What are the Best Markets for Day Trading?

Affiliate Disclaimer: "TraderMaker is supported by its readers. Please assume all links are affiliate links. If you purchase something from one of our links we make a small commission from Amazon or other partners. It helps us pay for the running of this website. Thank you!"

When I reflect back to the start of my own trading journey knowing the best markets to trade would have given me a welcome hand up. I would loved to have known the answer to the question: What are the best markets for day trading?

First let me answer this question with a brief summary answer before getting into the details of this post:

The best markets for day trading are markets that offer good trading volumes and the right sort of volatility, a slow moving market is almost impossible to day trade. The market needs to offer an edge. High competition and markets without a level playing field make finding an ‘edge’ difficult. For day trading to be worthwhile brokerage fees need to be low and the risk of taking on leverage needs to be manageable. Other things a day trader should consider are the tax advantages of trading one market over another, what timezone you’re trading in and whether the trader prefers to trade using and informational edge or pure technical analysis.

Day Trading can be done in almost any financial market and instrument. There are however characteristics of some markets that lend themselves more to day trading than others. If you are interested in day trading, choosing the market, trading vehicle and instrument to trade is an important first step and one that few traders really take the time to consider.

In this article I will go break down how to determine the best market for you. At the end I will provide my ‘personal opinion’. However, I encourage you to make up your own mind, by furthering your research around the topics discussed. The focus of the discussion is on day trading, this Includes scalping and intraday trading. Short term trades held during a single days trading. Of course, many of the concepts we will discuss will also relate to longer term swing trading strategies.

The first thing I’d like to do is give a quick overview of the different types of markets. The main financial markets include:

  • The Capital Markets: this includes stock markets and bond markets.
  • Money Markets: Wholesale market where financial instruments with high liquidity and short term maturities are traded; Certificates of deposit, US Treasury Bills. municipal notes, federal funds.
  • Spot Markets: Goods are bought and sold for cash and delivered immediately; financial instruments or commodities.
  • Derivative markets: Contract prices are ‘derived’ from some underlying asset. Common derivatives include futures, options, swaps and CFD’s.
  • Forex: The interbank market for trading currencies.

The objective of this post is to help you decide what markets are best suited to you and your trading ‘personality’. This article aims provide the information you need to find the market that’s going to give you the greatest chance for success.

I will be discussing the 3 markets widely considered most suitable for day trading, Stocks, Forex and the Futures. I’ll list the key considerations and the advantages and disadvantages of each. The markets listed above not discussed I consider either not easily accessible to retail traders, to complicated or simply move to slow.

“This article aims provide the information you need to find the market that’s going to give you the greatest chance for success”

If you are new to trading I encourage you to read this post to the end and take the time to investigate each market / instrument mentioned before selecting the best market for you.

The reason I stress this point is because your decision to select one market over another will inevitably dictate; the education provider you choose, the amount of time you spend trading, the amount of capital required to fund an account, the type of equipment you will need, the strain on your emotional capacity and perhaps whether you succeed or fail as a day trader.

Best markets for day trading

So, having introduced you to why it is so important to take the time to investigate the best markets for day trading. Let’s get into it!

The first market I’d like to discuss is the most famous and the most popular market for day traders; The equities market also referred to as the stock market.

DAY TRADING STOCKS

Stocks or Equities are individual company shares floated on any stock exchange. Traders simply choose to buy or sell any number of company shares. Individual stocks are listed and traded on exchanges around the world, the most popular are US based exchanges including the New York Stock Exchange (NYSE) and NASDAQ. These exchanges offer the highest trading volumes perfect for day traders. Other large exchanges in order of value of shares include the London Stock Exchange (FTSE 100), The Japan Exchange (JPX), The Shanghai Stock Exchange (SSE) and The Hong Kong Exchange (SEHK).

Part of the appeal of trading stocks is traders can choose to buy or sell the shares in the world’s biggest companies such as Amazon, Apple or Google or speculate with up and coming fledgling companies that offer potential for large percentage gains.

Traders categorise stocks based on their market capitalisation. Big-cap stocks are categorized as stocks with market capitulation greater than $10 Billion, mid-cap stock between $2 billion and $10 billion and small-cap stocks have market capitalisation ranging from $300million to $2 Billion.

Choosing what type of stock to trade will largely depend on account size, the amount of leverage used or whether the trader is looking to day trade or swing trade.

Small cap stocks typically offer exposure to highly volatile price movements offering potential for large percentage gains (or losses) on each stock purchased. Big cap stocks require leverage to achieve similar account percentage gains per trade. Given the time constraints of short term intraday trading, small cap stocks are preferred by day traders whilst mid to big cap stocks by swing traders.

So, why are stocks a popular choice for day traders and what are the advantages and disadvantages?

What are the advantages of day trading stocks

  • Volatility: Volatility offers the opportunity for day traders to profit. Strong stocks demonstrating high relative volumes offer the best opportunity for increased volatility and strong price movements. Highly volatile stocks can move quick, therefore if you plan to day trade these highly volatile instruments it is critical your broker can execute trade orders fast and you use a platform offering hot keys.
  • Learning resources: The popularity of stock trading has led to a wealth of information available for new traders. Aspiring traders can significantly short cut their learning curve by learning from experienced and successful traders. Stock day trading courses include books, pdfs, video courses, forums and trading rooms. Be warned however, not all courses are created equally, many courses employ very simple analysis techniques offered at a high price tag. If you are looking to purchase a course do so wisely.
  • Lots of instruments to trade: There are thousands of stocks available to trade, providing amble opportunity to find a suitable trading setup.
  • Low commissions: Brokerage commissions for trading stocks can be low relative to other markets. Many brokers offer fixed fees no matter the trade volume or a base trade rate plus a small per share fee. This is a huge advantage for experienced traders looking to trade high volumes. At large volumes fees almost become insignificant relative to P/L.
  • Low leverage requirement: Trading small cap stocks there is often little reason to be highly leveraged. With a well-funded account, a small amount of leverage should provide a large enough position size to see good gains on a stock with controlled dollar risk.
  • Easier to gain informational edge: Small cap stocks are more sensitive to micro events and prices are far more likely to move with catalysts such as news reports, product launches and earning report releases.
  • Less competitive: Small cap stocks mostly fly under the radar of big institutional investors. Their funds are so big they have little interest in buying smaller companies. This means a level playing field for retail traders and other speculators.

What are the disadvantages of day trading stocks

  • Pattern Day Trading Rule (PDT): PDT applies to traders that make four or more ‘day trades’ (open and close trade in same day) in a five-business day period. Because day trading is seen by the SEC as inherently riskier than say buy and hold strategies. Traders are required to hold a minimum of $25,000 in their broker account at any one time. If the account falls below this level traders can’t trade until the balance has been restored to this amount. Whilst this rule may seem annoying. It’s in place for good reason – to protect inexperienced traders taking on more risk than they can afford to lose. This rule applies in general to US stock market and US based brokers regulated by FINRA. Not all foreign stock markets have the same account minimums or day trading rules as the US. Trading foreign markets is one option for getting around the PDT rule. There are also options to trade the US markets through foreign based brokers.
  • Low liquidity: Low liquidity can plague traders trying to move in and out of stocks quickly. Without sufficient trading volume low liquidity can mean orders aren’t filled or filled at the wrong price, known as slippage.
  • Finding stocks to trade: Not all stocks offer suitable price movement, volatility, momentum, relative volume or a suitable catalyst every day to be traded consistently. New stocks to trade need to be found using stock scanners.
  • Short selling: For lower liquidity stocks short selling can be more complicated process than for other higher liquidity markets. Short selling any market involves effectively borrowing shares or contracts, selling those borrows and then profit by buying back the same number of shares or contracts at a lower price, you keep the change (your profit) before returning the shares or contracts to your broker or lender. The disadvantage of shorting stocks is that finding shares to borrow is not always possible. Some brokers may not be able to find the shares you want. If your strategy involves a lot of short selling you may want to have multiple accounts with several brokers to minimise this problem. Finding shares to short can also take time, it therefore requires a lot more premeditation.
  • High risk: Fast moving or low liquidity stocks present significant risks to day traders, particularly inexperienced traders and especially when short selling.
  • Easily manipulated: Market manipulation in small cap stocks is easier to achieve than other larger markets. Low market capitalisation makes it easy for big players to create large price swings, taking out traders stops. Stock promotors create pump and dump schemes, pumping small cap stocks to extreme highs creating market exuberance before dumping them to the short side. Front running by market makers who deal on advance information provided by their brokers before it’s known to traders. These are just a few examples of market manipulation.

With experience good traders learn to mitigate the risks of market manipulation, for example using mental stops instead of hard stop so market makers can’t see your orders. Don’t FOMO into over extended moves, instead check company financial reports for obvious inconsistencies in earnings vs stock performance, and finally confirm all news report catalysts with supporting chart price action.

Day trading stocks summary

Stocks are an excellent market option for day traders. However, several hurdles for beginner traders and a steep learning curve make it a more challenging option starting out. Nevertheless, it’s fair to say that with the right coaching, strategy and willingness to work hard, stocks or equities are one of the best options for aspiring day traders.

What are the best stocks to Trade:

Small cap stocks (market capitalisation $300million to $2 Billion) are often considered riskier than big cap stocks but also offer the most volatility and price movement perfect for day trading. Nasdaq and NYSE exchanges offers some of the best opportunities for traders to find small cap stocks with good price movement. Always consider trading volume when looking to trade these types of stocks. High relative volume with a low float provides an excellent environment for price volatility.  Low volume / low liquidity stocks should be avoided.

DAY TRADING FOREX

The next important market to discuss is forex. Forex is an extremely popular amongst both retail and institutional traders. It is now the largest market in the world trading at $5.3 trillion dollars per day it dwarfs the equities and futures markets.

The forex market is the world’s currency market. Currencies are always listed in pairs and traders look to profit from exchange rate fluctuations when one currency moves higher or lower in relation to another. Forex is a globally decentralized market, opposed to stocks there is no single exchange or single physical exchange location. The main participates in the forex market are Governments, Companies and large international banks, and the major players are Deutsche Bank (15%), Citigroup (15%), Barclays (10%), UBS (6%), HSBC (6%) and JP Morgan Chase (6%). Trading is done for the most part through financial centres that facilitate trades between a wide range of buyers and sellers.

From a retail trader perspective, the forex market can be considered both regulated and unregulated. The regulated market for retail traders takes place at the Chicago Mercantile Exchange (CME). In the regulated market buy and sell orders are controlled by the CME and matched in what is known as a Liquidity bank. Traders trade through a Broker into this liquidity bank. It should be noted that trading forex through the CME is strictly a futures product and for the purposes of this post the pro’s and con’s align more with futures trading (see below).

In the unregulated market, brokers connect to a global liquidity pool, often referred to as Electronic Communication Network (ECN). Brokers may even trade through their own liquidity pool, referred to as a trading desk where traders are effectively trading against their broker. If trading forex outside the futures market always ensure your broker is routing your orders through a global liquidity pool.

So, is forex a good choice for day traders? and what are the advantages and disadvantages?

The short answer is, yes, forex can be a good choice for day traders, dependent on the trader’s experience and skill level. Let’s consider the advantages and disadvantages to determine if forex is the best choice or even a good choice for you.

What are the advantages of day trading forex?

  • Low barrier to entry: There is no Pattern Day Trading Rule in Forex. In fact, traders can open an account with as little as a few hundred dollars. Some brokers offer micro lot sizes. This allows new traders to trade small size whilst learning. Fees are a percentage of the position size opposed to a set order fee.
  • Learning resources: there is huge variety of learning resources online available for trading forex. Taking a good quality course can short cut the learning curve, however forex education market is full of poor quality courses. Make sure if you are planning to purchase a course you do your research.
  • 24 hour market:  Forex is traded 24 hours a day, 5 days a week. There are 4 major trading sessions, the Sydney session, the Tokyo session, the London session and the New York session. The market opens with the Sydney session at 5pm Sunday (EDT) and closes with the end of the New York session at 5pm Friday (EDT). Not all pairs have suitable movement for day trading all the time. Local currency pairs for each session have the best market movement suitable for day trading.
  • Liquidity: The forex market is the most liquid market in the world. A big advantage for day traders looking to enter and exit the market without waiting for orders to fill. This also means less order slippage – orders are filled at order prices. This provides excellent reliability for traders looking for tight entry and exit points. Perfect for day traders looking to scalp the market.
  • Short selling: There no requirement to source borrows in forex. Traders simply place a sell order the same way they would a buy order.
  • Harder to manipulate: Because of the share size of the forex market it is a lot harder for one player to manipulate the market. This doesn’t mean to say that manipulation doesn’t happen. In fact if you google ‘forex manipulation’ you are sure to come across many claims of market maker manipulation, stop hunters and reports of banks being fined for market manipulating.

What are the disadvantages of day trading forex?

  • Highly competitive: This is a huge disadvantage of trading forex and becoming profitable. In forex your largest competitors are big banks, institutional traders, high frequency trading algorithms or experienced retail traders. Being the most liquid market in the world, it attracts the best traders in the world.
  • No Volume Data: This provides an unfair advantage to market participants that have access to this information. Especially if your trading strategy relies on trade volume.
  • Harder to gain an informational edge: If you are a technical trader that likes to use fundamental catalysts to supplement trades, this is more difficult in the forex markets. Currencies tend to be less sensitive to smaller events and tend to move mostly based on Marco events.
  • High leverage: To trade forex, depending on your account size of course, will require the use leverage, particularly for day traders looking for price movement over a short timeframe. The use of leverage is a double-edged sword, it increases the opportunities for upside gains but also increases the potential for losses. Forex has gained a poor reputation in recent years because of the use or ‘misuse’ of leverage and its effect of magnifying risk. Traders should be mindful of the potential risks involved in using leverage, always use stop losses and never take on excessive leverage in relation to account size. Most professional traders use leverage of 1:5 and many would consider this highly leveraged, if trading for short amounts of time, day trading for example, higher leverage might be used.
  • Variable spreads: Depending on the currency pair, brokerage and the liquidity in the market at any one time, spreads can vary significantly. Spreads function as a percentage of your position size. The larger your position the higher the spread cost.
  • Currency correlation: Currency cross pairing means that most currency pairings have some level of correlation to their related pairs. For traders watching several pairs, currency correlation is an important consideration and traders should avoid over exposure to a single currency due to correlations.
  • Regulation: Stocks, futures and options are all regulated markets by the Commodities futures trading commission and the Security exchange commission. Forex on the other hand for the most part is not, and lack of regulation has led to illegal activity and outright fraud in some cases. If looking to trade forex ensure your broker is at least an ECN forex broker, which means that instead of trading through their own internal trading desk they connect to a global liquidity provider. Better still trade through a regulated exchange such as the CME group liquidity pool.
Day trading forex summary:

At face value Forex offers a lot of attractive attributes to aspiring and experienced traders: Low entry barriers, high liquidity and flexible trading hours. However, its highly competitive nature makes forex a less attractive option for day trading in my opinion and other markets provide a higher probability for success.

What is the best forex pair to Trade:

USD pairs account for about 80% of the forex trading volume and depending on your time zone and session your regional pairing is often the best forex pair to trade. EURUSD, AUDUSD, USDJPY, GBPUSD and USDCAD are good options for high liquidity pairs with good volumes. Trading a single market or only a handful of markets will allow you to develop a better understanding of your chosen currency pair and how it trades.

The third market to consider is the Futures market, the futures markets are less well known to retail traders than stocks, equities and forex. It is however a very important important market to discuss in the context of day trading.

DAY TRADING FUTURES

The purpose of the futures market is to provide price certainty to buys and sellers of commodities or assets, to be delivered at a certain date into the future. The need for futures was originally derived from the lag time for commodity production till the ultimate delivery date. Produces wanted to know that they will achieve a certain price for their product irrespective of how market forces affect prices in the interim before products are ready for market. Buyers and consumers also want consistency in the price they pay. The futures market acts as a hedging instrument to stabilize revenues and costs for business operators.

The futures market is a centralised market traded at several futures exchanges, the most common ones include the New York Mercantile Exchange, The Chicago Board of Trade, the Chicago Mercantile Exchange, the Chicago board of options Exchange, the Chicago Climate Futures Exchange, the Kansas City Board of trade and the Minneapolis Grain Exchange.

The first futures contracts focused on agricultural commodities such as grains and livestock, now the market includes contracts related to several assets including Oil, Natural Gas, Gold and Silver also stock indices such as the S&P500, Nasdaq and the Russell.

In 1997 the first e-mini futures contracts were introduced.  The value of the full futures S&P 500 contract became to large for small traders to so the e-mini S&P 500 was introduced. Its value is one fifth the size of the full contract. E-mini contracts are now available in several other assets including the NASDAQ, Gold, Crude Oil, Natural Gas and the Dow Jones Index.

So, is the futures market good for day traders? Absolutely, let me outline the advantages and some disadvantages of day trading futures.

What are the advantages of day trading futures?

  • High volatility: There are 2 major participants in the futures market. Hedgers, who generally don’t seek to profit by trading commodities, and speculators who aren’t interested in taking possession of the underlying assets but simply looking to profit from price movements. Speculators are often blamed for creating large price swings in the futures market, these swings and a fast-moving market make futures perfect for short term trading.
  • High liquidity: The popularity of speculating in the futures markets adds a huge amount of liquidity into the market, perfect for entering and exiting large short-term positions quickly.
  • Low barrier to entry: Like forex the Pattern Day Trading (PDT) rule doesn’t apply to futures. Some brokers offer account minimums of $1000 with margins per contract at $500. However, because futures are traded in ticks and points. Ticks being the smallest price increment, new traders will need to take on more dollar risk per trade to begin. For more experienced traders with larger accounts this shouldn’t present an issue.
  • Trade a Single Market: There is often enough volume in a single futures contract (ES, NQ, CL) to allow traders to focus on a single market. Every market instrument has its own ‘personality’, each one moves in their own way and volatility affects price differently.
  • Quality resources: There are some of the best trading platforms available on the market available to futures traders. Some of the best offer free market replay functionality, Chart trading that allows traders to drag and drop orders into position straight to the chart. Automated trading strategies and multi-screen functionality as standard.
  • Short selling: Short selling is as simple as trading long. Traders should however keep in mind the risks of trading short and always use a stop!
  • Lower tax rate: Trading futures is taxed differently from other markets such as Forex or Stocks. In futures profit income is taxed at a blended rate called the 40/60 rule. 60% of profits is taxed at a long term capital gains rate plus 40% at a short term capital gains tax rate (short term rate is typically higher than long term rate). All gains in stocks and forex are taxed at the higher short term rate. Note: This applies to US tax residents and should NOT be considered tax advice, remember to always consult your own tax professional or accountant.

What are the disadvantages of day trading futures?

  • High leverage: To trade futures even e-mini futures, traders will generally need to take on significant amounts of leverage. Buying a single contract of the e-mini S&P 500 is the equivalent of controlling $140k worth of stock.
  • Learning resources: The futures market is a less well-known by retail traders. Perhaps because of this there isn’t the same amount of training resources available online outside some good trading forums.
  • Competition: Speculators contribute to a significant percentage of the daily trading volume in the futures market. Like forex, speculators in the futures market include institutional traders, high frequency trading algorithms and experienced retail traders, whilst it can be argued that the futures market is less competitive than forex, strong competition still exists and to compete traders need to work hard to develop their edge to be successful.
  • Fewer instruments to trade: There are a limited number of instruments to trade and even fewer ideally suited to day trading. The most popular and some would argue the best instrument to trade is the e-mini S&P500 (ES), followed by Crude Oil (CL) and Nasdaq (NQ). Because of the high volatility, liquidity and fast-moving nature of some instruments many traders focus exclusively on a single market and generally have little need to be trading any more
  • Higher fees: Relative to other markets, trading futures will incur higher commissions no matter the position sizing. Some brokers may offer discounts for more contracts being traded in a calendar month or for larger account balances.
Day trading futures summary

Futures are an excellent market to trade. The high volatility, fast price movement, high liquidity, and quality price action is perfect for day trading. Its biggest drawbacks are its competitive nature and amount of leverage required to trade. Competitiveness is present in any market; the key question is, can you compete? In my opinion there exists enough inefficiency within the futures market to develop an edge.

What is the best futures Instruments to trade:

It’s hard to go past the e-mini S&P500 (ES). It offers all the advantages of a great day trading instrument. Some would argue that it is the best day trading instrument available today. I’d have to agree.

Conclusion

No market is going to offer all the advantages of day trading without any of the disadvantages. In my persona opinion, small cap stocks and e-mini futures offer the best opportunities for retail day traders to succeed. More experienced traders may find a better edge in small cap stocks, e-mini futures is arguably easier for beginners to learn. The e-mini S&P 500 (ES) futures offers an excellent balance for beginner and experienced day traders. In fact, many traders who learn to trade using the ES find little need to trade other markets for the rest of their trading careers.

I hope you have found value in this article as a useful resource for deciding what day trading market and instrument is best suited to your own trading ambitions. If you have any question please leave a comment.

If you’d like to learn more about getting started day trading check out my post How to get started day trading – A beginners guide.

Leave a Comment