Day Trading Canada: All You Need to Know in 2021

Day trading is the term used to refer to the practice of buying and selling a security within a trading day. While day trading isn’t restricted to any specific kind of marketplace, it is most commonly practised in stock markets and foreign exchange (forex) markets. Day trading isn’t for beginner investors and most successful day traders are seasoned, well educated and well funded investors. Day traders capitalize on small price movements that occur in highly liquid stocks or currencies with the help of leverage and short term trading strategies. When you day trade, you need to close out your position before the markets close for the day to secure your profits. As a day trader, you will also have the option to enter and exit multiple trades during a single trading session. Some brokers also have different definitions for ‘active’ or day traders. Their opinion is driven by the number of trades a client opens or closes within a month or year. Some of the strategies used in day trading are: Scalping, Range trading, News-based trading, and High-frequency trading (HFT), These strategies aim at capitalising on small price movements in high-liquidity stocks or currencies. If you have been wondering about day trading in Canada, this post has got you covered. We will go through the basics of day trading and how you can do it in Canada. Let’s get started.

Day Trading Canada: Important Aspects

What are the different types of Trading Accounts?

There are multiple types of trading accounts available for traders to use. You can choose the one that suits your needs the best.

Cash account

Day trading with a cash account (also known as without margin), will allow you to only trade the capital you have in your account. This limits your potential profits, but it also prevents you losing more than you can afford.

Margin account

This type account allows you to borrow money from your broker. This will enable you to bolster your potential profits, but also comes with the risk of greater losses and rules to follow. If you want to start day trading with no minimum this isn’t the option for you. Most brokerage firms will insist you lay down a minimum investment before you can start trading on margin. You can also experience a margin call, where your broker demands a greater deposit to cover potential losses.

Which are the most popular day trading markets?

The most lucrative and popular day trading markets today are:

Stocks

Physical stocks in individual companies, regular and Leveraged ETFs (an “Exchange Traded Fund” holds multiple stocks or commodities and is traded like a single stock), futures, and stock options.
Trading stocks intraday offers different opportunities than a traditional ‘buy and hold’ strategy. Speculating on stock prices via CFDs or spread betting for example, mean traders can profit from falling prices too. Margin or leverage also reduce the capital required to open a position. So you can take a position on the latest news release, product announcement or financial report – as well as technical indicators. If you’re day trading the Toronto Stock Exchange Index (SPTSX), you’ll be buying and selling the shares of companies, such as the Royal Bank of Canada and Cenovus Energy.

Forex

The foreign exchange currency market is the world’s most popular and liquid.
The sheer volume of forex trading makes it attractive for day traders. There are multiple short-term opportunities in a trending currency pair, and an unrivalled level of liquidity to ensure opening and closing trades is quick and slick. More suited to technical analysis, there are other ways to trade foreign exchange. In addition, forex has no central market. This means traders can make trades six days a week, 24 hours a day. They present a great starting point for entry level or aspiring traders with full time jobs. In the day trading forex market, you’ll be trading currencies, such as the Canadian Dollar, U.S dollar and Euro.

Binary Options

The simplest and most predictable method, as the timing and return on a successful trade are known in advance.
Regulatory changes are pending, and with the sector maturing, these products are now offered by big established brands. The only question for you is – will the asset rise in value, or not? With the downside limited to the size of the trade, and the potential payout known in advanced, understanding binaries is not difficult. They offer a different method of trading, and can play a part in any day trader’s daily portfolio.

Cryptocurrencies

Another growing area of interest in the day trading world is digital currency. This is the financial vehicle of the moment. Spectacular growth has seen cryptos attract many new investors. Brokers are also ensuring retail access to these markets is less complicated. Taking a view on any of these new blockchain based currencies is being simplified all the time. Barriers to entry are now almost nil, so whether you are a bull or a bear, now is the time. Some of the most popular currently are Bitcoin,  Ripple, Litecoin and Ethereum. Day trading with Bitcoin, LiteCoin, Ethereum and other altcoins currencies is an expanding business. With lots of volatility, potential eye-popping returns and an unpredictable future, day trading in cryptocurrency could be an exciting avenue to pursue.

Commodities

Oil and natural gas, food stuffs, metals and minerals.

Futures

The future price of a commodity or security. In the futures market, often based on commodities and indexes, you can trade anything from gold to cocoa.

Index funds 

While index funds have started becoming popular among financial advisors these days, these are quite slow as financial vehicles and quite unsuitable when it comes to daily trades. They are good for long-term investment though. 

What are some useful day trading strategies?

The internet is rife with many websites, blogs, subreddits and youtube tutorial videos which carry day trading advice. However, just picking up the first trading strategy that you come across and going with it, isn’t the most astute way to tackle day trading. Savvy traders tend to employ day trading strategies in forex, grain futures and anything else they’re trading in, to give them an edge over the market. Even the slightest edge can make the difference between success and failure. Here are some of the strategies that are commonly used:

  • Swing trading
  • Scalping
  • Trading zones
  • Trading on volume
  • Arbitrage trading
  • A simple day trading exit strategy
  • Utilising news

It is those who stick religiously to their short term trading strategies, rules and parameters that yield the best results. Remember, even minor losses can add up to be big losses over time. 

What are Pattern Day Trading Rules in Canada?

Compared to how the rules are in the US, Pattern Day Trading rules in Canada are a lot more relaxed. However, in case you want to trade in American securities from Canada, the pattern day trading rules do become more complex. Ensure that you do enough research on this to avoid being flagged as a pattern day trader and getting your account locked.

Day Trading in Canada: Important terms to know

  • Leverage rate – This is the rate your broker will multiply your deposit by, giving you buying power.
  • Automated trading – Automated trading systems are programs that will automatically enter and exit trades based on a pre-programmed set of rules and criteria. They are also known as algorithmic trading systems, trading robots, or just bots.
  • Initial Public Offering (IPO) – This is when a company sells a fixed number of shares to the market to raise capital.
  • Float – This is how many shares are available to trade. If a company releases 10,000 shares in the initial IPO, the float would be 10,000.
  • Beta – This numeric value measures the fluctuation of a stock against changes in the market.
  • Penny Stocks – These are any stocks trading below $5 a share.
  • Profit/Loss ratio – Based on a percentage basis, this is the measure of a system’s ability to generate profit instead of loss.
  • Entry points – This is the price at which you buy and enter your position.
  • Exit points – This is the price at which you sell and exit your position.
  • Bull/Bullish – If you take a bullish position day trading you expect the stock to go up.
  • Bear/Bearish – If you take a bearish position you expect the stock to go down.
  • Market trends – This is the general direction a security is heading over a given time frame.
  • Hotkeys – These pre-programmed keys allow you to enter and exit trades rapidly, making them ideal if you need to exit a losing position as soon as possible.
  • Support level – This is the price level where the demand is strong enough that it prevents the decline in price past it.
  • Resistance level – This is the price level where the demand is strong enough that selling the security will eradicate the increase in price.
  • Moving Averages – They provide you with vital buy and sell signals. Whilst they won’t tell you in advance if a change is imminent, they will confirm if an existing trend is still in motion. Use them correctly and you can tap into a potentially profitable trend.
  • Relative Strength Index (RSI) – Used to compare gains and losses over a specific period, it will measure the speed and change of the price movements of a security. In other words, it gives an evaluation of the strength of a security’s recent price performance. Day trading tip – this index will help you identify oversold and overbought conditions in the trading of an asset, enabling you to steer clear of potential pitfalls.
  • Moving Average Convergence Divergence (MACD) –  This technical indicator calculates the difference between an instrument’s two exponential moving averages. Using MACD can offer you straightforward buy and sell trading signals, making it popular amongst beginners.
  • Bollinger Bands – They measure the ‘high’ and ‘low’ of a price in relation to previous trades. They can help with pattern recognition and enable you to arrive at systematic trading decisions.
  • Vix – This ticker symbol for the Chicago Board Options Exchange (CBOE), shows the expected volatility over the next 30 days.
  • Stochastics – Stochastic is the point of the current price in relation to a price range over time. The method aims to predict when prices are going to turn by comparing the closing price of a security to its price range.

Day Trading Tax Rules

Canada’s day trading income tax rules are quite direct. In totality, profits from intraday trade activity are not considered capital gains. They are considered business income instead. What that means is that profits reported as gains are subject to taxation. Losses on the other hand are deductible.

This allows a day trader the ability to subtract all losses from another source of income to bring down the total amount of taxes owed. In quite a few scenarios, this isn’t that direct. Let’s take a look at them.

Superficial Loss Rule

Day trading rules and regulations in Canada are generally around the 30-day trading rule. The rule is also known as the superficial loss rule. This rule mainly comes into play upon the disallowance of capital gains.

A superficial loss can’t be claimed as a capital loss. Based on the individual circumstances, the loss can be permanently denied but added to the adjusted cost base of any remaining or re-purchased shares. In some cases, it can also be partially denied.

The 30-day trading rule, just like the name suggests applies to the period beginning 30 days before the day of the sale transaction for the capital loss in question, and the 30 days afterwards. Losses are disallowed when these conditions are met (from section 54 of the Income Tax Act):

  1. “During the period that begins 30 days before and ends 30 days after the disposition, the taxpayer or a person affiliated with the taxpayer acquires a property (in this definition referred to as the ‘substituted property’) that is, or is identical to, the particular property.”
  2. “At the end of that period, the taxpayer or a person affiliated with the taxpayer owns or had a right to acquire the substituted property.”

Purpose

The 30-day rule is aimed at preventing taxpayers from taking part in artificial transactions purely to cause an immediate capital loss. If this rule didn’t exist, a trader would be able to sell shares, trigger a capital loss and then rebuy the same shares straight away.

Every country’s obligations vary based on different financial and sociopolitical reasons.

Tax Rules: Conclusion

While it might seem lucrative to try and get around day trading tax rules, you should stop yourself from doing that. Canada Banks, a conglomeration of Canadian based financial institutions, stated the Canada Revenue Agency (CRA), take an in-depth look at the content and intent of a day trader, to determine whether activities should fall under capital gains or trading income.

Day Trading Margin Rules

  • Day trading margin rules are less strict in Canada when compared to the US. Pattern rules there dictate intraday traders must keep a minimum of $25000 in their securities account.
  • Fortunately, for Canadians worried about the same rules applying to those with under $25,000 in their account, you can relax, for the most part. This means beginners and those with limited capital will still be able to buy and sell a range of instruments.
  • Having said that, at some Canadian brokers, the SEC pattern day trading rules still apply. This is because at some brokers, your US securities exchange trades are cleared in the US. So, if you place three stock or option intraday trades on a US securities exchange period within 5 days, you can be deemed a ‘pattern day trader’. Therefore, you would need to adhere to the rules requiring you to have over $25k in your trading account.
  • For those looking to avoid the $25,000 rule, look for a Canadian broker that doesn’t grant you access to US securities.

Do specific day trading rules apply to forex, futures or any other instrument? 

No. The Government of Canada and the CRA do not enforce different rules for different instruments. So, day trading rules for forex and stocks are the same as bitcoin.

What is the One Canadian Dollar Cheque?

Because of governmental and regulatory anti-money laundering requirements, quite a few brokers impose one of the more peculiar day trading rules for cash accounts.

Customers might be asked to send a one Canadian dollar cheque. The cheques need to be cleared through the Canadian banking system. However, this amount is never credited to your account and it can’t be refunded either.

Day Trading Canada: How Much Money Can You Make?

If you practice day trading properly you can make a good amount of money. However, as far as different methods of stock market investing go, day trading is one of the riskiest things to do. Before you decided to start day trading in Canada, you probably would’ve heard stories of day trading millionaires who started trading with just 1000 dollars, but soon hit the jackpot and mastered the markets. There is no denying the fact that such success stories do exist and there are day traders who have bought million dollar mansions and million dollar cars with the help of the money they made by day trading. However, those people are few and far between and money earned through day trading varies greatly. Just because you start day trading today, doesn’t mean you will be driving a McLaren Senna 12 months from now. To make a living day trading in Canada, you will need to be committed and disciplined. In Canada, it is important you adhere to all day trading equity, non-margin and settlement rules. In particular, the superficial loss rule is the most important to keep in mind, as it often trips up traders. However, all of the above are worth careful consideration. With this information, you should now be able to trade confidently in the knowledge you are trading within legal parameters. You will also need to approach every trade with a sound strategy. So be careful, exercise caution and approach it safely. Yes, you can make money day trading in Canada. Just be careful while you are at it.

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