How To Choose A Broker For Day Trading
Join 1000's of Authors at StreetArticles Today!

How to Choose A Broker for Day Trading

Day trading is the practice of holding positions in a financial market for no longer than a single day, and often for much shorter periods of time. Day traders always exit any trade before the end of the trading day (often referred to as the 'regular cash session'), and aim to profit from the accumulation of lots of small wins, rather than swinging for large gains over a longer time horizon as most investors do.

Although day trading has many similarities to other more long term approaches to the markets, and similar strategies are often employed in shorter timeframes using instruments such as futures, when it comes to choosing a broker for day trading there are some significant differences. Understanding these and choosing both the right trading instrument and the right online brokerage firm can be crucial to your success as a day trader.

The reason for this is somewhat technical, but important to understand; it hinges upon the difference between fixed costs and variable trade profits.

As a trader of any kind, you'll have an average profit per trade. Assuming you're profitable, then this figure will be positive. However, there will be a considerable difference between the average trade profit of a day trader versus a long term investor.

This has absolutely nothing to do with the success of the trader or their ability to identify profitable opportunities, it's simply a function of time. The longer the period of time, the more price will typically move. If you hold a position for a week, then price has the opportunity to move much further (whether in your favor or against you) than if you only hold the position for a minute. Even if every single trade is profitable for a trader that only holds positions for a minute, then their average profit per trade will be small - price simply doesn't move very far in a minute.

So, the average profit per trade varies according to time, and the average profit per trade of a day trader will typically be much lower than that of a longer term trader. This is regardless of whether you're trading stocks, options, forex, futures, or any other market.

What doesn't vary, on the other hand, are the fixed costs associated with trading. Depending on your choice of broker and the instrument you trade, these can include all of the following:

  • Commission
  • Spread
  • Exchange Fee
  • Slippage
  • Financing for Margin
  • Financing for Short Sales

Whether you happen to be buying a futures contract or shorting a stock, the costs will be the same regardless of whether you hold that position for a few minutes or a few months.

This creates a situation where the day trader has exactly the same fixed costs as the longer term trader, but a much lower average profit per trade. In fact, the day trader needs to achieve a modest profit just in order to cover his or her fixed costs and break even.

Let's study a quick example to see how this works . . . Suppose that a trader buys a single futures contract. He pays a spread of $12.50, exchange fees and commission of $5, and experiences a tick of slippage when he enters his position, also costing him $12.50. His total trading costs are $30. That means that his position needs to achieve a profit of $30 just to break even. If the market he's trading typically only moves $30 in 15 minutes, and he always exits his positions after 15 minutes, then if he would need for 100% of his trades to be winners just in order to break even.

Does this make day trading a futile enterprise? Certainly not. If the trader hold positions for 30 minutes (in which the market moves $60 on average) then his chances improve considerably: if anything more than 75% of his trades are winners then he will overcome his fixed costs and achieve a profit. Average profits per trade rise, and fixed costs per trade remain the same.

What does all this mean when it comes to choosing a broker for day trading?

Minimizing fixed costs needs to become an absolute priority for short term traders, and low commissions and spreads are something that must factor heavily in the choice of broker. After ensuring that the broker is registered with the regulator and compliant, keeping brokerage costs to a minimum will need to become the top priority, and should be given more significant attention than charting platforms, range of markets, and other features.


Street Talk

No comments present
You May Also Like
Elss : Encompassing Investments With Tax Saving
The financial year 2015-16 has ended and with that, the tax paying deadline is also over. It is often observed that the clients pursue the tax saving plans by the end of the year, i.e., in February or March. It may have helped you till now, but it is a…
By: Dishika Baheti in  Investing  >  Day Trading   May 18, 2016  
0
  Likes: 0

Fundamentals Of A Company Check - What Would Be the Services Employed
Business planet is cool as well as risky. The deeper you enter, the a lot more threat you get into. Nevertheless a systematic approach generally assists to collect the puzzle and stroll straight. Investing into a company could be helpful should you go through a meticulous company check. All strings…
By: daniel huang in  Investing  >  Day Trading   Apr 26, 2016  
0
  Likes: 0

How Administration Outsourcing Benefits Private Wquity And Venture Capital
In the high-frequency world of alternative securities, private equity and venture capital investments stand out for bringing in substantial returns from equity appreciation and capital gains. Private equity firms align with accredited investors, like wealthy individuals and institutions such as foundations, university endowments, pensions, insurance companies, and other multi-manager funds,…
By: Cheryl Muncher in  Investing  >  Day Trading   Mar 15, 2016  
0
  Likes: 0

Tips for Buying Refurbished Robots
Is a refurbished robot right for my business? That is the first question that comes to mind when you consider buying a refurbished robot. They are repaired, rebuilt, and cleaned in order to reenter the robot market. If bought from a quality robot store, they offer cost benefits as well…
By: alexbarker in  Investing  >  Day Trading   Feb 19, 2016  
0
  Likes: 0

Out Of Currently Being Goods Involving Must to Help Professions to 800 DIY Currently Currently Being
Many people maintain the money pertaining to items it's possible not really pertaining to paying for models concerning the Professions powerleveling railings. The most famous porch models typically include wood. Lumber porches plus lumber railings generally go with equally modern day plus Victorian or even various other form real estate.…
By: appgamenews in  Investing  >  Day Trading   Jan 21, 2016  
0
  Likes: 0

What is the Highest Standard Of Corn Peeling Machine?
Corn peeling machine develops towards high-performance. And we have high quality automatic corn peeling machine now. Corn peeling rate can reach 98% above and soybean and mung bean peeling rate can reach 95% above, which reaches the highest standard of this industry. When it refers to find out a high…
By: paomo in  Investing  >  Day Trading   Jan 08, 2015  
0
  Likes: 0

How To Choose The Right Bridesmaids Dress
Like planning your wedding, every stage of the selection of bridesmaid Long Champagne Bridesmaid Dress is once in a lifetime event. Exciting, right? But because it is a one-time, I know to make a decision may be a little scary. After all, you can not rely on past experience to…
By: vickysunny in  Investing  >  Day Trading   Oct 27, 2015  
0
  Likes: 0

Knowing The Ins And Out Of Forex Helps
Opportunities abound for personal traders in the Forex marketplace. You should take time to research the forex market carefully, as it can net you significant earnings. During the learning process, new traders can greatly benefit from guidance provided by seasoned traders. Read this article for advice on how to get…
By: mick leach in  Investing  >  Day Trading   Feb 07, 2012  
0
  Likes: 0

So What is Forex?
If you have ever traveled to a foreign country, then you must have found it rather necessary to find a currency exchange booth right at the airport, and exchange the money present in your wallet that is if you are a man or a purse if you are a women,…
By: Graham O. Osano in  Investing  >  Day Trading   May 12, 2013  
0
  Likes: 1

Automatic Forex Trading Systems - Do Metatrader 4 Expert Advisors Really Work?
If you've been on the Forex trading scene for any given amount of time, you're likely to have come across one of the many automatic Forex trading systems available on the market. The majority of the best Forex trading systems are created as Metatrader 4 expert advisors, and there are…
By: Thad B. in  Investing  >  Day Trading   Feb 21, 2011  
0
  Likes: 0

Things to Avoid Before Entering the Forex Market
A vast majority of forex traders never achieve success as a forex trader, yet everyone wants to get into the forex business. They think that they be able to beat the odds and become one of the few successful forex trader. However, most traders enter forex market and make the…
By: prabhu1 in  Investing  >  Day Trading   Dec 30, 2013  
0
  Likes: 0

Truths That Cannot Be Denied About Forex
There is a lot of interest in forex markets, but a lot of people tend to be hesitant. Perhaps it seems difficult for a lot of people. It's always wise to be careful with your money. You want to educate yourself on Forex before you start investing. Pay attention to…
By: mick leach in  Investing  >  Day Trading   Feb 08, 2012  
0
  Likes: 0

How To Succeed With Forex Trading Today!
Anyone can trade on the foreign exchange market. Read on to discover the basics of forex, and some ways you can make money by trading.Don't expect to create your own unique strategy to wealth in forex. Forex trading is a complicated system that has experts that study it all year…
By: mick leach in  Investing  >  Day Trading   Feb 06, 2012  
0
  Likes: 0

Reliable Forex Tips That Will Help You Succeed
People think that Forex trading will baffle even someone with a PhD. When you do your research, you simplify the process. What you are about to learn in the following article is valuable information that will help you get on the right track with Forex trading.You have to understand that…
By: mick leach in  Investing  >  Day Trading   Feb 07, 2012  
0
  Likes: 0

How to Options Trade
When I learned how to options trade markets were quite a bit slower and competition was significantly less (for lack of a better word) automated. Today's market requires quite a different strategy than those of days past. Today's trader has to be less exposed in terms of duration with shorter…
By: Steve Wise in  Investing  >  Day Trading   Sep 05, 2011  
0
  Likes: 0

Article Views: 1416    Report this Article