements, risk level and optimal time to trade. Start by focusing on a single market before juggling between multiple trading balls.