The key to short-term trading success: Day trading - Meaning, rules, and practical strategies explained in detail

Day Trading Meaning: The Art of Closing Positions Within the Same Day

In the stock market, investment styles vary widely. Some emulate Buffett’s long-term holding approach, but increasingly, traders are choosing another path — completing buy and sell transactions within the same trading day, known as “day trading.” Simply put, day trading involves closing all positions before the market closes, leaving no overnight holdings.

Day trading can be divided into two basic methods: one is buy first, then sell (buy-day trading), and the other is sell first, then buy (sell-day trading). If you buy a stock in the morning and sell it all before the market closes in the afternoon, that’s buy-day trading; conversely, if you start without holdings, sell short first, then buy back before the market closes, that’s sell-day trading.

Why is day trading becoming increasingly popular in Taiwan’s stock market? After the Financial Supervisory Commission relaxed restrictions in 2016, this trading method officially entered the public eye. Currently, day trading accounts for nearly 40% of total trading volume in Taiwan’s stock market. In the US, due to the T+0 settlement system, day trading is even more naturally suited, providing participants with greater flexibility.

The Three Main Attractions of Day Trading

Avoid Overnight Market Fluctuations

Taiwan stock trading occurs from 9:00 am to 1:30 pm, constantly influenced by international markets such as Hong Kong, Europe, and the US. If a major news event suddenly breaks out the night before, a seemingly bullish stock could plummet at the open the next day. Through day trading, investors can close their positions during the trading session, fully avoiding overnight risks and not worrying about unexpected events at international market close.

Improve Capital Turnover Efficiency

Day trading allows investors to enter and exit multiple times within a single trading day, only bearing the risk of price differences. In theory, capital can cycle multiple times in the same day, greatly increasing turnover rate and expanding profit potential. Compared to long-term holding, capital utilization efficiency is significantly better.

Leverage Amplification Effect

Since day trading profits are based on price differences, the actual transaction amount can far exceed the principal. In Taiwan’s stock market, margin trading for day trading requires an initial margin of about 50% (equivalent to 2x leverage), enabling small investors to operate larger positions. Of course, leverage is a double-edged sword — it amplifies gains but also increases the risk of losses.

Hidden Costs and Risks Behind Day Trading

Transaction Fees and Taxes Eat Into Profits

Seemingly small trading costs can accumulate rapidly with frequent operations. For example, in Taiwan, even with a half-price transaction tax reduction (from 0.3% to 0.075%), if you make 5 trades in a day, each with a principal of NT$100,000 and a profit of only 0.5% (NT$500), after deducting fees and taxes, net profit might only be NT$100–200. A small loss on one trade can quickly eat into earlier gains, leading to a situation where “profits are offset by costs” over the long term.

High-Intensity Pressure and Decision Risks

The core of day trading is capturing short-term price differences. During the trading session, Taiwan stocks often experience rapid fluctuations of 1%-2% driven by foreign investor activity, industry announcements, and market sentiment. For day traders, such volatility can determine the outcome of a single trade within minutes. This requires traders to monitor the market intensively, make quick judgments on bullish or bearish directions, and set precise stop-loss and take-profit levels. Under high pressure, hesitation or impulsive decisions are common, especially for less experienced traders, and short-term volatility risks outweigh potential gains.

Leverage and Liquidation Risks

Many investors use margin or securities lending to increase their trading capacity. However, leverage can be dangerous: for example, if you borrow NT$200,000 to buy NT$600,000 worth of stocks with NT$100,000 of your own funds, a 5% decline in stock price results in a NT$30,000 loss (10% of your principal). In extreme market conditions (such as hitting the limit up or down and being unable to close positions), losses can escalate further, and you may face margin calls from your broker.

Psychological Traps and Addiction Risks

The immediate feedback of profits in day trading can easily lead investors to become addicted to the thrill of short-term gains, gradually neglecting long-term investment performance. “Experimental trading” can evolve into “frequent trading,” and then into “placing orders based on gut feeling.” Over time, this can result in “small continuous losses” or “a single large loss,” consuming significant time and energy, and gradually eroding capital, diverging from original investment goals.

Five Traits Suitable for Day Trading

Day trading is not suitable for everyone. The following five types of investors are most suited:

Have ample time and can monitor the market throughout: Day trading requires quick decision-making within a short period. Those unable to focus on the market may miss entry and exit opportunities; office workers generally do not meet this criterion.

Have strict discipline and risk management skills: Must set and adhere to stop-loss levels, avoid violating principles due to greed, and control the size of individual positions.

Have strong stress resistance and quick decision-making ability: Markets can fluctuate dramatically every minute. Those easily influenced by emotions (panic selling, greed chasing) are akin to self-destructive trading.

Have investment experience and technical analysis skills: Able to interpret intraday charts, volume-price relationships, and utilize tools like moving averages, candlestick patterns, support and resistance levels. Novices who trade impulsively will only pay tuition fees with their capital.

Have sufficient funds and can bear losses: Day trading is a speculative approach aiming for small gains with high leverage. Insufficient capital and excessive leverage greatly reduce the margin of error, risking a total wipeout.

Five Types of Day Trading Operations

Spot Stock Day Trading (Unique to Taiwan Stock Market)

Currently, over 1,600 stocks in Taiwan can be day traded with spot stocks. This is the most common form of day trading. The process is relatively simple, and risks are manageable.

US Stock Intraday Trading (Day Trading)

US stocks can be closed within the same day without special restrictions, but are subject to the Pattern Day Trader (PDT) rule: with less than US$25,000 in account equity, a maximum of 3 day trades are allowed within 5 trading days; with more than that, unlimited trading is permitted.

Margin and Securities Lending Day Trading

Margin day trading involves buying stocks on margin and selling within the same day; securities lending day trading involves short selling and buying back on the same day to cover. Be aware of additional interest on margin loans or borrowing fees, and the risk of short squeeze on popular stocks.

Derivatives Day Trading

Involves buying and selling financial derivatives contracts within a single trading day, including stock index futures, options, single-stock futures, and options. Many short-term traders prefer using Taiwan index futures for day trading due to high leverage and low costs.

Algorithmic and High-Frequency Day Trading

Uses automated computer algorithms to determine buy and sell points, focusing on small profits from high-frequency trades. Costs are low, but technical requirements are high, making it difficult for retail traders to implement.

Comparison of Day Trading Rules: US vs Taiwan

Cost Estimation for Day Trading Fees

Buying 100 lots of TSMC (price NT$600, total NT$600 million) costs approximately: broker fees (at 30%) about NT$2,565,000, day trading securities tax about NT$900,000, totaling over NT$11.5 million. Clearly, transaction tax is the main cost in Taiwan’s day trading.

In contrast, US stocks are quite different. Buying 1,000 shares of NVIDIA (price $1,000, total $1,000,000), most brokers have eliminated commissions, and SEC/FINRA fees are less than $0.15, so total costs are under $1.00. However, investors should pay attention to spreads, slippage, and borrowing interest as hidden costs.

Three Practical Steps for Day Trading

Step 1: Stock Selection — Find “Popular Stocks”

Success in day trading first depends on choosing the right stocks. Focus on stocks with “popularity,” not obscure stocks with low prices, small volatility, or sparse trading volume. Selection methods include:

News Focus: Stocks that are reported tend to attract many investors; positive or negative news can amplify daily volatility, creating trading opportunities.

Follow-up on Institutional Reports: Companies suddenly covered by institutional research reports often see large fund movements, which are worth monitoring closely.

Quantitative Data Analysis: Observe daily top gainers, losers, turnover rankings, and trading volume. Pay special attention to stocks with “trading volume suddenly increased” (more than 50% above the 5- or 10-day average). Combine news and data analysis to determine trading direction.

Step 2: Trading Direction Judgment

Day trading can go long or short. Going long can be “trend-following” or “buying on pullbacks.”

Pay close attention to previous lows and opening prices, and refer to support and resistance levels on candlestick charts. Unlike swing trading, day trading should focus on 5-minute charts (each bar representing 5 minutes), not daily charts.

When going long, monitor the overall market momentum — if the market weakens, most stocks are affected; if individual stocks outperform the market significantly, consider holding positions. For example, NIO (NIO) in conjunction with Nasdaq 100 trend can help judge whether to continue rising or exit.

When shorting, look for bearish market sentiment, such as policy news causing sector-wide declines. For instance, if the market weakens overnight but BIDU (Baidu) outperforms, consider covering the short position when the index hits a new low but the stock’s low has not broken new lows.

Step 3: Establish Trading Discipline

Ultra-short-term trading requires strong comprehensive skills; discipline is key to success.

Set reasonable profit and loss targets: Most investors find it hard to buy at the lowest point and sell at the highest. Set stop-loss and take-profit levels based on actual conditions, generally around 5% for profit and 2-3% for loss. More importantly, never hold positions close to market close — late selling may result in unfilled orders, and stocks become unsettled, requiring settlement payments; as the market approaches close, selling pressure increases, risking poor exit and potential losses if prices fall below cost.

Prudent capital management: Day trading involves buying and selling within the same day, but if the market moves against you, you may want to hold positions. Maintain sufficient funds on hand; only trade with what you can afford to lose. Avoid excessive leverage.

Decisiveness and disciplined mindset: The two most important mentalities in spot stock day trading are decisiveness and avoiding greed. Enter trades decisively, and exit decisively — whether profit or loss, cut losses or take profits promptly. Do not hold onto the hope of “more gains.” Only by doing so can you minimize losses and achieve stable profits.

2025 Recommended Day Trading Stocks

High-turnover stocks suitable for day trading in Taiwan

High Liquidity Stocks Suitable for US Day Trading

The above stocks have high daily trading volume and liquidity, making them most suitable for short-term day trading.

Final Reflection

As a trading tool, day trading’s advantages lie in increasing capital turnover and avoiding overnight international market risks. However, risks should not be underestimated — investors often over-leverage in pursuit of quick gains or fall into a cycle of frequent trading driven by psychological weaknesses.

Taiwan’s trading costs are relatively high (fees plus transaction tax), leading many investors to shift toward US day trading. The US’s T+0 settlement system, low transaction costs, and abundant liquidity indeed make it more friendly for short-term traders.

Regardless of the market chosen, the key to success or failure in day trading always boils down to: discipline, risk control, and mindset. Only by humbly facing the market and strictly executing trading plans can one achieve stable profits amid short-term volatility.