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Day trading has become one of the most popular ways of trading, and much of the trading industry advertises it as a way to make a fortune or earn a living. However, as all Muslims know, just because something is legal or popular in a country does not make it Halal!
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To help Muslims align day trading with their faith, I will cover the following:
What does the term“day trading” means.
The main Shariah principles.
What Shariah law says about day trading.
How to make day trading Shariah-compliant is Day Trading?
The definition of“day trading” is opening and closing a trading position within the same day.
For example, if I enter an EUR/USD trade at 9 a.m. and close it at 1 p.m. the same day or buy Apple stock at 10 a.m. and close it at 3 p.m., I have executed day trades.
“Day trading” can refer to transactions in any underlying asset or financial instrument. There are equities day traders, Forex day traders, Crypto day traders, Futures day traders, Options day traders, etc.
Many people also use the term“day trading” to refer to short-term trades that last a few days, and some even use it for people who manage long-term trades but sit at the screen all day. For clarity, I will talk about day trading and short-term trading together in this article, but not longer-term trading or investing, even if a person monitors their trades all day.
Now we have a definition for day trading, let's look at some of its key features:
Short-term focus: Day trading naturally has a short-term focus, lasting a few minutes to a few hours.
Frequent trades: Day traders typically place multiple trades in a single day, sometimes dozens.
Leverage: Because of day trading's short-term focus, it captures much smaller moves than longer-term trading. As a result, day traders generally need high leverage to create profits worth their time investment.
Market timing: Unlike long-term trading, where timing may not be essential, day trading relies on precisely timing a market turn or momentum.
Technical analysis: Because day trading relies on market timing, technical analysis is more common than fundamental analysis for day traders. Fundamental analysis can take weeks or months to affect the price of an asset, which is too long for day trading Principles in Financial Transactions
Shariah financial principles exist to ensure a sustainable and fair economic system that benefits society, and its rules impact how Muslims should trade the markets. Let's look at the key ideas:
Money is a medium of exchange and not an asset: This is a central Shariah financial principle, and as we will see further in this list, other principles are derived from it.
Prohibition of interest (“Riba”): Because Shariah treats money as a medium of exchange and not an asset, it prevents charging a fee (i.e., interest) on money itself. Islam's non-interest-based financial system is the most significant difference from other economic systems.
An exchange of goods or services should accompany the exchange of money. This again stems from the core principle that money is a medium of exchange rather than an intrinsic asset.
Prohibition of Gharar (Excessive uncertainty or ambiguity): For example, leverage should not be excessive, and contract terms should be clear, precise, and disclosed to all parties. Avoiding Gharar helps to prevent irreparable damage to individuals or the broader financial system.
Prohibition of Haram activities: For example, investing in companies that produce alcohol or pork products or are in the gambling sector is prohibited.
Proportionate sharing of profit and losses: The distribution of profit and losses amongst parties should be proportionate to the inputs of capital or expertise.
Proportionate sharing of rights and obligations: Like the proportionate distributions of profit and losses, the rights and responsibilities must also be equitable amongst parties.
Prohibition of Gambling (Maisir): Islam prohibits games or transactions where the outcome is based on chance rather than skill or effort. Gambling generally has no underlying commercial purpose (for example, no exchange of goods or services). Because it can be addictive and be used to exploit others, there is an element of unjust gain at the expense of others. For those reasons, Shariah considers it harmful to society and prohibits it. Maisir's definition can also expand to speculative activities that create wealth without corresponding effort or value addition.
Sanctity of Contracts. Shariah forbids fraud, misrepresentation, and breaches of trust in contracts.
What Does Shariah Law Say About Day Trading?
Islamic scholars' opinions on day trading vary widely. Some scholars consider it haram regardless of the type of day trading. The scholars who view day trading as Halal agree that it can only be Halal under certain conditions.
Why some scholars believe day trading is haram:
Day trading is pure speculation, more like gambling. This is probably the key objection of those who consider any form of day trading to be haram. For example, Day trading does not consider an asset's long-term fundamentals.
Day trading has excessive risk, especially when leveraged, giving it the characteristics of Gharar.
Day trading does not benefit society. It is short-term and does not allocate capital to long-term productive investing.
Many day trading platforms rely on short selling, which most Islamic scholars consider haram because Islam forbids selling assets you do not own.
Why some scholars believe day trading is Halal:
Shariah does not specify a minimum time to wait after purchasing an asset before selling it or restrict buying and selling on the same day.
Day trading benefits society because it adds liquidity to the markets and aids in“price discovery,” meaning the activity helps assets find their correct value.
Individuals typically day trade through regulated brokers or exchanges, which offer clear contract conditions, regulated trade execution, and up-to-the-second pricing. Participants know how much they can buy or sell at every instant and that pricing is fair and transparent for all parties, often more so than in other industries.
Day trading requires skills and intelligence and is not a game of chance.
Day traders track the value of underlying currencies or assets, which is not present in gambling to Ensure Shariah Compliance in Day Trading
If asked, "Is trading Forex haram or halal?” use a Shariah Forex account because they do not have an interest-based rollover fee for holding trades past a specific time. Shariah Forex accounts have become hugely popular worldwide, and the best Islamic Forex brokers are reputable and well-regulated.
If I am not using a Shariah Forex account, I can still avoid the interest-based rollover fee by not holding open positions past the broker's cut-off time for charging the interest.
Trade Halal assets. For example, trade currencies or commodities such as gold or silver or stocks in Halal industries that benefit society, such as automotive, manufacturing, or pharmaceuticals.
Avoid stocks in Haram industries, such as gambling, alcohol, or pork products, and interest-based industries like banking and finance.
Use an Islamic stock screener to find Shariah-compliant stocks.
Many stock indexes now have Shariah-compliant versions available for trading. For example, the S&P 500® Shariah includes all Shariah-compliant constituents of the S&P 500. Investors can trade the index through an ETF or pick individual stocks that are a part of that index to trade.
Do not short-sell assets or stocks Take
Day trading can be permissible under the right conditions, and plenty of tools and services are available to Muslims to ensure they can day trade in a Shariah-compliant manner. The best Forex brokers for day trading offer Shariah Forex accounts with excellent regulations, trade execution, and costs. For stock day traders, there are Islamic stock screeners that identify Shariah-compliant stocks or Islamic stock indexes. For example, the S&P 500® Shariah is a Shariah-compliant version of the S&P 500. I could trade the S&P 500® Shariah ETF or individual stocks in that index and be Shariah-compliant. I shouldn't chase excessive leverage to avoid Gharar or short-sell individual stocks, as Islam forbids selling assets I do not own.
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