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Aussie Day Trading Tip: Trade Liquid Instruments

Day trading Australian markets can be done using listed ASX shares or a range of derivatives (both listed or over-the-counter).

As we all know, the markets don’t always go in one direction- it sometimes rises, other times falling or just ranging- so as a day trader you need to have the flexibility to take both side of the market: be long if you expect your selected security to rise or be short if you expect  do fall.

When Day Trading ASX stockmarket we must look  for the most liquid shares which typically are the big  four banks (ASX codes: ANZ, CBA, NAB and WBC),  big miners (ASX codes: BHP BLT, RIO).

Some other examples of ASX stocks that are very liquid and therefore good candidates for day trading: Fortescue Metals (FMG), Newcrest Mining ((NCM), CSL Limited (CSL).

Aussie Day Trading Tip: Make Use of Leverage

By definition, a day trader is in and out of the market within the same trading day hence it makes lot of sense to trade with borrowed money using leverage. In practical terms trading with borrowed money can be done by trading  a margin loan account, trading CFDs and trading options.

WARNING: In all cases leverage can help you increase your returns but it can also magnify your losses!

       ♦ Margin Loan Account

Margin Loan Account lets you borrow money to buy shares, usually from a list of approved shares. The lenders use a Loan to Value Ratio (LVR) that is the amount of your loan divided by the total value of your shares. Most lenders require you to keep the LVR below a maximum of 70%.

The shares you buy are considered as security by the lender which means the lender can sell the shares to repay the loan in case of a ‘margin call’. 

Margin loan interest rates and features vary so shop around for a lender that best suits you. Start by searching online at the websites of providers to compare different margin loans.

    ♦ Trade Contracts for Difference (CFDs)

CFDs are leveraged derivatives products with their value derived from the value of another asset (shares, indices, commodities and foreign exchange). The CFD providers require a percentage margin to open a trade, most often the margin is between 5%-10%.  The CFD provider will charge you interest on any long CFD positions held open overnight. Often interest is charged on the full face value of your trade. The interest rate you are charged will vary depending on the CFD provider.

     ♦ Trade Options

Options are also an instrument that can be used for day trading. With options offering leverage and loss-limiting capabilities, it seems that day trading options may be a great idea.

In reality the day trading option strategy faces a couple of challenges: time value component of the option premium tends to dampen any price movement; reduced liquidity of the options market which is actually increasing the bid-ask spreads, again cutting into the limited profit of the typical day trade.

 Aussie Day Trading Tip: Find Your Day Trading Strategy

Build a dynamic system and tailor a risk strategy to that system. A risk strategy means using your capital and optimally allocating it for each trade you make – risking too much on a single trade can be disastrous, and increases our risk of ruin. Allocate too little, and we may see sub optimal profits. 

This ‘game’ has endless ways to approach it and one of the biggest hurdles will be finding a strategy that suits your personality and risk appetite. What makes sense for one trader will just create friction and distress for another. 

 Aussie Day Trading Tip: Treat Trading as a Business

I treat my trading like a business and take it very seriously, and so do others that I know. Every business requires RESOURCES and incurs EXPENSES.

Be prepared to spend the TIME and MONEY required for education in understanding concepts such as expectancy, and building a trading system to give you confidence.

It’s not uncommon for a business to be unprofitable in the first year. Anyone can trade successfully if is willing to learn and analyse his/her feelings and decisions. Learn from your mistakes or better still from someone else’s.

 Aussie Day Trading Tip: Confidence kills

Respect the market every second of every day. Expect the unexpected. Always ‘babysit’ your position and exit your trade immediately whenever you feel uneasy.

Successful day trading requires flexibility. Train your mind not to develop a market opinion and bias but rather to understand the potential for both sides of the market. This will allow you to make your trades based on what the market is doing at the time of the trade.

Be humble and be nimble!

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