How to Day Trade in Canada

What is Day Trading?

Often, when people begin to enter the investment world, they have a lot of questions, but one of the main ones is, can you buy and sell stocks on the same trading day? In short, the answer is yes, since day trading is legal and this is one of the principles behind day trading. Day trading is when an investment is bought and sold at least once within a short period of time, usually within a day or so, hence the name. 

Many people don’t realize that you don’t have to hold onto an investment for a long period of time. Because the investment market often fluctuates at a moment’s notice, most of the time, day trading is more lucrative than waiting out investments. If you haven’t heard of day trading, you may have heard of intraday trading. It’s the same thing, just a different name. No matter how you do it, though, fundamental and technical analysis is key to successful trading, making day trading profitable.

Swing trading

Another form of trading, similar to day trading, is swing trading. This form of trading follows the same principles as day trading, but a swing trader looks to make small to medium day trading profits over a longer period of time, usually over a couple of days up to several weeks. These traders use a lot of the same principles that day traders do, and the same knowledge required applies.

Day Trading Marketplaces

There are many marketplaces that people use to day trade, but the most common is Forex trading (foreign exchange) and the stock market. These markets fluctuate often and can be determined by economic statistics, interest rates, and corporate earnings. They’re also regulated by the IIROC (Investment Industry Regulatory Organization of Canada), which is the industry regulatory organization.

Is Day Trading Legal in Canada

To put it simply, yes, day trading is legal in Canada. That said, just because it’s legal doesn’t mean that successful day trading is simple. There are tons of trading platforms to choose from, with restrictions on the types of brokerage accounts that you can hold. For some trades, you claim capital gains, and for others, it’s regular taxable income. 

To make significant profits on the Canadian market, professional traders spend a lot of time analyzing market conditions. They also become very skilled with their ability to manage risk when selling securities and purchasing at market price. This avoids significant losses in stock trading because, when day traders lose money, they’re losing income as well. 

How to Start Day Trading

In Canada, starting to day trade is pretty simple. However, starting to trade and earn an income can be pretty difficult. One of the ways you can help yourself with trading is by adopting a strategy. These can help you stick to the day trading rules while earning income from highly liquid stocks. 

Day Trading Strategies

Here are a few common day trading strategies  and trading styles to help navigate the trading markets:

• Technical Analysis focuses on the investment’s price and volume statistics to determine the best course of action. They use chart patterns to identify patterns of significance.
• Momentum trading uses market volatility and market fluctuations by purchasing a security in an uptrend and selling when it shows signs of going down.
• Scalping focuses on earning profits from small price movements in the market. Many traders who use this trading strategy trade hundreds of times per day. These small profits often add up quickly and are seen as less risky.
• Range Trading is a little more technical. It involves using support and resistance levels in the market. Basically, this strategy involves calculated decisions based on current popularity in the market and uses that information to determine whether it will make a profit or not.
• News-based trading is just what it sounds like. Traders use economic changes to make stock decisions.
• High-frequency trading allows professional day traders to use special algorithms to take advantage of any fluctuations in the market.
• Trend following uses an investment’s historical performance and market trends to dictate its current risk. If the investment has historically remained stable, chances are it will stay that way.
• Contrarian Investing is a principle some investors follow where they sell what other investors are buying and buy what others are selling.
• Price action involves looking at the price fluctuations over time of the investment and making a judgment based on the trend.
• Chart Patterns use the investment’s trends to plot a pattern. Traders use this pattern to determine the future of the investment and decide the right time to buy or sell.

Can You Day Trade Stocks?

Stocks are one of the most popular investments for day trading activity, but they are just one of the many things that are available to trade in today’s day trading market. Stocks are shares of companies, and since stock prices fluctuate quite often and don't stay at a fixed price, they are perfect for day trading. Stocks also include ETFs (Exchange Traded Funds), which are combined stocks sold as one. Some other options for day trading are:

• FOREX (Foreign Exchange Currency Market) is another one of the most popular markets for day traders because of the volume available. Forex works outside of regular trading hours, which allows for more money-making opportunities and is often recommended for those just starting to day trade.
• Cryptocurrencies are also increasingly becoming more popular. Some of the more popular cryptocurrencies are Litecoin, Ethereum, Ripple and Bitcoin. This market is becoming much easier to invest in making it a great way to start investing or day trading.
• Binary Options are straightforward investments and are sometimes referred to as “All or Nothing” investments. These investments are easier to predict how much risk there is before trading and can often be traded on any market.
• Futures are specific contracts that are agreed upon to be bought or sold at a defined future date for a specific price. This type of trading is often used when trading commodities such as oil.
• Commodities are the trading of goods internationally. Things like grain, minerals, oil and cotton.

How to Start Day Trading in Canada

Now that we have gone over some of the basics of trading, where do you start? First, can you day trade in Canada? Yes. It is simpler to day trade in Canada than it is in the U. S. and getting started day trading is much easier than it sounds. Apps such as Wealthsimple and Questrade can help you get started. 

While there are less trading apps available in Canada than the U.S. , these apps provide you with the power to trade right from your phone. They also provide the trends in the stocks to help you decide where the best place is to start investing your money.

Day Trading Risks

Day trading can be quite risky, so it is important to do some research before you start buying stocks and/or deciding on the market you wish to invest in. The first thing you should do is study the market. Even if you understand the basics of the stock market, it is important to have a good understanding of the different factors that influence the market.

Studying these factors can guide you to make the most educated decisions. Many traders choose to study one specific industry and focus on those market factors when trading.Once you have learned the market, you need to decide what strategy you want to use. There are a few of the most popular strategies above. Of course, there are many other methods you could use, along with market knowledge and trading history, to develop a well-defined trading plan.

Canada Day Trading Process

Now that we have discussed knowledge and strategy, it is time to start experimenting. It is recommended to start low and figure out your footing before investing a ton of money into day trading. 0% commission apps, such as Wealthsimple, can be a great way to start. You can see the stock trends, invest small amounts of money, and study the trends in real-time.

This low-risk practice will allow you to practice different strategies and figure out which one works the best for you. Then you can start figuring out how these investments can affect your taxes. Talk to someone who specializes in this area. This will help you avoid a hefty tax bill at the end of the year and help you claim trading on your taxes.

While the apps are a great way to start earning some money, learn the basics of day trading and find your footing in the industry; once you start to make your way up to a consistent level of trading you will need to go through an investment platform. Whether this is an online brokerage or an in person advisor is up to you. A broker/brokerage will help you with trades through the platform that they use and will provide the expertise needed to day trade effectively.

Who Is Considered A Day Trader in Canada?

Now that you have begun the process of day trading. When are you considered to be a day trader? The Canada Revenue Agency defines a day trader as someone who makes a living by managing investment transactions or someone who works in the industry and makes frequent trades in a short period of time.

In reality, anyone can start dabbling in day trading, but you aren’t considered a day trader until it becomes your main source of income. Even though this is the case, any income you receive from day trading, even if it isn’t your main source of income, must be reported to the CRA.

The Rules of Day Trading in Canada

When it comes to day trading in Canada, even though the rules are more lenient than those in the U.S., there are a few rules you need to keep in mind. First, it is important to claim your income correctly as either trading income or capital gains. Mostly, the income of a day trader is considered business income, and gains can be taxed, but losses are tax-deductible. Keeping track of this can also keep you out of trouble with the CRA.

Superficial Loss Rule

One of the most important rules of day trading in Canada that traders must follow is the Superficial Loss Rule. It applies to serious traders as well as all other traders. This is also known as the “30-day rule”. It applies to 30 days from the date of the sale and 30 days after.

If a capital loss (also known as losing money) occurs within this time, it is considered to be a superficial loss and cannot be claimed. This rule basically enforces that a seller can’t sell a share, trigger a capital loss on that share and then immediately re-buy that same security.

The second rule is that there is no minimum amount required to participate in day trading unless you start dealing in US stocks. However, if you strictly deal in Canada, then you don’t have to worry about this. Even if you are a Canadian day trader, if you start dealing in U.S. markets (regulated by the Financial Industry Regulatory Authority), a minimum of $25,000.00 is required.

The only required amount of money for some brokers can be a “one Canadian dollar cheque” in Canadian dollars. This is a result of government requirements related to money laundering, but it isn’t required by all brokers.

The next rule is more of a suggestion instead of a rule, but it is recommended not to risk more than 1-2% of the balance in your account on a transaction. This helps reduce the risk of loss and increases the potential for gain. The less capital you risk, the greater your overall gain.

Trading can be very risky, especially if you are new to the market. It is important not to make too many risky decisions and to practice safe trading. Many people can get swept up in the idea that day trading is fast money, and new day traders can lose money very quickly. A majority of the most successful day traders follow this rule.

Self-Employment and Day Trading

Depending on how much you make and if it’s your main source of income, the CRA could determine that your day trading income is actually business income. In that case, you wouldn’t be eligible for the trading capital gains tax, and you would have to pay taxes as if you were self-employed with a business. This is because investment income is considered income.

Day Trading and TFSAs

When it comes to day trading, many people have opted to open Tax-Free Savings Accounts. Tax-Free Savings accounts are accounts where the interest on the money deposited in these accounts is tax-free. This can be tricky when dealing with day trading income. TFSAs are meant to earn interest over time on savings and have an allotted amount per year that is available to be deposited tax-free, similar to an RRSP. This amount is cumulative over the years, so, depending on your age, it can be quite high.

Like RRSPs, you can hold different investments in your TFSAs, such as:

• Cash
• Mutual Funds
• Bonds
• Guaranteed investment certificates
• ETFs

Even though the interest in a TFSA is considered nontaxable, if the income in the TFSA is determined to come from any sort of investment income, that will be taxed.

How will the CRA know what the TFSA is used for? Well, even though it is not necessary to individually declare your year-end balance of your TFSA, banks do provide that information to the CRA annually. So, before you start using TFSAs for day trading, make sure you speak with a financial professional to ensure you fall within the CRA tax guidelines.

How Much Do You Need to Start Day Trading in Canada?

In Canada, there is no minimum amount required to start day trading. However, depending on what financial markets you are trading in can determine what amount you should start with. If you are trading in FOREX, it is traded in lots and a minimum of 1000 units of the foreign currency you are trading in is needed. Therefore, the minimum amount of money needed would be enough for 1000 lots.

Stocks have no minimum amount in Canada but the U.S requires $25,000.00. If you decide to trade in U.S stocks this amount might be required but a broker would be able to recommend a reasonable amount to start with.

How Do You Make Money as a Canadian Day Trader?

The average annual salary of a day trader in Canada is $67,995.00. Is it possible for you to make this much? Well, that depends on a lot of factors. Day trading can be complex for someone who is not used to how the markets work and often has a lot of research involved. It is highly recommended that you have a solid grasp of the ins and outs of trading before trying to make this a career.

It is also important to remember that while many investments work within the stock market hours, some don’t, so this won’t be your average Monday-to-Friday job. It will also require research outside of this time to make significant profits and have substantial capital to offset any losses and to fund the next trade to make up for the losses. It is also recommended that a diverse portfolio of different platforms be used to create more cash flow.

Even though a focused platform is necessary to create income, it is also necessary to invest outside of that platform for more cash flow. Even though a focused platform is necessary to create income, it is also necessary to invest outside of that platform. necessary to create income, it is also necessary to invest outside of that platform.

Canadian Online Brokers and Their Fees

Don’t forget that there will be trading fees involved with day trading. Different brokers have different fees, and the cost of these all depends on the site or broker you decide to use. Here is a list of the best online brokers for online trading in Canada and their fees to help you make informed trading decisions. 

Day Trading for Beginners in Canada

When starting day trading in Canada, you want to look for a brokerage that has low fees and offers speed in its trades. While this isn’t everything you need to succeed, it can help to kick-start your day trading success and make the most of your initial investment. What your initial investment is should depend on what the minimum account balance is. 

Some Canadian traders say starting with paper trading is best, but it isn’t necessary. There are a few brokerages, like Interactive Brokers, that allow for same-day trades over an extended period of time. While there is a cost and you don’t get unlimited trades, the cost is low enough that active traders make a profit. Whether you’re a stock trader or a pattern day trader, the resources you need are there. 

Conclusion

Day trading is one of those things that isn’t a fit for everyone, but if you have an interest in personal finance and investing, it may be something to look into. Make sure you start small to verify your interest and learn the different strategies and markets for making multiple trades per day. Practice with small investments before investing in large ones, and gain some capital (instead of borrowing money with margin accounts) before making day trading your main source of income.

These little precautions can help maximize your income from day trading and limit your risk of loss (risk management). Even if day trading isn’t the best option for you, that doesn’t mean you can’t enter the investment market. A lot of these markets are great for investing on a small scale to earn some extra money.