Leading Day Trading Instruments

Day trading includes trading (or initially brief selling and afterwards acquiring back) a tool with a focus on making a fast earnings. The holding duration may differ from a few secs to a few hrs but not surpass the period of a trading day. As an example, a speculative investor may identify a technical uptrend in Microsoft Company stock (MSFT) at 10:15 a.m., take a long position and also square it off in 45 mins for a quick revenue.

A carry-over of the setting to one more day does not qualify as day trading. By its nature, day trading needs quick and prompt action by a trader, typically in higher values that cover the thin earnings margins. In general, little profits on large quantities offer day investors an acceptable earnings. A lot of day trading occurs on margin, enabling traders with minimal capital to take big placements that equate to sometimes their trading capital. Large volume likewise guarantees lower transactional costs.

Numerous tradable properties are offered in the international markets, consisting of supplies, bonds, foreign exchange, commodities and different derivative instruments on those (like futures, choices, or swaps). When it involves temporary trading, a few possessions have a tendency to outshine the others.

Best Instruments for Day Trading

Which instruments are best for day trading? Let’s begin by checking out a couple of fundamental features that fit the day trading requirements:

  • High liquidity: Ease of buying and selling in large amounts smoothens trading and ensures price fairness and efficiency.
  • High volatility: High volatility is a friend if one wants to trade frequently with an aim to generate profits multiple times. Not just for pricing of plain vanilla financial products like equities and bonds, volatility plays a pivotal role for pricing other popular products like options.
  • Low Transactional Cost: Frequent trading should not lead to high transactional costs. Brokers offer staggered brokerage charges wherein the per unit trading cost lowers as one trades in higher volumes. Low costs are a must for any day trading activity.
  • Margin trading/leverage: No trader would trade actively and frequently if they have to hold large amounts of trading capital. The inherent benefit of leverage is that it allows traders to trade higher proportions with limited capital. A low capital requirement leads to a high level of trading activities in the overall market. However, leveraged or margin trading is a double-edged sword that offers exposure on both profit and loss side. Care should be taken to keep trading within cautious limits.
  • Availability of information: Markets move on news, and day traders keep a close eye for information on assets they trade on. Not all brokers and trading platforms provide easy and quick access to associated news on all instruments. Add-ons like text alerts on mobile devices may remain restricted to a qualified list of instruments (e.g. top 30 or top 100). Easy availability of news and associated features become “good-to-have” parameters when selecting day trading instruments.

Let’s see which tools fit the above standards for qualifying as the very best fit for day trading:

  • Forex instruments: Foreign currency exchange markets run 24/7 and forex instruments fit perfectly for short-term day trading as they offer high volatility, large liquidity, low capital requirements, and low transactional costs. However, care should be taken to select an apt currency pair that matches the needs of day trading. Exotic currency pairs should be avoided as they lack the liquidity parameter. Most forex day trading happens through near-term forex futures, closely followed by forex options, forex spot trading, and forex binary options trading. Day traders should select the ones they are familiar with and that fit their desired trading strategy.
  • Index futures: One of the most liquid and high-volume trading instruments is futures on popular indices like the Standard & Poor's. Index futures are highly liquid and come with low transaction costs, but they are less volatile. Day traders familiar with futures trading benefit from the high leverage available on index futures trading.
  • Futures on volatile stocks: Like futures on indices, futures on highly volatile stocks are popular day trading instruments. Traders should be careful about selecting futures on the right underlying stocks, as the volatile stock list changes frequently.
  • Commodity futures: Futures on highly-liquid commodities like crude oil and gold make them good instruments for day trading. Day trading in commodity futures also offers a diversification of assets from the usual equity or index-based trading.
  • Options on indexes (and volatile stocks): Options offer low-cost alternatives to costly stocks. (For related insight, read about AAPL options.) Carefully-selected option positions (or option combinations) on highly-tracked indices and popular stocks with high volatility are suitable day trading instruments due to their high liquidity, high volatility, and low capital requirements. However, they usually come with high transaction costs.

In all of the futures and options trading based upon various underlying possessions, the accessibility of a mini-contract collection supplies the best combination of reduced agreement dimension needing low capital investment and high volume. Beginners checking out day trading during their knowing stage can start with the mini-series agreements.

  • Index-based ETFs: Exchange-traded funds (ETFs) are gaining popularity as one of the most efficient investment classes. These ETFs are good not only for long-term investors, but also day traders, because of their high liquidity and the low cost of trading. Carefully selected ETFs on common indexes like the S&P 500 or commodities like gold are the best bets for day traders.
  • Bond futures: Bonds may not be the best trading instruments for day trading due to the high capital requirement. However, bond futures offer high liquidity, high volume, very low transaction costs, and high leverage due to their lower risk profile. More importantly, day trading in bond futures offers much-needed diversification for traders (depending upon the overall economic cycle).

The Bottom Line

Day trading is an exciting and also extreme activity, which commonly draws in novices. It comes with its own factors to consider. No monetary tool must be selected for trading unless the trader has established sufficient knowledge as well as knowledge with its qualities. Trading a tool just since it gets on the top of a trading checklist is a certain indication of failing if the trader does not have fundamental understanding of that tool. Traders must meticulously research as well as acquaint themselves with the essentials as well as the realistic possibility of success prior to commencing day trading with any type of tool.

Tip: For investors’ reference only, it does not constitute investment advice. Financial investment products have high risks and are not suitable for every investor. If necessary, please consult a professional consultant.