Day Trading in Canada

Day trading is a popular way for Canadians to attempt to make money from the markets. The short holding periods give day traders the potential to earn weekly or monthly income. I’ve been trading in Canada for over a decade, since moving here in 2010, and I’ve found Canada to be an excellent location for day traders. The country has reputable brokers offering a wide range of trading instruments, high-quality execution, and robust regulation. The time zones in Canada are also excellent for day trading, enabling me to access markets during their active periods.

Let’s look at how to get the most out of day trading in Canada.

What Is Day Trading?

The standard definition of day trading is opening and closing positions within the same day. For example, if I enter a long EURUSD position at 9:30 AM ET and close it at 2 PM ET, I have carried out a day trade. If I had instead held the trade open until the following day, it would be considered a “swing trade” rather than a day trade.

Day traders can execute multiple trades in a single day. Some may execute just one or two trades per day, while others may execute dozens of trades, depending on their trading strategy.

What Are the Risks & Requirements for Day Trading?

1. Low trading costs (spreads and brokers’ commissions): Day trading involves opening a higher number of positions with smaller profit targets compared to longer-term trading. For example, a Forex day trade may aim for a 25-pip profit target, but a longer-term trade may aim for 150 pips. This means day trading is more sensitive to the size of spreads and commissions.
2. Accurate fills: Day trading is more precise than longer-term trading, and slippage will affect my profitability much more in day trading. For example, if the market is moving quickly and my execution has a 3-pip slippage against me, it has a greater percentage impact on a 25-pip profit target than on a 150-pip longer-term trade.
3. Type of execution: Especially for Forex, the type of execution, such as ECN versus Market Maker, matters a lot for day trading. ECNs give traders access to the liquidity providers’ “raw prices.” Market Maker brokers instead fill client orders with an internal dealing desk. Many Forex traders prefer ECN brokers for their transparency and the ability to capitalize on the smallest price movements.
4. Overtrading and emotional trading: Day trading can lead individuals to make emotional trading decisions, such as taking unnecessary trades that do not align with their strategy, especially after experiencing a series of losing trades. The fast pace of day trading does not easily allow someone to take a deep breath and reassess strategically whether trading conditions are good.
5. Having a strategy: This sounds obvious for any trading style, but it’s especially true for day trading. It’s almost impossible to make decisions on the fly in day trading without a tested strategy. Establish a set of rules for entering the market, determining where to place stop-losses and profit targets, and the position size on each trade. These criteria make a complete trading strategy.

Is Day Trading Legal in Canada?

Yes, day trading is legal in Canada. So long as someone can open a brokerage account, there are no restrictions on who can or cannot day trade in Canada. For example, brokers or regulators do not require individuals to hold professional qualifications, meet minimum income levels, or demonstrate a specific amount of knowledge to engage in day trading.

The Rules of Day Trading in Canada

There are two rules to keep in mind:

1. US brokers require a minimum USD 25,000 account size if a trader meets the Pattern Day Trader criteria: According to FINRA’s website, “You’re considered a pattern day trader if you execute four or more “day trades” within five business days—provided that the number of day trades represents more than 6 percent of your total trades in the margin account for that same five business day period.”
2. The “Superficial Loss Rule” is a Canadian tax rule that states that an individual cannot claim a capital loss for tax purposes if they sell an asset at a loss and repurchase the identical asset (e.g., a stock) within thirty days.

How to Start Day Trading in Canada

I could write an entire article on the steps to starting day trading in Canada, but here is a summary of the essential steps:

1. Open a brokerage account. Canadians can use domestic or foreign-based broker that accept Canadian clients.
2. Next, fund the account using the broker’s preferred funding methods, such as a credit card or bank transfer.
3. Decide which markets to trade, ensuring you can be at the screen during the active times of your markets. For example, Forex majors and US equity indexes are most active during the New York Open. Asian Forex pairs are also active at the open of the Asian session.
4. Develop or learn a strategy and test it on a demo account or a small balance first. A trading strategy contains entry, stop-loss, and take-profit rules, as well as risk management rules.
5. Trade the strategy live, track results, and journal your progress.

Day Trading Strategies in Canada

There are lots of different ways to day trade, but here are some key trading strategies:

Price-action trading: This type of technical analysis trading utilizes only the price chart, without relying on indicators. Price action traders rely on identifying trends, chart patterns, and support and resistance levels.

Momentum strategies: trading in the direction of an identified trend.

Reversal strategies: trading market reversals identified through a combination of chart patterns, support & resistance, and indicators.

Range trading: trading the price as it moves in a range defined by support and resistance levels. Many traders use additional indicators to confirm that the price is turning at the top and bottom of a range.

Volume-based strategies: For example, methods such as Volume Spread Analysis (VSA) or Volume Profile utilize volume to help identify future price direction.

How Are Day Trading Profits Taxed in Canada?

The two primary forms of taxation for trading profits in Canada are Capital Gains Tax and Income Tax.

The Canada Revenue Agency (CRA) applies capital gains tax (CGT) if it views the person’s trading profits as a non-business activity, i.e., a hobby. CGT is 50% of a person’s marginal income tax level. For most traders, paying tax on capital gains is less costly than paying income tax.

However, if the CRA views a person’s trading activity as a business or profession, they will apply income tax to profits. The advantage of paying income tax is that it allows deductible expenses, whereas CGT does not. The CRA uses four criteria to determine whether a person’s trading activity fits the definition of a business: 1. Number of trades; 2. How long positions are open; 3. The time spent trading, and 4. How much money they make.

Some very active traders establish a corporation for their trading activities and pay corporate tax instead. There are costs associated with establishing a corporation, but in certain circumstances, the tax burden can be a lot lower than that of CGT or income tax.

What Should I Consider When Choosing a Broker for Day Trading in Canada?

1. How is the broker regulated? Canadians do not have to use domestic brokers. If using a foreign broker, I recommend sticking to jurisdictions with strong regulation, such as the UK, Australia, the US and the EU—brokers in these regions must ensure fair trading conditions and segregated client funds.
2. Leverage. Canadian brokers have stricter leverage caps than some foreign brokers.
3. Markets and instruments. Ensure the broker has the markets available that you wish to trade. For example, Canadian brokers allow CFD trading, whereas US brokers do not.
4. Customer service. I prefer brokers that offer both live help and email support.
5. Minimum account size. Ensure that you can meet the broker’s minimum account size requirements.
6. Trading platforms. Ensure the broker has the platforms you wish to use, e.g., MT5.

Day Trading in Canada—Pros & Cons

Pros

1. Any Canadian is allowed to open a brokerage account and begin day trading.
2. The short-holding periods of day trading make it easier to earn weekly or monthly income compared to longer-term trading.
3. A higher number of trades in a short period helps people quickly see if a strategy is working or not.

Cons

1. Traders must be available at the times of day that are active for their chosen markets.
2. Day trading requires a lot of emotional discipline.
3. Commissions and spreads can be more costly in day trading.

My Take

Day trading is an excellent way to earn weekly or monthly income from the markets, because trades are opened and closed within the same day. However, traders must develop and test a strategy that works in live market conditions, because trading profits are never guaranteed. Canada is an excellent environment for day trading because Canadians can use domestic or foreign brokers, have access to many markets, and Canada is situated in a time zone that makes accessing markets during active periods much easier. However, day trading can take a great deal of time to learn and requires discipline.