Are you thinking of exploring day trading in Canada? Day trading can be a fun and lucrative endeavour, but without a solid strategy, you could end up losing a lot of money.
This guide covers everything you need to know about day trading in Canada, ranging from how to start and practical strategies to succeed.
What is Day Trading?
Day trading is an investment strategy that involves purchasing and selling stocks within the same trading day.
Day traders buy low and sell high, often with short holding periods to reap large profits. Many day traders use charts to track stock prices and news to predict changes in price direction.
Some day traders hold positions for hours, while others hold positions for minutes or even split seconds.
The goal is to make money by taking short-term price movements. It is particularly suitable for traders with limited capital.
Day trading is very different from buy-and-hold strategies because it requires you to be online all the time monitoring the markets.
When you day trade, you can buy and sell within a single trading day. So, whenever the market closes, you’ll know precisely how much profit or loss you make or incurred for that day.
What Can Be Traded Daily?
Here are the securities you can trade daily in Canada:
1. Forex
Forex is a market used for trading currencies. This is the heaviest traded market amongst all market categories and commodities.
Forex brings the advantages of the fast-paced market, such as speed and flexibility, to day traders.
It can be used to hedge against fluctuating exchange rates and provide other tangible benefits, such as tax hedging.
Also, it is a market where you can make or lose hundreds of thousands of dollars in a few minutes.
2. Stocks
A stock is the part of the entity purchased by investors. It represents fractional ownership of a corporation and entitles its holder to a share of its profits, revenues, and other distributions.
Trading in your stocks should be done when you are ready to fund your portfolio. The process may appear somewhat overwhelming at first.
However, once you understand the concepts behind it, trading stock becomes an exciting way to make money every second of every day.
Therefore, whether you are a small-time investor or someone with a large amount of capital, trading stocks can be one of the best ways to generate income.
3. Cryptocurrencies
A cryptocurrency is a form of digital money that allows people to make secure transactions over the internet.
Some of the most popular cryptocurrencies, such as Bitcoin and Ethereum, are growing rapidly lately, with millions creating extra income.
Although, in some situations, cryptocurrency exchanges have been accused of being scams or of being criminals.
However, with a regulated cryptocurrency exchanger, you can rest assured you’re working with a reputable company and a team of licensed professionals.
4. Binary Options
A binary option is an option where the payoff depends upon the price of an underlying asset at a given point in time.
An underlying commodity, currency or index might be used to determine the value of the payoff. But it may depend on a parameter, such as whether the asset is above or below a specific price.
A binary option provides you with an obligation to either receive a fixed amount of money or receive no payment at all.
Each option is funded by the buyer closing out existing trades or by the seller receiving either a deposit or a margin payment.
Pros and Cons of Day Trading in Canada
Here are the major advantages and disadvantages of day trading in Canada you should know before venturing. Pros
- Independence: Day trading gives you the feeling of independence as you are in full control of your investment and profit. You set your own trading hours and trading strategies with personal liberty.
- No Overnight Risk: Unlike long-term investors that have to keep their eyes on overnight stock market crashes, you have nothing to worry about sudden changes as a day trader. Day trading helps you make quick decisions and avoid high risk by trading within a short time frame.
- Flexibility: Day trading is more flexible compared to other types of trading. You have multiple strategies to choose from based on your trading skills and risk tolerance.
Cons
- Quick Risk: Most traders join day trading with the aim of making quick money, but in turn, they face quick risk. It’s easy to lose most if not all of your investment if you don’t master day trading strategies well.
- Research-Intensive: Day trading requires intensive research than other types of trading. To succeed, you must invest a considerable part of your 24 hours tracking the stock market.
Types of Orders for Day Trading
An order is an instruction to your broker to buy or sell a stock, portfolio bond, or another security.
However, you need to decide on the type of order you wish to execute. Below are some options to choose from:
1. Market Order
When you execute a market order, When you place your market order, your broker puts a sell on a stock at the best possible price available in the current market.
2. Stop Order
Stop orders are used to limit the potential loss of a financial position when a stock reaches a specific price.
3. Limit Order
A limit order lets you buy or sell a stock at a specific price or better and can be placed at any time, before or after the transaction has occurred. This means the order will only take effect if the stock is below your price.
How to Start Day Trading in Canada
Here is a step-by-step process of starting a day trading in Canada:
1. Study the Market
If you want to start day trading, the first thing to do is figure out what it takes. After all, throwing your money into the market without studying it first is a good way to lose money.
2. Develop a Strategy
The next thing you must do is develop a trading strategy, understand your risks, and know your potential returns.
This can be achieved by reading books, magazines and referencing online resources.
3. Know Your Limits
Because these high-risk ventures can be very costly, it is essential to set a realistic limit on the amount of money you are willing to spend. It is best to set a smaller amount and work up to it.
Also, choosing the wrong asset class could hurt your investment because there is potential for large ups and downs in the market.
4. Set up a Demo Account
Set up a demo account before you start risking big money. A demo account allows you to start training for real-time trading with low cost and minimal risk.
A demo account with daily setups, moving average, trailing stops, and many other features can help you develop your style of approaching the market.
5. Find Out the Tax Implications
As with any complex investment strategy, there are tax implications involved when trading stocks. The advice of a professional financial advisor is strongly recommended to find out not just what to do but also which laws to follow.
6. Choose a Broker
Getting started in the world of day trading could seem daunting, but you will need help at one point. This is where a broker comes in.
However, it is advisable to choose a broker that has experience in day trading and can explain what is happening to your account.
You don’t want to blindly go out and invest with a broker that you don’t feel comfortable with. Pick one that matches your personality and investment style.
How to Choose a Day Trading Broker in Canada
A day trading broker handles your account and provides a platform and tools for your trading. However, not all brokers are reliable for day trading in Canada. Here are the factors to consider when choosing the best day trading broker in Canada.
- Specialization: Choose a broker that specializes in the kind of securities you want to trade. From stock trading to Forex trading, different brokers specialize in trading areas in Canada.
- Read Reviews: Reading customer reviews online will help you choose the best day trading broker in Canada. If the broker has a lot of poor customer ratings, that’s a big red flag.
- Ask for Recommendations or References: If you know anyone that’s into day trading, ask them for recommendations. But if you don’t have anyone to recommend a broker for you, ask your potential broker for references. This will go a long way in assessing the reputation of the company.
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Check Fees and Commissions: If you want to reap the most of your investment, choose a broker with low fees and commissions. You can even choose commission-free brokers to save more trading costs.
- Tools: The more tools a broker has, the easier and more effective your day trading is. Don’t hesitate to ask your potential broker all the day trading tools they have, such as trading accounts, research and real-time data.
- Regulatory Compliance: Choose a broker that complies with regulatory agencies in Canada to avoid risking your funds. If a broker had any regulatory bridge, that’s a red flag.
- Support: Despite your trading skills, you may need help in one way or the other when trading with a broker. This makes it essential to assess the customer support of your potential broker before getting started.
Wealthsimple Day Trading
makes it easy for anyone with spare money to invest in the market, no matter how little.
However, Wealthsimple does not provide any recommendation for day trading but solicits the opinion when requested.
After every transaction, you will immediately have access to assets that can be sold right away or used to finance another trade without incurring any fees.
Here are three things to keep in mind when doing day trading on Wealthsimple Trade:
- Quotes provided by Wealthsimple Trade are 15 minutes delayed.
- All transactions involving US-denominated assets will be subject to a currency conversion fee.
- Day trading can have tax implications regardless of the account type.
Day Trading Strategies
There are several common strategies day traders employ, according to reports.
Listed below are some of the most common strategies used by day traders:
1. Range Trading
This “range trading” strategy is the perfect way to analyze a stock’s price range concerning its previous highs and lows, making it easy for investors to anticipate high and low prices in the future.
2. Trend Following
Trend following is best explained as the act of buying or selling stocks or other securities based on their current trend.
This means buying low and selling high, but with the additional benefit of also allowing the trader to profit on any temporary investment reversal.
3. Scalping
This strategy aims to make as many small price moves as possible to get more money with each trade.
The premise is simple. Enter a position at a fair price and cover it quickly to take advantage of a price movement to bigger profits, but without risking too much money.
4. Contrarian Investing
Contrarian investing is the art of buying undervalued stocks. This strategy relies on the belief that popular opinion can lead investors to buy overpriced stocks.
When prices become too high or too low, you can sell part of your position at the bottom or top of the price range and avoid average price shocks.
5. Chart Patterns
Chart patterns explain the trading cycle of day trading. These specially created images describe the cycles of price movement.
The images depict the price movements the day before the opening bell and highlight where resistance levels were based on what traders saw during their trading positions.
6. News Trading
You’ve probably heard the term “the news of the day,” but sometimes, it can be more complicated than that.
News can be vital information to trade on, but it must come from respected sources with reliable reputations.
When you read news stories, observe buying or buying patterns that are forming, think about how the news may affect the stock’s current price.
7. Technical Analysis
You can’t predict the future. But you can use technical analysis to make informed decisions about the trends in the market.
Technical analysis lets you find patterns of movement in the price action of stocks, commodities, currencies and indexes.
Common Day Trading Mistakes to Avoid
Numerous day traders lose money as a result of simple, preventable mistakes.
Avoid these common mistakes, and you can help your day trading success.
1. Having High Expectations
Having high expectations can cause you to lose sight of why you entered the market in the first place and end up with less than you bargained for.
If you set your sights on a small account, you could find that after a few days, the money has been used up, and you’re broke.
2. Starting Without a Business Plan
Business plans are essential to your success as a trader. Therefore, if you’re looking to start trading without a business plan, you run the risk of throwing away a lot of time and money.
A plan is your roadmap to success. It will help you set goals, understand risks, accurately measure progress toward those goals, and clarify the obstacles necessary to overcome.
3. Failing to Manage Risk
Trading involves a series of decisions, and many traders lose money because they don’t have a way to manage their risk in the right way.
Therefore, if you don’t manage your risk or manage it poorly, you put yourself at risk of losing too much money over time.
4. Not Committing Time and Money
To be a successful day trader, you must devote a substantial amount of time and money today trading successfully.
Don’t deceive yourself by thinking you can do it all in the evenings, late at night, or on weekends.
5 Tips of Becoming a Successful Day Trader in Canada
Whether you’re starting day trading in Canada or already a day trader in Canada, follow these five essential tips to become a successful day trader in Canada.
1. Keep it Simple
One of the easiest ways to become a successful day trader is to keep it simple, choosing one market or instrument.
Keep it simple in the beginning. Focus on one stock only, no matter how much you are willing to spend.
2. Be Realistic
Don’t let anyone fool you. Day trading work is hard. You must be realistic about how much money you can expect.
Day trading is for highly motivated individuals who want to turn their passion into a stable source of income.
3. Keep a Record
If you’re new to the stock market and want to increase your skill, you need to know how to keep a record of earnings reports and stock performance.
Having a spreadsheet can help smooth out any inefficiencies in your day-trading process.
4. Timing
For traders interested in day trading, timing is everything. There are thousands of quotes on different stocks to choose from each day, all of them separated into groups based on the time of the day.
However, timing can be difficult for novice traders, but it won’t be long before you get used to trying to pick winner stocks out of groups of losers.
5. Sensible Decision Making
Indeed if you are an aspiring day trader, you’ll be faced with countless decisions.
However, making wise decisions to conquer this aspect of your trading is an art that takes time and experience.
The key to success here is to make the best possible decisions with incomplete information.
Alternatives to Day Trading in Canada
Day trading may not be ideal for you considering its disadvantages. Even if you have a high-risk profile, it’s essential to save yourself the cost by considering other alternatives. Here are two major alternatives to day trading in Canada to consider.
1. Traditional Investing
If you’ve above-average knowledge of the stock market, it’s essential to consider trading long-term trading real estate, stocks and bonds etc., to earn high returns. Investing in the right assets will help you minimize risk and achieve more returns in the long run than day trading. If you’re looking for the best traditional assets to invest, read the following articles:
2. Robo-Advisors
Robo-advisors serve as a low-cost alternative to traditional trading platforms. If you’re looking to earn more with less, consider choosing one of the best robo-advisors in Canada. Robo-advisors do the hard job of selecting and investing in assets that suit your investment objective and risk profile. All you need to do is to invest and watch your money growing hands-off.Wealthsimple Trade and Questwealth Portfolios are some of the top robo-advisors in Canada, allowing you to trade different assets at a low cost.For example, you can buy and sell stocks and ETFs without commission on Wealthsimple Trade. This means saving and earning more from your investment.
Conclusion
The stock market can be a complicated place for beginners. Most people who’ve been investing for years don’t attempt day trading because they fear losing more money than they feel comfortable losing.
But the process of day trading isn’t as scary as some make it look. With a good understanding of the basics and a little practice, you’ll be a pro before you know it.
Now that you have gone through this comprehensive guide, which covers the basics of day trading, different strategies, and avoiding common mistakes.
Hopefully, you can now make informed decisions while doing day trading in Canada.
FAQs
Is day trading legal in Canada?
Even though day trading comes with risks, it is a legal activity in Canada.
Can you day trade on Wealthsimple?
Despite its limitations, day trading is possible on the Wealthsimple platform.
Can you make money day trading?
There is no doubt day trading is a lucrative endeavour, but it can also go wrong.
Can you make a living trading stock?
It is possible to make a living trading stock if you have the patience and ambition.
Can you day trade in RRSP?
Nothing is stopping you from doing day trading in your RRSP. However, you can end up causing a streaming wave of problems.
Can I day trade in my TFSA?
You can’t day trade with your TFSA. This is because the Canada Revenue Agency (CRA) considers day trading income as taxable while TFSA income is non-taxable.
How much do day traders make in Canada?
Day traders in Canada make $67,995 on average per month.
How are day traders taxed in Canada?
Day trading income is considered a business income in Canada. So the Canada Revenue Agency (CRA) taxed day traders based on their regular income and marginal tax rates.
Hi, I'm Adeola Adegoke. I am a licensed Insurance Broker in Manitoba, and I hold a master’s degree in Mathematical Sciences (with a major in Financial Modeling) from the African Institute for Mathematical Sciences (AIMS), Tanzania.
Also, I have a second master's degree in Statistics from the University of Regina, and I am currently pursuing my Ph.D. in Statistics at the University of Manitoba.
The primary purpose of Money Reverie is to help everyday Canadians make better financial decisions by providing up-to-date financial news and information, reports, product reviews, and government programs.
