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How to Day Trade in Canada 2024: A Difficult Endeavour

How to Day Trade in Canada

How to Day Trade in Canada 2024: A Difficult Endeavour

Day trading is almost always portrayed as the flashier cousin of long-term investing, often showcased as leading to a luxurious lifestyle anywhere in the world.

In reality, day trading is much more difficult to do, especially when you consider all of the aspects involved with this risky hobby or potential career.

Here are three disheartening statistics:

  • 80% of all day traders quit within the first two years.
  • Average retail investors underperform a market index by roughly 1.5%. Active traders underperform by 6.5% annually.
  • Roughly 1% of day traders have some consistency in being profitable net of trading fees.

If you are still adamant about learning how to day trade in Canada, our approach will help to increase your chances of successfully day trading.

Is Day Trading Illegal in Canada?

Day trading is perfectly legal in Canada, as long as you adhere to general investment laws that apply at all times. This includes making sure that you are paying taxes on your day trading profits.

Canadians are allowed to freely trade a large number of investment instruments. These include stocks, bonds, options, commodities, futures, and more.

The steps to successfully day trade in Canada include:

  1. Planning your approach to day trading
  2. Opening an appropriate account at a favourable discount brokerage
  3. Establishing a strategy
  4. Trading the investments
  5. Journaling your trading and refining your approach

We will cover these steps and how to day trade in Canada below, to help increase your chances of being a profitable trader.

How to Day Trade in Canada

If you are hoping to make money day trading in Canada, the whole venture must be properly structured from start to finish.

Step 1: Planning your Approach to Day Trading

Planning your Approach to Day Trading

Planning how you will treat day trading as a component of your day-to-day life is just as important as the execution.

Day Trading as a Full-Time Career

Some day traders begin day trading to replace a full-time job or career. If this is your intention you must apply and understand several key points.

If you are looking to day trade investments like stocks, the majority of your work will be done during regular market hours. If you are looking to trade other investments, such as futures, your work window may be wider.

Day trading as a sole source of income is a high-risk endeavour, especially when you are just starting out. We strongly recommend that you put aside money in an emergency fund, as well as have the liquidity to cover basic expenses at least during the first year.

Day trading as a full-time career requires an elevated risk tolerance as well as a very strong ability to remove emotions from a decision-making process. If you do not have these characteristics, day trading will be difficult or impossible as a career or even as a hobby.

Lastly, you will need to think about your day trading infrastructure. This includes your modelling software, computer hardware, and data sources.

Day Trading as a Hobby

Without a full-time dedication to day trading, long-term success with day trading will be virtually impossible. On the open market, you are competing with professional traders, career day traders, institutions, asset managers, and many other players.

When factoring in the costs of day trading as well as the level of competition, treating day trading as a hobby becomes akin to gambling. We do not recommend day trading at all if you will not at least dedicate yourself to it on a full-time basis.

Step 2: Opening an Appropriate Account at a Discount Brokerage

Opening an Appropriate Account at a Discount Brokerage

The day trading journey becomes even more difficult once you begin to factor in the impact of taxes.

While tax-exempt accounts (TFSA) and tax-deferred accounts may be appealing, your best bet is to day trade within a regular non-registered investment account. If you are beginning to day trade full-time to replace a job or career, doing so in a TFSA can lead to tax troubles.

If the CRA considers your TFSA account to be “carrying on a business,” you will become responsible for paying taxes on all of the trading done within.

Aside from deciding to open a non-registered account, you will also have to find a discount brokerage that is well-suited to your day trading. Factors to consider include:

  • Low commissions per trade
  • Live price reporting
  • The complexity of the trading platform

Given these factors, we would recommend either opening a non-registered account with Questrade or with Interactive Brokers.

Questrade is a trading platform that is more beginner-friendly. This will make your life easier as a day trader that is just starting off.

Interactive Brokers is designed for more seasoned investors and traders. We recommend considering it after you have spent some time getting comfortable with trading.

Step 3: Establish a Strategy

Establish a Strategy

Now that you have decided to take day trading seriously and have established an account, it comes time to establish a strategy that will make you money.

The most basic principle in trading or investing is to buy low and sell high, allowing you to keep the difference as a gross profit. Stocks are the most basic type of investment to buy and sell as a day trader.

More experienced traders may want to consider other asset classes such as futures, options, and commodities. These typically come with more risk, especially if there is leverage involved. Day trading and using leverage are extremely risky and can lead to financial ruin if done incorrectly.

Establishing and sticking to a Stop-loss Strategy

The most important thing to control when doing any day trading is your losses. Your trading will lead to many wins and losses – the most important thing is to have slightly more winners than losers.

Loss aversion is an emotional bias that whittles down the investment performance of many investors and traders. This bias will lead to selling winning positions early and holding on to losing positions too long.

Establishing a set rule for stop-loss orders will greatly increase the chances that your losses are quantified and under control. Keep in mind that stop-loss orders do not guarantee that your losing position will be closed out at the established price 100% of the time.

Deciding on a Trading Strategy

Day traders rely heavily on technical indicators to decide on when to enter a trade and when to exit a trade.

Examples of some of the most common trading indicators include:

  • Moving averages
  • Moving average convergence divergence (MACD)
  • Relative strength index (RSI)
  • Volume

Observing one or more of these technical indicators may showcase a buying or selling opportunity.

An example of a buying opportunity may exist if the 50-day moving average of a stock breaks above the stock’s 200-day moving average. This outlines positive short-term momentum in a stock and is called a golden cross.

Conversely, a selling opportunity may exist if the 50-day moving average of a stock breaks below the stock’s 200-day moving average. This showcases negative short-term momentum in a stock and is called a death cross.

Coming up with a formal trading plan involving more than one technical indicator is a good idea for sustained trading success.

Step 4: Trading the Investments

Trading the Investments

Now that the strategy is in place and you have found one or more investments that you would like to trade, it is time to do the actual trading.

Before placing any trades, make sure to consider:

  • The cost of your trade, taking into account the number of shares
  • The bid-ask spread of the investment you are trading
  • How urgent the trade is

Stocks that have a wide bid-ask spread may not be appropriate for day trading. You will lose a substantial amount of money to the spread twice – once when you open the position and again once you close the position out.

There are two main types of trades that are used to open and close positions.

Market Orders

The market order is used to immediately execute the trade at the current available price. This type of trade gives you control over when a trade is executed but not over what price the trade is executed at.

For large orders involving many shares, you may end up buying or selling a large portion of the shares at a price that is different than the currently listed bid or ask price.

The advantage of the trade is that it is almost always filled immediately, allowing you to take advantage of any urgent information.

Limit Orders

Limit orders are used to control the price that an investment is bought or sold at while giving up control of when the trade is executed.

If you are looking to trade quickly based on urgent information, this type of trade order is likely inappropriate.

Placing a limit order to buy an investment at a price that is higher than the current listed price will at least immediately buy a portion of the shares.

Placing a limit order to sell an investment at a price that is lower than the current listed price will at least immediately sell a portion of the shares.

You will not always be filled at exactly the limit price that you input. Brokerages will fill your order at a better price if possible. This means filling your limit buy at a lower price or filling your limit sell at a higher price.

Step 5: Journaling Trades and Refining Approach

Journaling Trades and Refining Approach

Novice day traders may get lucky with their first few trades and feel that they are experts in their field. The secret to making a career out of day trading is to be profitable over the long-term, on a net-of-fees and after-tax basis.

When you are starting out, your trading strategy may be fairly crude and need refinement. This is why it is critical to keep track of every trade and discover approaches that work and those that don’t.

For the journaling of trades, some things to keep track of can include:

  • The investment traded
  • The indicators used
  • The time it was bought and sold at
  • The type of trade used
  • The gain or loss as a percentage

Your objective over time is to trade at a winning rate of roughly 60%. This can vary based on the size of the trades, but the main idea is to be winning money more often than you are losing money.

The winning rate may also vary based on your tax situation as well as trading commissions paid to your brokerage.

Another important reason for keeping a trading journal is that it keeps you accountable for your trades. Especially when looking to control losses, it is important to stick to a plan. A trading journal will help with finding flaws in your trading.

How much do Day Traders Make in Canada?

How much do Day Traders Make in Canada?

According to Glassdoor, the average day trader salary in Canada is $67,995 per year.

Your potential earnings per year as a day trader will depend greatly on the amount of capital that you are trading with on a regular basis.

A day trader may be consistently closing out winning trades at a 50% profit, but if the position size is a few hundred dollars, you will need a large amount of them to reach the salary outlined by Glassdoor.

How is Day Trading Taxed in Canada?

How is Day Trading Taxed in Canada?

If day trading is replacing a full-time job or career, the Canada Revenue Agency will likely not allow you to take advantage of the generous tax rate enjoyed through capital gains.

Long-term investors that are not day trading for a living only pay taxes on 50% of capital gains in Canada.

If the CRA can justify that you are day trading as a full-time career, you may be responsible for counting your gains throughout the year as regular income. This leads to a massive increase in the tax liability that you would face as a full-time day trader versus a regular long-term investor.


How to Day Trade in Canada

Day trading as a replacement for a full-time job or career is much more difficult in reality than it is generally portrayed.

When taking into account the impact of fees and taxes, it becomes extremely difficult to be profitable over the long term.

With that said, following our outline above will help to improve your chances of being a successful day trader over a longer period of time. Make sure to follow best practices when buying any investments, including stocks.

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