Is day trading haram?

Nowadays, day trading is one of the most common ways to trade, often misunderstood and overhyped. Day trading is not always an easy side job that brings overnight success or a way to generate quick revenue but also a full-time stressful job where traders lose money as well.

So why is there a debate regarding day trading?

For Muslims, just because something is popular doesn’t always mean it’s Halal (permissible). In Islam, there’s a rule that goes against selling something you do not own. This is based on a saying from Prophet Muhammad, who advised not to sell what you don’t possess. However, nowadays, it’s not that simple. When a stock is bought, it usually takes a day until you own it. As a result, if you buy and sell an asset within the same day, do you truly own it?

Read on to understand what trading is, how it works and whether it’s allowed in Islam.

What is day trading?

It refers to buying and selling a financial asset within the same day to make quick profits from small price movements. If you buy EU/USD at 9 am and then sell it at 1 pm for example, you’re day trading. Day trading can refer to any transactions regarding any financial instrument including stocks, forex, futures, and other.

Rather than focusing on a company’s long-term value, day traders look at short-term price changes using tools like technical analysis and momementum trading.

In order to day trade, one needs to be a fast decision-maker, strongly focused, able to stay calm under pressure. Day traders use real-time data, advanced charts and fast internet to identify buy or sell opportunities.

Risk management is also of high importance. To potentially succeed as a day trader, you will need to limit the amount of money you lose. In fact, traders usually risk no more than 1%-2% of their money in total.

A lot of professional day traders work for big companies with improved tools, while solo traders go through a more tough competition, like very fast trading computers.

Although day trading can potentially lead to generating revenue fast, it also carries risks. If you are a beginner or cannot handle losses, day trading might not be for you, or you might need a little more work.

Day traders focus on events that lead to fast fluctuations in market prices. A popular approach is trading based on news. Planned announcements like economic reports, company earnings or decisions regarding interest rates are factors that often impact the markets hence prices, and therefore, day trades can use them to their advantage.  

Common characteristics shared by day traders

Closing all trading positions before end of a market session.

Not holding positions overnight

Making multiple trades per day

Focusing on technical analysis and short-term patterns

Accurately timing market shifts or momentum changes

What are Shariah principles in financial transactions?

Shariah financial principles exist to ensure the economy is fair and valuable to everyone. Muslims are guided on how to trade by these rules:

• No interest (Riba): Money is not treated as an asset. Therefore, traders cannot charge or earn interest on loans, which is the main difference between Islamic finance and other systems.
• Money is a way to buy and sell things, not to earn it on its own: This is a basic rule and the foundation of all other rules.
• Money should be used to exchange products and services: According to Islamic principles, people shouldn’t trade money for money, but use it to buy or sell real goods.
• No excessive confusion (Gharar): Agreements should be transparent and unambiguous. Contracts, for instance should be clear, easy and fair. Islamic law prohibits uncertainty and high-risk, unclear terms because they can harm both the economy and individuals.
• No forbidden (Haram) business: Muslims are now permitted to trade companies that have to do with gambling, alcohol, pork or anything really that is not allowed by Islam.
• Fair distribution of profit and loss: Each individual involved should get a share of the profits and losses based on the work and money the contributed.
• Fair distribution of rights and obligations: All individuals involved should get an equal portion of rights and obligations, similar to what mentioned right above.
• No gambling (Masisir): Gambling is now allowed since it relies on luck instead of skill or effort. Islamic law does not allow it because it often harms both individuals and society as a whole. An example is risky investments in which trades try to generate revenue without actually putting in effort or adding value.

Is day trading allowed in Islam?

Islamic scholars share various opinions on day trading. Some believe it is haram. Others think it is halal, as long as certain rules are followed. There isn’t one correct answer that works for everyone. Those that support that day trading is haram believe that it is similar to gambling because traders buy and sell quickly, sometimes without looking for an asset’s real value.

They support that this type of trading is Gharar especially when using leverage and isn’t really helpful to society as it focuses on short-term profits instead of longer-term ones. Many trading platforms offer short selling, which involves selling an asset you don’t own. Islam does not permit this practice.

However, there are those that believe that day trading can be halal. According to them, there is no minimum time for the duration in which traders must hold a position before selling it.

Through day trading, markets can be improved because of making it easier to buy and sell assets and by helping prices show those assets’ real value. Also, traders most of the times use platforms that offer fair contracts with transparent prices and trading conditions. It takes skills, knowledge and deep analysis of the assets to day trade. Therefore, day trading shouldn’t be linked with gambling.

How to trade while being Shariah-compliant

Those ones that want to day trade while adhering to Islamic principles, need to take a few more steps. Use an Islamic account which avoids interest by not charging rollover fees for keeping trades overnight. Without such an account, you may avoid interest by exiting trades before the broker charges it.

It is of high importance to trade permissible assets including gold, silver, or stocks in industries that offer something to society like healthcare, manufacturing or technology. You could avoid stocks that are connected to haram industries like alcohol, gambling, pork or traditional banks that are interest-based.

Instead, you could trade Sharia-compliant indexes like the S&P 500 Shariah. Finally, you should avoid short selling. Prior to starting, you could always familiarise yourself with Islamic finance so as to ensure that your trading is aligned with your beliefs.

Final thoughts

To sum up, there’s not one clear answer as to whether day trading is haram as there are various opinions on the subject.

It is important to ensure that assets traded are Shariah-compliant and avoid things that aren’t allowed including using leverage or short-selling.

Becoming familiar with Islamic finance could help you align your beliefs with your trading, especially as the markets constantly change. IronFX offers the Islamic, swap-free account option that adheres to Shariah principles and is interest-free.

Disclaimer: This information is not considered investment advice or an investment recommendation, but instead a marketing communication. IronFX is not responsible for any data or information provided by third parties referenced, or hyperlinked, in this communication.