Must-Read for Short-Term Trading | What Does Day Trading Mean? Complete Analysis of Taiwan and US Stock Market Rules

Short-term investors are doing one thing: capturing market volatility through day trading to generate profits. According to market data, day trading volume in Taiwan’s stock market has already accounted for nearly 40%, and in the US, due to the T+0 system, traders can buy and sell within the same day, offering greater flexibility. But what exactly does day trading mean? What are its attractions, and what hidden risks does it carry? This article will analyze these aspects from a practical perspective.

What Does Day Trading Mean? A One-Sentence Explanation

Day trading refers to completing both buy and sell transactions within the same trading day (or selling first and buying later), ensuring that all positions are fully settled before the market closes. Simply put, “enter today, exit today,” without holding stocks overnight.

Since Taiwan’s Financial Supervisory Commission opened up stock day trading in 2016, this trading method has gradually become a tool for many investors to manage overnight risk. Especially when Taiwan’s stock market is impacted by international news from Hong Kong, Europe, the US, etc., day trading allows traders to determine the outcome within the day, avoiding being hit by black swan events.

Why Is Day Trading So Popular? Three Core Advantages

1. Avoid International Market Overnight Risks
Major news from the previous night often causes stocks to plummet at the next market open. Day trading completes buy and sell transactions during the trading session, leaving no stock holdings after close, thus naturally avoiding sudden international market shocks overnight.

2. Improve Capital Turnover Efficiency
Multiple entries and exits within the same day only involve price difference risks. Ideally, this can significantly increase the frequency of capital utilization, thereby expanding profit potential.

3. Amplify Leverage Potential
Since only the price difference needs to be paid, not the full purchase amount, day trading allows investors to leverage a smaller principal to control a larger trading volume. Of course, leverage is a double-edged sword—while it amplifies gains, it also magnifies losses.

Hidden Risks of Day Trading You Must Recognize

Although the advantages of day trading are attractive, there are four major pitfalls lurking beneath, causing many beginners to lose everything.

Cost Erosion of Profits
While the government offers a “half-rate transaction tax” discount for day trading, frequent trading incurs significant brokerage fees and taxes. For example, in Taiwan, executing five trades in a day with a principal of NT$100,000 per trade, earning 0.5% (NT$500) each, after deducting fees and taxes, net profit might only be NT$100–200. A slight loss on one trade can wipe out the accumulated profit from previous trades.

Psychological Pressure and Decision Risks
Day trading relies on short-term price fluctuations. Taiwan stocks often experience 1%-2% rapid swings during trading hours due to foreign investor movements, industry news, and market sentiment. For day traders, these fluctuations can determine win or lose within minutes, requiring investors to monitor the market intensely and make precise judgments quickly. Under high stress, it’s easy to hesitate and miss opportunities or make impulsive mistakes.

Leverage Amplifies Two-Way Risks
Many investors use margin (long positions) or short selling to increase capital efficiency. But leverage is a double-edged sword. In Taiwan, initial margin for margin day trading is about 50% (2x leverage). If the market reverses, losses are also amplified. For example, borrowing NT$100,000 to buy NT$200,000 worth of stocks, a 5% drop in stock price results in a NT$10,000 loss (10% of principal). Extreme market moves can lead to hitting price limits or forced liquidation, even facing broker margin calls.

Easy to Fall into Addiction
The instant profit feedback from day trading can be addictive, leading traders to focus on short-term gains and neglect long-term investment performance. Many start with “experimental trading” but gradually shift to “frequent trading,” eventually depleting their capital through continuous small losses or a single large loss.

Who Is Suitable for Day Trading? Five Self-Assessment Questions

Day trading is not suitable for all investors. Here are five groups of people who are more appropriate:

1. Have ample time and can monitor the market throughout — Short-term decisions require real-time monitoring; those unable to do so may miss opportunities or suffer losses.

2. Have strict discipline and risk management skills — Must set stop-loss points and adhere to them; avoid gambling on a trade and violating principles. Also, control position sizes.

3. Have strong stress resistance and quick decision-making — Market can swing significantly within minutes; emotional volatility can be dangerous.

4. Possess certain investment experience and technical analysis skills — Able to interpret intraday charts, volume-price relationships, and use tools like moving averages, candlesticks, support/resistance levels.

5. Have sufficient capital and can bear losses — Day trading is a high-risk, high-reward speculative approach. Insufficient capital and high leverage increase the risk of margin calls or wipeouts.

Comparison of Five Day Trading Methods

Spot Stock Day Trading

The most common method; over 1,600 stocks in Taiwan can be day traded without borrowing or margin.

US Intraday Trading (Day Trading)

US stocks can be closed out within the same day without overnight holdings. Limited by PDT rules: if capital is below $25,000, maximum of 3 day trades in 5 days; above $25,000, no limit.

Margin and Short Selling Day Trading

Margin day trading involves buying on margin and selling within the same day; short selling involves borrowing stocks to sell and buying back later. Additional interest or borrowing fees apply.

Derivatives Day Trading

Buying and selling financial derivatives within a trading day, including stock index futures, options, single-stock futures, etc. Many short-term traders use Taiwan index futures due to leverage and low costs.

Algorithmic and High-Frequency Day Trading

Using automated algorithms to determine buy/sell points, focusing on small, frequent profits. Low costs but requires advanced technical skills; generally difficult for retail traders.

Taiwan vs US: Day Trading Rules Comparison

Practical Calculation of Day Trading Fees

Taiwan Cost Estimation

Suppose buying 100 lots of TSMC (price NT$600):

• Transaction amount = 600 × 100,000 = NT$60,000,000
• Commission (at 0.04275%) ≈ NT$60 million × 0.04275% ≈ NT$25,650
• Transaction tax (halved for day trading) ≈ NT$60 million × 0.075% ≈ NT$45,000
• Total cost approximately NT$70,650

The main cost in Taiwan day trading comes from transaction taxes, which is why many investors turn to US stocks.

US Cost Estimation

Suppose buying 1,000 shares of NVIDIA (price $1,000):

• Transaction amount = $1,000 × 1,000 = $1,000,000
• Broker commission = $0 (most brokers offer free trades)
• SEC/FINRA fees ≈ $0.145
• Total cost under $1

US day trading costs are much lower than Taiwan, but traders must consider bid-ask spreads, slippage, and borrowing interest.

Three Steps for Practical Day Trading

Step 1: Select the Right Stocks

The first step is choosing suitable stocks. Focus on stocks with “popularity” and high liquidity, rather than those with low prices and thin trading volume.

Selection methods include:

• News: Media reports often attract attention; positive or negative news can amplify daily volatility.
• Institutional Activity: Research reports may influence institutional adjustments.
• Quantitative Indicators: Observe trading volume rankings, turnover rate, or sudden volume surges (over 50% above the past 5-10 days’ average).

Step 2: Determine Trading Direction

Day trading can go long or short.

• Going long involves “trend-following” or “buying on dips/support.”
• Going short requires a clear bearish market sentiment.

Monitor:

• Previous lows and opening prices
• 5-minute K-line charts (not daily charts)
• Overall market momentum affecting individual stocks

For example, if the market is weak but a stock performs better than the index, consider holding; otherwise, consider closing or reducing positions.

Step 3: Strictly Follow Trading Discipline

The most testing aspect of spot day trading is self-discipline.

Set Stop-Loss and Take-Profit:
Generally, setting profit targets at around 5% and stop-loss at 2-3% is reasonable. Avoid waiting until near market close to execute trades to prevent unfilled orders and stock becoming inventory requiring settlement payment.

Money Management:
Always have sufficient funds in your account before trading; only trade with what you can afford to lose.

Mindset Management:
The key mindset is “decisiveness” and “not greed.” Be decisive when opportunities arise, and avoid overtrading or holding on too long.

Suitable Taiwan Stocks for Day Trading in 2025

Below are Taiwan stocks with high daily trading volume and liquidity suitable for day trading:

Suitable US Stocks for Day Trading in 2025

These stocks have high daily trading volume and liquidity, making them top choices for short-term day trading.

Final Reminder on Day Trading

Day trading is fundamentally a trading strategy that aims to increase capital turnover and avoid overnight international market fluctuations. However, many investors chase quick profits by excessively leveraging, ultimately suffering heavy losses due to overexposure to risk.

Additionally, Taiwan stock trading incurs higher overall costs due to transaction fees and taxes, especially on selling, which is why more Taiwanese investors are turning to US stocks for day trading.

Regardless of the method chosen, the most important factors are discipline, risk management, and mental resilience. Day trading is not a guaranteed way to make money; it requires professional knowledge, sufficient capital, and strong psychological strength.