A Guide to Day Trading in Canada

What Is Day Trading?

As the name suggests, day trading refers to the buying and selling of a security (e.g stocks, currencies, bonds) within the same day.

Using short-term strategies, successful day traders are able to make profits through high frequency trading using a combination of analytical tools, strategies, and information.

Many of these trades are highly speculative in nature, and there are no guarantees of success.

Day trading is often contrasted with investing.

Traditionally, investing refers to individuals who pick out companies that have a good long-term outlook and invest with the intention of holding for a long time.

These long-term investors are less worried about day-to-day price fluctuations, and instead focus on price movements over the period of months or years.

Investment is usually meant for individuals with longer-term time horizons (e.g., planning for retirement), while day trading is often much more short-term in nature.

Even in times of economic downturn, long-term investors will typically weather the storm and hold onto their stocks.

Traditionally, institutional traders were the main players participating in day trading.

Significant amounts of money have been invested by these institutions to develop algorithms capable of executing trades with both speed and accuracy.

Over the years, retail investors gradually also began to participate in the practice.

Day trading became much more accessible in the digital era, when electric trading platforms made it easier to quickly execute trades. 

Did You Know?

In 2005, a cable was laid in the Atlantic ocean between New York and London. The purpose of this wire was to shave 5 milliseconds off of trades. For professionals who use complex algorithms to day trade, 5 milliseconds can make a world of difference!

One of the benefits of day trading is the elimination of the risk associated with holding security overnight.

By selling before the end of the day, traders avoid after-hours events that may cause the value of their holdings to drop while they are unable to sell (e.g. negative news or a bad earnings report).

There are a few different strategies used by day traders.

One of the most common is referred to as scalping.

Using this technique, traders try to capitalize on small price movements to secure a little bit of profit.

This is repeated dozens of times a day, and these numerous small profits can add up to a significant amount.

Another common strategy is referred to as news-based trading.

In situations where news is driving market uncertainty, day traders take advantage of this information and make informed decisions, rapidly executing trades throughout the day as the market reacts to events like economic data, earnings reports, or policy announcements from the government.

Given the speculative nature of day trading, the practice is quite heavily regulated.

In the United States, authorities require those who make more than 3 day trades a week to keep at least $25,000 in their account.

Part of the reason is that many day-traders are trading on the margin, meaning that they are borrowing money to trade with.

This gives them more purchasing power in order to buy more shares than their account balance would usually allow.

If small price movements downwards occur, day traders trading on the margin can have their entire account balances wiped out in minutes.

Canadian guy day trading

In Canada, there are no such account minimums for those who day trade.

However, there are a unique set of rules that differentiate day traders from regular investors.

The Canada Revenue Agency (CRA) treats profits from day trading differently from regular investing.

Those who the CRA deem to be day-traders are met with a separate set of rules.

Income generated from day trading is actually considered business income rather than capital gains.

This means that while all gains are reported as profits and subject to taxation as if it were a regular business, losses can also be deductible.

For example, if you lose $10,000 a day trading a year but have another side job as a freelancer, you can offset these losses by paying less tax on the money that you have earned through your freelancing gig.

It is important to note that day trading cannot be done within registered accounts like RRSPs and TFSAs.

As these accounts were created to encourage longer-term saving, the CRA has been known to flag those who use them for high-frequency trading.

If the CRA believes you are generating business income through day trading in a TFSA, money earned will be subject to taxes.

Steps To Start Day Trading

Step 1: Pick a brokerage

As a high-frequency trader, picking the correct brokerage platform is a crucial step for day trading.

Executing multiple trades per day can mean that commissions and fees add up very quickly.

With multiple, low-dollar value trades per day, picking a brokerage that keeps costs down can go a long way to ensuring consistent profits.

Many brokerage platforms cater specifically to day traders, with packages that lower commissions the higher number of trades you make.

Access to quick trade execution is also important.

Being able to see real-time stock prices and make quick decisions is vital to day traders, as second-to-second price fluctuations are the best opportunities to make a profit.

Step 2: Decide how much time and money to invest

As mentioned, day trading is considered highly speculative.

Understanding and being comfortable with the risks associated with this practice is important before you begin trading.

Not only do you need to decide how much to put into your account, but you also need to decide how much you are willing to risk per trade.

In general, day traders will limit themselves to 1-2% of their account for each trade.

This will help minimize losses from one specific trade and spread-out money to allow for dozens of trades a day.

Given that day traders are reacting to price changes by the second, it is also important to decide how much time you want to commit to the practice.

Being committed and dedicating the time and resources to day trading is important if you want to be successful.

In order to be successful, day trading is often treated as a full-time job.

Step 3: Picking what stocks to trade

Day traders look for certain characteristics when deciding which stocks they would like to focus their attention on.

When evaluating stocks, one thing day traders will look for is high volume.

Having liquidity in the stock means that day traders can enter and exit trades quickly and easily.

Another attribute that makes a stock ideal for day trading is volatility.

To take advantage of day trading strategies, traders are usually on the lookout for any stocks that have lots of price action throughout the day.

Step 4: Pick a strategy

With day trading, timing is everything.

Seconds can be the difference between profits and losses.

Picking a strategy and sticking to it is important to success.

Common strategies include following the trend, contrarian investing, scalping, and trading the news.

Each strategy requires a different skillset, and day traders must understand the benefits and risks before deciding to pursue a certain strategy 

Platforms to use for Day Trading

There are several platforms in Canada that have designed services specifically catered to day traders.

These platforms allow individuals to take advantage of low fees, allowing for high-frequency trading without losing too much money to fees and commissions.

Other points that day traders should value highly include the speed of execution, ability to access margin trading, and good customer support.

For those who are looking to trade exclusively in Canadian markets, Questrade is a great option.

The discount brokerage company offers an “Active Trader” package in both fixed ($4.95 per trade) and variable (1 cent per share) pricing options.

This structure allows for day traders to take advantage of high frequency trading at a low price point.

In addition, Questrade also offers data packages for both U.S. and Canadian markets.

This gives day traders vital access to level 1 and level 2 live streaming data.

Having real time information is extremely important, as second by second price movements can provide lots of opportunities to make a profit.

This feature costs $89.95 a month but can be rebated based on the amount spent on commissions.

Spending $400 on commissions a month will result in a full rebate on this live pricing subscription.

Another great option for day traders is Interactive Brokers.

Catered more towards professional traders, the variety of trade execution options that are available on the platform allow for complicated strategies to be executed with ease.

In addition, Interactive Brokers provides margin trading accounts, which are perfect for day traders.

In Canada, rules regarding day trading on margin accounts are less strict than in the United States, allowing traders more flexibility, which also comes with more risk.

The platform offers access to a wide range of tradable securities.

For day traders, opportunities can usually be found in other assets outside of stocks.

For example, for currency (FX) trading, commodities trading, and bonds trading are all offered by Interactive Brokers.

These securities are all very popular for day traders as they provide great opportunities for those who are experienced.

Like Questrade, Interactive Brokers offers a few different pricing systems that users can take advantage of.

The one best suited for day traders is the tiered pricing system.

On U.S.-based stocks, commissions on the lowest tier start at $0.0035 per share on the first 300,000 shares (minimum of $0.35) and drop down to $0.0005 for the highest volume tier (users who trade over 100,000,000 shares a month)

Keep In Mind

As mentioned, day trading is considered speculative and can be highly risky.

With this high risk comes the potential for high reward, but day trading requires a very deep understanding and knowledge of the markets.

Doing sufficient research before beginning is important to ensure that you fully understand the potential risks of the practice.

Even if you manage to make money from day trading, it is also important to keep in mind the tax implications associated with the practice.

As previously mentioned, profits from day trading are considered by the CRA to be business income rather than capital gains.

When looking at profits and budgeting money, it is important to remember to set aside enough to pay taxes on those gains.

In general, there are no set criteria to determine who is a day trader in Canada.

The determination is made by CRA based on factors such as:

  • frequency of transactions 
  • period of ownership 
  • knowledge of the securities market and time spent studying the market
  • financing (margin or debt financing)
  • type of shares (normally speculative in nature or of a non-dividend type)

Understanding what activity constitutes day trading and what the associated tax consequences are of this designation is important to keep in mind for all those who are considering day trading.

Frequently Asked Questions

  • Is day trading legal in Canada?
  • Can you day trade as much as you want in Canada?

I have been investing for half a decade, using the perspectives gained from my work experience in the private, public, and non-profit sectors to shape my investment outlook. I have a specific interest in the potential of emerging disruptive technologies and their impact on the future.