Wondering what exactly is intraday trading and whether it’s right for you?
I’ve spent the best part of my working life trading intraday for a living as a proprietary trader for over 4 years…
And I’ll share with you everything I know…
Everything I’ve experienced…
The pros and cons…
And the nitty-gritty details that no one is telling you about intraday trading.
By the end of this post, you will be able to make an informed decision as to whether intraday trading is right for you or not.
The Definition of Intraday Trading
Intraday trading (also commonly known as Day Trading) is the act of getting into trades during the trading day and exiting all trades before the market closes.
This is the opposite of Swing Trading, where you hold your positions overnight and usually for days or even weeks.
Now, intraday trading is slightly different in the stock market than in the futures and forex market.
When I first started my journey as a proprietary trader in 2011, I was an equities trader.
That means I traded the stock market.
The stock market has only a fixed number of hours per day.
So what that means is that your working hours are only when the stock market is open.
For the US stock market, that’s 9:30 a.m. to 4 p.m. Eastern Time.
However, this is different if you’re trading the futures or forex market.
The futures and forex market is open 24 hours, 5 days a week.
That means the futures and forex market does not close until the weekends.
So “intraday trading” literally can mean trading non-stop for 24 hours each day.
When I moved to another prop firm that’s trading the futures and forex market, traders would go into the office as early as 6 a.m. and leave as late as 3 a.m.
Some would even sleep at their desk in the prop firm!
But hold on to your pants and relax because you don’t have to trade that long each day if you’re thinking of trading the futures or forex market.
However, you still have to have sufficient “screen time” to be able to trade intraday.
You see, the market is open 24 hours because it’s traded round the clock by different major sessions opening.
The above image shows the 4 major trading sessions.
They all overlap each other to create the 24-hours trading session for the forex market.
What’s important is to trade when the market is most active and that is trading during the London and New York sessions.
Intraday Trading in the Stock Market
Now, if you’re thinking of doing intraday trading in the stock market, then you want to be aware of certain rules.
When people talk about doing intraday trading in the stock market, they are mostly referring to trading the US stock market.
While you can certainly trade the stock market in other countries, it may not be as liquid as the US stock market.
What’s the Minimum Capital to Get Started?
To do intraday trading in the US stock market, you need to be aware of the Pattern Day Trader Rule (PDTR).
The rule states that if you want to trade the US market intraday (their definition is that you enter a trade and exit that same trade before the stock market closes), you need a minimum capital of $25,000.
This rule is set by the US Securities and Exchange Commission.
So unless you have a minimum capital of $25,000, you might want to consider trading the other markets.
For most people, that means they wouldn’t be able to trade the US market intraday.
So if you don’t have $25,000 to trade the US stock market intraday, what can you do?
You might want to consider trading the futures market.
Intraday Trading in the Futures Market
While trading the stock market means you are trading the individual shares of a company, trading futures is completely different.
When it comes to trading futures, the 3 most common markets traded are:
1) Index futures
Index futures are futures contracts on the major indices like the S&P 500, Dow Jones, Russell 2000, FTSE 100, ASX 200, Eurostoxx, and other countries’ index.
Generally, when you talk about trading the index futures, the most commonly traded futures are the E-Mini S&P 500 (ES), E-Mini Russell 2000 (RTY), and the Mini Dow Jones (YM).
2) Commodity futures
Commodity futures are futures contracts on commodities like crude oil, gold, silver, wheat, corn and pork bellies.
3) Treasury futures
Treasure futures are futures contracts on the bond markets.
When I was at the prop firm, we had a desk that was specifically spread treading the bond futures like the US 10-year bond, US 30-year bond, German Bunds, and UK Gilts.
We would find two highly correlated bonds and would go Long one and Short the other when they deviated from each other.
What’s the Minimum Capital to Get Started?
With futures trading, there is no PDTR.
However, you still need a recommended starting capital of at least $5,000.
And the reason is because of the margin needed to trade one futures contract and the tick size of that contract.
For example, the margin required to trade one contract of the E-mini S&P 500 Index Futures can be as low as $400 – $500 for some brokers.
And since the value of one tick (the smallest move in the market) is worth $12.50, if you have a 10-tick Stop Loss, that would already be $125 risk per trade.
If you have 5 losses in a row, that would be a total loss of $625.
That would already be more than a 10% loss of a $5,000 starting capital.
So while you can start trading for as little as $500 – $1,000 as your starting capital, it’s highly recommended that you have at least $5,000 to $10,000 to properly trade the futures market.
But what if you don’t even have $5,000 to spare?
Are you doomed to never do intraday trading?
Luckily for you, there’s another way.
Intraday Trading in the Forex Market
Trading the forex market is by far the most attractive to people wanting to get into trading.
And the reason is that it’s the lowest entry to get started trading.
Some brokers can let you start with just $1 (yes it’s very ridiculous), and even give you bonus money for trading with them:
Generally, if the broker is reputable, it doesn’t need to give any deposit bonus to get you to trade with them.
I’d personally stay away from such brokers.
Some brokers even give you an insane amount of leverage to trade the forex market.
For example, some brokers give you a leverage of 1:3000 for trading with them.
That means you only need $1 just to trade a $3000 position!
And if you think about it, you’d be concerned about how safe the brokerage can be if they offer such high leverages to their traders.
Because if a black swan event were to happen just like what happened to USDCHF in early 2015, where the market dropped more than 1800 pips in just one day, you’d be worried if you could still get your money back from your broker!
Unfortunately, while the forex market is easiest to get started trading in, it’s also the place where it’s flooded with shady practices and you can easily get scammed of your money if you’re not careful.
Because the forex market is unregulated (that means unlike the stock market and futures market there is no centralised exchange), you want to also be very careful in choosing the right brokers.
As long as you stick to reputable brokers from respected regulators, you will be fine.
What’s the Minimum Capital to Get Started?
Of all the three markets, the Forex market is the least capital intensive.
And as mentioned above, some brokers can let you start trading with just $1.
Is Intraday Trading Right For You?
The most important thing you need to ask yourself when deciding to do intraday trading or not is whether you have the time or patience to sit in front of the screen all day to trade?
When I was much younger in my 20s and even in my early 30s, I would be able to sit and stare at the screen all day long.
But now that I’m almost 40 (at the time of this writing), it’s just a strain on my eyes and back.
And if you have a full-time job, it might be difficult for you to day trade.
So this is something you need to seriously think about.
And please don’t quit your job just to try and do intraday trading if you’re new to trading.
If you want to become a full-time trader as your career, I suggest you apply for a proprietary trading job as opposed to trading on your home at home.
Many proprietary trading firms don’t pay a salary.
They just pay you through profit sharing.
That means if you don’t make money from the markets, you won’t get paid.
Also, intraday trading is extremely popular with many new traders because they think it’s “easier” and “quicker” to make money.
But that’s not necessarily the case.
And the reason is that when you’re trading intraday, you’re competing with professional traders.
When I was at the proprietary trading firm, traders were not allowed to hold positions overnight.
We must be flat (meaning no open positions) before the market closes.
If you want to hold any positions overnight, you’d need to have a very good reason to do so.
Otherwise, you must close any positions you have before the market closes or you’d be making a trip to the boss’ office to explain yourself.
Think about this – if you want to make some money playing poker, would you want to play at a table full of professional poker players who play poker for a living?
Or would you rather play at a table full of newbies who just play poker recreationally?
Obviously you’d go for the latter because that’s easier money.
Similarly, when it comes to trading the markets, would you rather trade against the professional traders who trade for a living?
Or would you rather trade against the retail traders who don’t trade for a living and can make mistakes?
Again, obviously the latter.
It’s already tough trading the markets regardless whether you’re doing intraday trading or not.
But it’s a tougher road to go on when trading intraday.
What is a Positive Edge?
Ever gone to the casino before?
If you have, I’m sure you must have played Roulette before.
What I find fascinating about this is that many people come up with all sorts of betting strategies to beat the roulette.
But the game has been rigged in the favour of the casino the moment you start playing.
Here’s what I mean…
The European roulette wheel has 37 numbers (numbers 0 to 36).
Many people think that betting on either the red or black is a 50% chance to win.
But that is not true because there is the additional number “0”.
So your odds of winning either red or black is just:
18 (red/black number) divided by 37 (total numbers) = 48.64%
Assuming you bet $100 each time, here’s the reality each time you make a bet:
- 48.64% of the time you win $100
- 51.36% of the time you lose $100
Does this look like winning odds to you?
Absolutely not.
If you think about it, it means that the casino, in the long run, will win your $100 51.36% of the time.
If you played the American roulette wheel, the casino’s edge will be even greater because they have two zeros on their wheel.
That is what I call a “Positive Edge”.
Now you might say:
“But it’s just 51.36% of the time I’ll lose. It’s not a lot.”
Yes, it’s not a lot.
And you might win in the short run.
After all, it’s possible to flip a coin 10 times and you get heads every time.
But try flipping it 1,000 times or even 10,000 times.
It will inevitably normalise back to getting heads 50% of the time and tails 50% of the time (assuming a fair coin of course).
The key here is that in the long run, playing the roulette wheel is a sure way to lose money.
That’s the reason why casinos are open 24 hours and they don’t put a clock in the casinos.
They want you to stay there all day long so their positive edge will play out over the long run.
The casino is not a charity organisation.
They didn’t design their games so that you can win.
If they did, they would be bankrupt sooner or later.
They designed their games so that THEY will win in the long run.
And that’s exactly what you want to do when it comes to trading.
You also want to be like the casino and put the odds in your favour as much as possible to “rig” the trading game in your favour.
The Negative Edge to Overcome
However, because of spreads and commissions, you are starting the game with off what I call a “negative edge”.
And this “negative edge” is bigger for intraday trading than it is for swing trading.
For example, the spread and commissions will have a bigger effect on intraday trading because of smaller Stop Losses in smaller timeframes.
If you have a 2-pips spread and a 10-pips Stop Loss, that would already account for 20% of your Stop Loss.
That means your trade only needs to go against you by 8 pips to get stopped out.
And based on a 10-pips Take Profit for a 1:1 risk-to-reward ratio, you would need the market to move 12 pips in order for you to take profit.
And assuming a risk of $100 for the trade, here’s the exactly what’s happening:
It takes a move of 8 pips against you to lose $100.
But it requires a move of 12 pips for you to make $100.
Does this sound like good odds to you?
Definitely not!
So what’s the alternative?
Swing trading.
When you trade the longer time-frames, you will naturally have a larger Stop Loss and Take Profit parameter.
So let’s say you trade the 4-hour timeframe and you got into a trade where your Stop Loss is 50 pips and your Take Profit is 50 pips as well (Note: I’m using a 1:1 risk-to-reward ratio just to illustrate the effect of the spread on your trades, but in reality, you want to go for more than 1R profit most of the time).
Using the same 2-pips spread, on a 50-pips Stop Loss it would only be 4% of the total Stop Loss.
That means you have significantly reduced the “negative edge” when you have a bigger Stop Loss because you’re trading the higher timeframes.
So again, assuming a $100 risk and a 1:1 risk-to-reward ratio, here’s how the trade parameters look like now:
- A 48-pips move against you to lose $100
- A 52-pips move in your favour to win $100
Your odds are now much better compared to a 10-pips Stop Loss.
But there’s still this negative edge.
So how do you overcome this negative edge?
There are 2 ways:
- A positive expectancy trading system
- Positive Swap
A Positive Expectancy Trading System
This is when you have a trading system that comes out profitable over a series of trades over time.
However, if it were that easy, most traders would be profitable.
But the fact remains that over 90% of traders lose money.
To have a positive expectancy trading system, you have two parameters tinker with:
- Probability of Wins vs Loss
- The amount each win produces vs. the amount each loss produces
Let’s use the casino roulette as an example:
- 48.64% of the time the casino loses $100
- 51.36% of the time the casino wins $100
Here is how you calculate expectancy:
(Percentage of Win x Amount Won) – (Percentage of Loss x Amount Lost) = Expectancy
So in the casino roulette example:
(51.36% x $100) – (48.64$ x $100) = $2.72
That means that if someone constantly places a bet of $100 each time on either red or black, the casino will win on average $2.72 per bet over time.
And the more times that person plays the roulette, the more the casino will make.
So when it comes to trading, you want to be able to tinker with both parameters to come up with a positive expectancy system.
However, this is the hardest thing to do because when the market changes, your probability of wins versus losses can get affected as well.
So what do you do to ensure your edge in the market?
Positive Swap
The forex market is the only market that allows you to get paid on a daily basis for holding your trades.
And what I’m talking about is getting Positive Swap (or positive interest).
This happens because of the interest rate differential in the currency pairs.
For example, if you are Long the USDCHF pair, you will be paid a positive swap for holding your position overnight.
Now, there is also a Negative Swap (or negative interest).
So if you are Short the USDCHF, you will have to pay the negative swap for holding your position overnight.
What determines whether a swap is negative or positive comes down to the currency pair you are trading and the direction of your trades.
Below is a table of the swaps paid out by different brokers (on 1 mini lot = 10,000 units):
What’s the effect of a positive swap?
Let’s take the example we used above but this time using 1 standard lot (100,000 unit) as our trade size:
- A 50-pips Stop Loss: 48-pips move against you to lose $500
- A 50-pips Take Profit: 52-pips move in your favour to win $500
Now, this in itself may not necessarily be a losing trade for you because this could be a positive expectancy trade.
For example, if 60% of the time the market moves 52 pips in your favour to hit your take profit, and only 40% of the time it moves 48 pips against you to stop you out, you would be profitable in the long run.
But as a trader trading in this brutal trading environment, I want every edge I can get.
And positive swap is a huge edge that can contribute to your bottom line.
So for this example, we will use USDCHF and let’s assume the swap paid out by your broker is $5 each day.
And let’s say this trade takes 10 days to finally hit either your Stop Loss or Take Profit level.
That means that the total positive swap you will get just for holding your position over 10 days is $50.
That is exactly 10% of your risk!
So now your trade looks like this:
- 50-pips Stop Loss = A 48-pips move against you to lose $450
- 50-pips Take Profit = A 52-pips move in your favour to win $550
Because of the positive swap, you now make $100 more when you take profit compared to when you get stopped out!
How does this look now?
I’d take this type of trade in a heartbeat any day.
Just by having the positive swap you can skew the amount won versus a loss in your favour.
And this is the advantage that swing trading has over intraday trading in the forex market.
Conclusion
Intraday trading can be very lucrative if you have the time to be in front of your screen for hours at a time, and have a consistently positive expectancy system.
And it’s certainly possible to be profitable doing intraday trading.
But for most people, swing trading might be a better option because you have one unique advantage that intraday trading doesn’t provide – and that is getting positive swaps.
With positive swaps, you will be able to have an unfair advantage in the markets and that will give you a likelier chance to be profitable, even if you’re just starting out.
So if you’re brand new to trading, I strongly suggest doing swing trading first.
Only once you have more experience trading the markets, then you can try intraday trading.
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