What kind of assets are good for day trading?
Trading in stocks, indices, currencies, commodities, and bonds.
The most important thing about the asset you want to trade as a daytrader is the liquidity. Since Daytrading is a discipline where you will only be in your position short time, minutes, hours, there has to be enough liquidity for you to get out at the exact level you wish to. When we daytrade, we use leveraged products. This makes it possible to make big earnings fast. But like a two-edged sword it also makes it possible to get big looses fast. And if there is not enough liquidity to get out when you wish, the risk of loosing turns even higher.
It is common for people that go into day trading to have dabbled in stocks before they make the switch. As liquidity for most stocks traded in Europe is too poor to consider day trading them, private traders tend to focus on the stock indices if they want to stick with trading stocks. A stock index is a weighted average of a pool of stocks. The most known are the major US indices, Dow Jones, S&P, and Nasdaq – in Europe the DAX-40 (Germany) and the FTSE-100 (UK). But there is a well of other indices to choose from.
It is worth keeping an eye on the stocks that make up the index you trade – and also the number of stocks in the index (how much is the effect of the movements of a single stock smoothed out). Those two pieces of information could give you a better understanding of the change in the price of the index and prevent you from overinterpreting the things you see. As an example, when two indices that usually are highly correlated start being out of sync it can’t always be taken as a divergence and thus a trading signal – often it would be because some major stock component in one of the indices made a big move.
One great advantage of using indices for trading is that they tend to be smoother, less volatile, and therefore more “technical” than single stocks.
This does not mean that you can’t day trade stocks. You can and a lot of Daytraders trade stocks. But you would have to choose stocks with enough liquidity.
What is forex and can I day trade forex?
Forex trading is trading currencies. Currency trading is in fact the biggest and most liquid market in the world.
A notable feature about trading currencies is that we are looking at currency pairs, which is simply the exchange rate between two currencies. The one named last is the base currency. So, for EURUSD the price given is the exchange rate for euros as expressed in US dollars.
It is common knowledge that a basic rule applies to the stock market when looked at over a long period of time: Stocks appreciate over time (not necessarily true for single stocks, of course). A similar rule does not exist within currency pairs. In other words, when you are long – or short – a currency pair it is just a reflection of which currency you favor the most at that point in time.
There are many traders who daytrade forex. In general forex due to the nature of two currencies traded against each other tend to move very differently than stocks and indices that focuses on the value of a stock or a stock market. Further, because a currency reflects the economic situation in a single country, forex is very sensitive to political and economic news related to the specific country.
Which commodities are best for day trading?
Commodities include tangible goods like fx. soybeans, wheat or pork bellies – as well as metals and sources of energy (oil, natural gas). Here the most traded products among retail day traders are WTI Oil (crude) and Gold, as liquidity in those products is good and volatility is sufficiently high. And maybe because it can be easier to understand the movements in those products for retailers.
The price in commodities is affected by supply and demand. If fx the weather globally one year is really bad for wheat the supply will fall while the demand remains the same. This will make the price go up.
And if the oil producing countries decides to raise the amount of oil put into the market, the price will go down.
It is a little different with gold. Gold is a safe haven and will to a broad extend reflect the economic situation on a global level. If the economy globally seems to be threatened, investors will move their money from markets with higher risk, like the stock market and into a safe asset like gold. In a situation like that the price on gold will go up. In this way gold can be used as a barometer for the general economic situation on a global level.
As can be seen trading commodities requires an insight into conditions related to the specific product. But non the less for most parts commodities are an asset class with high liquidity and can therefore very well be used for daytrading.
Can I day trade bonds?
The most popular instruments for trading bonds are the 10-year Treasury (U.S) and the German Bund (~the 10-year government bond). As margin requirement is quite high for trading these markets, as is the need for extensive macroeconomic knowledge, it is rare to see bonds used in day trading among retail traders. It is mainly a product used by professionals.
What shall I be aware of if I want to trade cryptocurrencies?
Even though we still don’t know exactly what drives the crypto market besides from simply supply and demand all we can say is that it is very technical and therefore well suited for trading with technical analysis. It is an unregulated market, with plenty of stories of fortunes vanishing into thin air through hacking, or through brokers going bankrupt. Secondly, for the purpose of day trading spreads are generally very high which has to be taken into consideration if you want to daytrade the products. You have to be sure that despite the high spreads you will still be able to make good profit.
But the whole crypto market is attracting a lot of people, especially young people. And there is no doubt that you see some big moves.
Which instruments are good for daytrading?
When you daytrade you use instruments with leverage. This means that you get to “borrow” more money than you have from the broker. If fx you have a leverage of 20 and you have 1.000 USD. You will be able to trade for 20.000 USD since the broker lend you 20 times the amount that you have.
In Europe, CFD-trading and spread betting are the vehicles most used in day trading. CFDs are banned in the U.S, therefore day trading is limited to trading stocks and futures in America. CFDs or contracts for difference are derivates provided by brokers that continuously mirror price for the products they are linked to. It is, with a few exceptions, the cash price of the index or commodity in question that we see and follow, not the futures price.
What is the difference between CFDs and Futures?
Though virtually 100% correlated, it is essential to know which type of price (cash or future) you trade at a given time, as prices may differ by as much as 0,3% of the product price or more. A classic mistake is to mistake the two sets of prices, thus proceeding to read the market in the wrong way.
Futures expires X times a year depending on which asst class it is. Stock index futures expire 4 times a year (in March, June, September, December). It takes place on the 3rd Friday of that month. It is known as Triple Witching Day – as it also sees the expiry of stock options and stock index options.
The most traded contract – by far – is the one to expire next. As the date of expiry approaches, the futures price will get closer and closer to the cash/spot price. The relation between them is described by the terms contango and backwardation, shown in the chart below:
What are Contango and Backwardation?
A market in contango has a price for the future, which is higher than the spot price. Conversely for a market in backwardation. A trading strategy is to speculate in the movements between contango and backwardation.
Cash price for that particular future (shown by the horizontal line in the chart) lies above the futures price, which is the curved line below it.
What may be a bit confusing here is that cash price itself will be gyrating over time and in real life never constitute a straight, horizontal line. The main point to take away from this, however, is that the futures price will always be placed above or below at a pre-defined distance from the cash price. The distance will slowly move towards the cash price by the day until expiry. The reason for this shall be found in costs for interest- and storage rates that in the old days were related to holding the asset until delivery (the day of the future expiration).
What are options and can options be used for Daytrading?
Options aren’t as popular among retail traders as futures trading and CFDs are while it is widely used amongst professionals. Still, they are worth knowing about and, to be fair, there is quite a large number of traders that use them. Due to the relative high cost of trading them, they are rarely used in day trading, but rather as a hedge of one’s trading account – or alternatively, as independent streams of income based on various long-term option strategies. These strategies frequently hold exotic names, such as covered call, married put, collar, straddle and butterfly.
There are two basic types of options, call options and put options. A call option is a bet that the underlying instrument (stock, index, commodity, etc.) will be above a certain price – the strike price – at a certain time in the future – the expiry date. The reverse for a put option, meaning the buyer of the option hopes to see the price of the underlying below a certain price at expiry.
As suggested by the name, the buyer has the option, not the obligation, to receive the underlying asset at the time of expiry. It is of course only when the option is in-the-money that the owner of that option has any interest in exercising. Another thing worth noting is the difference between American options and European options. American options are generally traded far more, mostly due to the fact that they can be traded at any time, thus you don’t have to wait until it expires to trade it, which is the case for its European counterpart. That lends you a lot more flexibility in creating trading strategies for options.
How much does it cost to trade options?
The premium of an option, aka its price at the time of purchase, reflects the likelihood of the strike price to be reached at expiry. On the other side of the bet is the seller of the option, who collects the premium but at the same time takes on a larger monetary risk than the buyer of said option. They, in turn, would often protect themselves through buying options with strike prices further up/down in order to limit their risk. This will act as a stoploss for their positions. Having said that, the vast majority of options do in fact expire worthless.
The premium you pay to acquire an option at a given time depends on three variables: The price of the underlying instrument, time until expiry (the longer, the more can happen), and the volatility of the underlying. The dependence on volatility in determining the price of the option is where options fundamentally differ from other asset classes.
The price in commodities is affected by supply and demand. If fx the weather globally one year is really bad for wheat the supply will fall while the demand remains the same. This will make the price go up.
And if the oil producing countries decides to raise the amount of oil put into the market, the price will go down.
It is a little different with gold. Gold is a safe haven and will to a broad extend reflect the economic situation on a global level. If the economy globally seems to be threatened, investors will move their money from markets with higher risk, like the stock market and into a safe asset like gold. In a situation like that the price on gold will go up. In this way gold can be used as a barometer for the general economic situation on a global level.
As can be seen trading commodities requires an insight into conditions related to the specific product. But non the less for most parts commodities are an asset class with high liquidity and can therefore very well be used for daytrading.
