Day trading on eToro: why is it not for everybody?

You may have actually come across day trading already without realizing it. Have you seen any of those movies with stressed out men in expensive suits on Wallstreet nervously watching their computer screens and making thousands within a second screaming madly about it?

Well, the reality of day trading is a bit trickier but probably equally stressful, to say the least.

With so many assets available on the eToro platform traders use an even larger numbers of trading strategies to invest in them, which could certainly be overwhelming for a begginer. Day trading is one of the most popular strategies (but also one of the most difficult ones) and below you can find a quick overview of what it is and why one should be careful day trading.

(NOTE: Before we continue, we have to give a disclaimer that the trading products offered by the companies listed on this website carry a high level of risk and can result in the loss of all your funds. CFDs are complicated instruments that are never guaranteed to provide you supplemental earnings.  In fact, Around 67% of all retail investors experienced a loss while trading CFDs. Make sure to keep this in mind before attempting to use the eToro platform yourself. All the information found on this website is not official trading advice and all practices shown are referenced for the use of the Demo account only.)

What is day trading?

Day trading involves opening and closing all of your trading positions in a day to capture price movements of assets that happen within relatively short timeframes. You are not taking on any of the risks involved in holding positions overnight and end all of the trades by the closing time of the market. Typically day traders engage in multiple trading positions to make profits on each one of them which will then add up into a noticeable sum, if they trade successfully. They trade on price changes that happen within hours or even minutes.

Swing traders are many times similar to day traders except that their trading time horizon tends to be relatively longer, up to a couple of days or even weeks.

Day traders have a very short-term outlook and trade based on current events and market trends, taking advantage of these short-term volatilities. Some day traders known as scalpers trade with a very large number of positions making small profits on all of them hoping these amounts would add up to a large sum: they basically ‘scalp’ the market. Such traders tend to use leverage to amplify gains and trade very frequently. Remember that leverage is a tool that should be used with great caution as it can amplify your losses as well as gains, and that any trading bears risks of capital loss.

Assets in day trading

Many traders look for stocks that are liquid and volatile, but are also traded in high volumes i.e. which are bought and sold many times, causing noticeable price movements. Why is that important? Trading such stocks should allow you to enter and exit trading positions quite quickly, which is very important in day trading. These statistics on trading volume and daily price range are available when you click on an asset and look in the chart section.

Day traders also focus on stocks with high volatility so they are able to profit off price fluctuations with a right type of strategy and tools. Assets that tend to be more volatile are assets like stocks and CFDs, currency pairs and commodities. Certain market sectors also tend to generate greater price movements, such as the technological and financial sectors as they are very sensitive to company, industry and global news, as well as these industries are considered to be inherently uncertain. You can always filter on the type of assets or markets on eToro platform, as shown below.

Why is it not for everybody?

As you might have realized from the title, day trading is not an easy solution for everybody. There are many risks and difficulties associated with using this strategy and here are only some of them:

1. The types of stocks daytraders tend to prefer are usually extremely volatile and the direction of their price movement is hard to predict and make a profit on. There is always a chance that markets will turn against you and you will end up in losses instead of gains you were hoping for. Successful traders spend a lot of time researching and monitoring and still sometimes face losses.
2. Day trading often relies on leverage as a tool for increasing returns, since day traders tend to open many small trades over a day. This is a very powerful tool that needs to be used with caution as it can increase your losses the same way it could increase your gains.
3. The amount of stress and psychological pressure involved in daytrading is very substantial and requires a lot of emotional control and self-discipline. Losses are inevitable even for the most skilled traders and one needs to learn to accept and manage them. Unlike the buy-and-hold strategy, day trading needs constant monitoring of your trades and always looking out for new opportunities. Sticking to your strategy becomes more and more difficult if you are not able to manage your emotions and losses well.

Day Trading on eToro

Well, how does one start day trading then? As always there is no universal recipe, but there are a few steps you might want to consider.

1.Skills and knowledge. Learning how to trade properly is the first stepping stone to a possibility of good results. Understanding the basics of trading and creating a strategy that suits your knowledge, skills and goals is an important step many traders skip at the beggining and end up in losses. You also need to understand how and why your chosen markets move, what news affect them, how to perform technical analysis and choose best indicators.

2. Pick assets. Many day traders focus on assets that trade in large volumes and are very liquid as this allows them to open and close trades quickly. Transactions costs per unit  is also something you may want to consider as you will be opening and exiting trades frequently. Luckily, eToro is very transparent on its fees and also offers zero commission trading for non-leveraged long positions on stocks and ETFs.

Many day traders choose currency pairs as an instrument as they are the most liquid global market but are also very volatile. Stocks, commodities, CFDs and indices which show large price movements are also often considered. Recently cryptocurrencies became quite popular amongst day traders but you have probably heard about large price swings these assets undergo. All of these assets are very volatile and risky, so you need to be good at your risk management techniques as trading them always involves high risks of capital losses.

3. Choose your analytical tools.

There are plenty of analytical tools and indicators available on the platform one could use in their daytrading to help you identify trend as well as the necessary entry and exit points. The types of tools you choose may depend on your trading strategies and there are some common indicators that day traders use.

Many times traders try to identify trends or directions in price movements and use indicators such as the relative strength index (RSI), average directional index (ADX), moving average convergence divergence (MACD) or even a simple moving average. MACD helps to identify points of trend reversals and the overall strength of these trends; ADX likewise indicated strength of a trend. RSI below for example can be used to identify points where the asset is overbought or oversold by measuring changes and speed of price movement; like MACD, it is a momentum indicator.

Bollinger bands can also be used to assess the volatility of a market which is important in day trading, plotting an upper and a lower band around the price 2 standard deviations away. Increasing volatility makes the two bands to widen and vice versa.

There is also an option to use a combination of two or more indicators of course, for example RSI that helps to signal the right conditions to enter a trade and a lagging indicator like MACD to indicate such conditions after they appeared. These are just an example of tools you could consider.

3. Decide on your strategy.

There are plenty of different personalized trading strategies investors use on the platform. Here are some examples of most common ones:

• Scalping. This very fast strategy focuses on making small profits on price movements in many trades during q day and requires a trader to manage their exit points really well to avoid large losses. Profits are increased using leverage and knowing how to time and execute trades correctly is vital.
• Buy the dips. This strategy mainly focuses on determening trades’ entry points for an asset that declines in price in the short term and there is an indication it will rise again.
• Price averaging. In this strategy you start buy using only a portion of what you want to invest into a trade initially and then adding more in increments over time. The point is, on average you should pay a lower price for your assets compared to what you would pay had you bought them all at once.

The final strategy you choose to pursue should be ultimately suited to your needs, be very specific, detailed and consistent. Your strategy should be able to tell you what assets to trade, how to set the stop-loss and take profit levels on your trades, the amount of risk and leverage you should use and so on.

4. Focus and practice. Many times traders that begin to day trade focus on many different asset types at once and that is quite difficult to manage. Markets are constantly moving into different directions, reacting to market news in their own ways and that requires a lot of time, attention and knowledge to manage. Mastering your techniques on a practice account using only a few assets or may be an idea to consider. A day trader needs to be able to immediately identify the necessary chart patterns and spot the right entry and exit points, use trading tools and leverage and that requires times and practice. Like any other skills, success in day trading needs learning, time and patient practice. Make sure you spent enough time practing for a while before risking your own money in real trading.

Well as you have hopefully seen, day trading is a very popular trading strategy on the eToro platform but it is certainly not for everybody. There are many risks associated with trading risky volatile assets and this kind of trading requires a lot of attention and monitoring, as you have hopefully realized. So don’t forget about risks associared with trading on eToro and best of luck!

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eToro is a multi-asset platform which offers both investing in stocks and cryptoassets, as well as trading CFDs.

Please note that CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 67% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work, and whether you can afford to take the high risk of losing your money.

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