Now you know about the different markets you can trade – and how to buy and sell them – it’s time to pick your trading style.
Your trading style dictates how you approach the markets: how often you place positions, what your profit horizons are and more. Let’s start by looking at forex day trading, one of the most popular ways to trade the currency markets.
What is forex day trading?
Forex day trading is a way to trade currencies that involves opening and closing positions within a single day. Day traders will manage positions over a matter of minutes to hours, often with the assistance of technical tools that can assist with entry and exit points.
How much you trade is up to you: you could stick to once per session or less, or open positions frequently as you spot new opportunities. But whatever you choose, forex day trading requires focus and discipline in fast-changing markets.
Because trades are kept open for such short periods, day traders look to profit from small price fluctuations in very liquid markets. They’ll tend to use short-term charts, such as 15-minute charts, to focus on where a market might move in the next few minutes and hours.
Name: Day trading
Timeframe: Short term
Finds trades using: Technical analysis
Requires: Time, good nerves
One major advantage of day trading is that it removes the risks and costs associated with keeping a trade open beyond the market close. Day traders don’t have to worry about prices gapping overnight, and don’t have to incur financing fees on their positions.
However, it requires a lot of time to devote to the markets – although many day traders use mobile apps, stops, take profits, and more to avoid sitting at a computer for hours each session. Day trading is fast-paced, so it requires proficiency and skill to analyze the market and make rapid decisions. This can be very stressful and is certainly not suitable for everyone.
Forex versus stocks day trading
Market liquidity is important to day traders because they need to be able to move in and out of positions quickly. Any delay to the trade could make a difference between a profit or loss. So, while you can day trade on stocks, forex is often more popular.
One other key factor in choosing markets to trade is cost. As day traders look to take advantage of relatively small price moves, the cost to open each position can have a significant impact on its result.
Say that you’re looking to earn a profit from a 10-point move in a market. Paying a 0.5 spread on EUR/USD means you can keep 9.5 points as a return. Trading stocks, where you must pay a commission charge, means your gain is far lower.
Finding forex day trades
Because of the time-sensitive nature of day trading, most participants can’t pore over fundamental data when choosing which opportunities to pursue. Instead, they tend to rely heavily on technical analysis.
Ignoring economic data entirely can be treacherous, however. Major releases will often have a significant and rapid impact on market prices, so you’ll need to be aware of what might be driving volatility in any given session.
Forex day trading strategies
Any strategy that enables you to capture short-term profits can be used when day trading. But here, we're going to focus on two popular options: trend trading and mean reversion.
Trend traders try to identify significant market moves as they form, then ride the resulting trend for as long as it lasts. Instead of focusing on fundamentals, trend trading uses technical analysis to spot the higher highs or lower lows that indicate a new trend.
Trend trading can work over both the long and short term. When day trading, you’re looking to take advantage of price action over a single day – either by capturing a small portion of a larger trend or by finding mini-trends.
Name: Trend trading
Finds trades using: Mostly technical analysis
Requires: Tools to spot trends
There are lots of different ways to identify trends. For example, you could look at price action to try and spot higher highs and lower lows, or you could use indicators such as trend lines, moving averages and more.
Mean reversion, on the other hand, is based on the theory that markets have an average level they will return to after a significant price move. If you can identify a market that has had an extreme fluctuation from its mean, you can then trade its return to normality.
Name: Mean reversion
Finds trades using: Mostly technical analysis
Requires: Tools to calculate the mean
Most traders using this strategy will employ technical indicators, such as moving averages or Bollinger bands, to calculate a mean for their market. Then, they’ll monitor when it breaks up or down from this level and go long or short accordingly.
How to start day trading forex
To start day trading forex, you first need to understand that it is a challenging endeavour requiring meticulous preparation which is not suitable for all traders. To have a chance of profitability, you not only have to be aware of the combination of fundamental and technical drivers of currency markets, but you’ll also want to start with sufficient capital in order not to bust your account.
This may vary from person to person, but while a few hundred dollars may be sufficient to merely experiment with a real money account, a large account size may give you a better opportunity.
You also need to ensure that you’re able to access your platform for the entirety of the time you plan to spend trading per day. An unexpected trip away from the computer or mobile, no matter how quick, could mean vital information on price action is missed.
Crucially, you need to understand the risks involved and ensure you employ a risk management strategy to try and mitigate them as much as possible. We’ll cover how to put a risk management strategy in place in the next course.
Forex day trading takeaways
- Day trading forex comes with risks, so strong risk management is essential
- Trading highly-liquid pairs at high-volume times can be important on short-term charts
- Multi-timeframe analysis can help give a ‘bigger picture’ on price action
- Technical indicators can assist with entries and exits, particularly with confluence
- Ensure you pay attention to the charts at all times!
Forex day trading is a way to trade currencies that involves opening and closing positions within a single day