What is Day Trading ? TEJ Guides You Through The Basics From The Ground Up
Taiwan Economic Journal (TEJ)
The most trusted financial database in Asia
Preface
For many novice investors, day trading is a widely recognized yet often misunderstood concept. It is frequently associated with high risk, high volatility, and leveraged trading, sparking both intrigue and apprehension among investors. This article will systematically explain the definition of day trading, its advantages and disadvantages, as well as provide a detailed breakdown of different types of day trading and capital requirements. Lastly, we will introduce TEJ advanced market data, enabling investors interested in day trading to quickly access relevant insights and make well-informed investment decisions.
What is Day Trading
Day trading refers to the practice of buying and selling financial instruments—such as stocks, currencies, or futures—within the same trading day. Day traders close all positions before the market closes to avoid overnight risks. This trading strategy relies on short-term price movements, liquidity, and market volatility to generate profits.
The Advantages of Day Trading and Why It Is So Popular
Leverage-Based Trading (Trading Without Initial Capital)
One of the most attractive aspects of day trading is that it does not require traders to hold cash or stocks upfront. As long as they make accurate market predictions, they can capitalize on price fluctuations to generate profits.
For example, suppose you believe a particular stock will decline in value today. The stock is currently priced at $100 per share, and you decide to short-sell 100 shares by borrowing them. After selling, your account will show $10,000 in cash. Later in the same trading day , as anticipated, the stock drops to $95 per share. You then use the $10,000 proceeds to buy back 100 shares at the lower price, spending only $9,500. Your profit is $500, achieved without utilizing any of your own capital—this is a classic example of a leverage-based transaction.
However, in real trading scenarios, transaction fees, liquidity constraints, and execution risks must also be considered to ensure a successful trade.
Reduced Transaction Tax: A Key Incentive for Day Traders
To stimulate stock market activity, the Taiwanese government introduced a transaction tax reduction policy. The standard securities transaction tax is 0.3%, but for day trading, the tax is reduced to 0.15%. This significant reduction in transaction costs is particularly beneficial for day traders, who often utilize high leverage, leading to larger trading volumes and, consequently, higher tax burdens. Without this tax reduction, excessive tax burdens could gradually erode net profits, diminishing promising returns.
Since its initial implementation in 2017, the day trading tax reduction policy has been extended multiple times. The most recent extension was set to expire at the end of 2024. On October 29, Taiwan's Finance Committee of the Legislative Yuan conducted a preliminary review of amendments to the Securities Transaction Tax Act. However, due to differing opinions among legislators regarding the duration of the tax reduction extension, the proposal was sent for further negotiation.
Fortunately, just before the policy’s expiration in late 2024, the Legislative Yuan approved the tax amendment in a final reading, extending the day trading tax reduction for another three years until the end of 2027, maintaining the preferential tax rate at 0.15%.
Disadvantages of Day Trading
High Time Commitment
Day trading demands constant market monitoring and real-time decision-making. Professional day traders often track 1-minute and 5-minute K-line charts, requiring intensive screen time and mental focus. This can lead to extreme stress, where traders may not even have time for breaks during trading hours. Additionally, returns are directly proportional to risk, and transaction costs, including brokerage fees and borrowing fees, can be substantial, significantly impacting net profits.
Lack of Risk Awareness
Traders with insufficient capital often resort to leveraged or margin-based day trading, increasing their exposure to risk. Without proper risk management, they may face forced liquidation or settlement defaults, leading to credit crises. In the event of a settlement default, securities firms may impose a penalty of up to 7% of the transaction amount and seek compensation for losses incurred. Furthermore, default records are reported to the Joint Credit Information Center (JCIC), which can negatively impact future applications for financial services.
Limited Trading Instruments
Day trading in Taiwan is restricted to:
Additionally, stocks that undergo trading method adjustments, are subject to regulatory actions, or are listed on the Innovation Board are not eligible for day trading.
Given these constraints, day traders must carefully evaluate liquidity, regulatory restrictions, and transaction costs before engaging in short-term trading strategies.