1 April 2024 - 14min Read

Forex trading

Forex day trading

Your trading style determines how you approach the markets, including how frequently you trade, your risk/reward targets, and other key factors. This guide will explain how traders use forex for day trading.

TABLE OF CONTENTS

Key takeaways

  • A forex day trading system is built specifically for short-term and technical day traders.
  • Forex day trading may be adjusted to various tactics, such as scalping, fading, momentum, or pivot trading.
  • Forex day trading can be either manual or automated.
  • Day trading forex has risks. Thus effective risk management is crucial.
  • Short-term trading works best with highly liquid currencies with high volumes. But high-frequency trading also increases the chances of loss.
  • Multi-timeframe analysis can provide a "larger picture" of price activity and patterns to get an idea of where the price might go intraday.
  • Technical indicators can also help with entry and exit points.
  • Forex day trading works when you can sit and track prices and treat it like your normal day job.

Marc Aucamp

Content Writer

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What is forex day trading?

In forex day trading, positions are opened and closed within a single day. Day traders may hold trades for a few minutes to many hours.

It is entirely up to you how much you trade: you may only trade once every session or once every week, or you could open positions according to the opportunities you get. Whatever you do, forex day trading demands concentration and discipline in fast-paced and volatile forex markets.

Day traders seek to profit from small price fluctuations in fast-moving markets since positions are open for short periods. They will typically utilise short-term charts, such as five-minute, 15-minute, or 30-minute charts, to focus on where a market may go in the coming minutes and hours.

One significant advantage of forex day trading is that it eliminates the risks and costs involved with holding a position overnight, over the weekend, or when the market is closed. Day traders do not have to worry about gaps overnight or incurring the cost of swaps on their positions.

However, day trading requires a significant amount of time to dedicate to the markets - though many day traders utilise mobile applications, stops, take profits, and other tools to avoid sitting at a computer for hours each session. Because day trading is fast-paced, it necessitates expertise and experience in analysing the market and making quick judgments. This may be quite stressful and is not right for everyone.

How does forex day trading work?

A currency day trading system provides traders with information to help them decide whether to purchase or sell currencies. Each trade entails purchasing one currency while simultaneously selling another, referred to as the currency pair.

There are two major systems in operation. Manual currency trading strategies entail traders watching for signals on their own. Indicators may include a certain chart pattern, a breakout over an important resistance level, or below a significant support area, or the occurrence of a news item. Before participating in buy or sell activity, traders analyse those indicators.

Automated currency trading systems, on the other hand, allow traders to train software to seek certain indications and then programme how to react to them. These systems can either notify a trader or execute the deal automatically. The following are some of the most common trading system methodologies:

  • Scalping is the practise of purchasing or selling shortly after a deal becomes profitable, taking modest incremental profits. Trading is frequent in this sort of system, with numerous small trades executed in fast succession. If done automatically, trading can be done in huge volumes - and trading costs can be substantial. 
  • Fading is the practise of shorting a currency pair shortly after it has made an upward move that is contrary to the existing trend. When buyers return to the market, the target price is established.
  • Daily pivots strive to profit from market volatility on a daily basis. Buying and selling take place during low volume times, while trades are closed during high periods of volatility.
  • Momentum systems track market trends or identify significant movements accompanied by high volumes. When volume begins to drop, and bearish candles appear, this method's aim is reached.

What do you need to understand while doing forex day trading?

There are five frequent blunders that day traders make in an attempt to increase profits but can end up having the opposite impact.

Here are the things you should understand and consider while day trading:

Averaging Down

'Averaging down' is a temptation that many traders struggle to avoid. Although it is rarely planned, many traders have found themselves doing so. Averaging down has various drawbacks in currency markets.
'Averaging down' means adding to a losing position. The trader effectively 'doubles up' or 'doubles down' if adding to a short position. This means that their new entry point looks more attractive than their original one. But by adding to a losing position, the trader is significantly increasing their potential risk. The trader may also be abandoning their original trading plan and ignoring their money and risk management rules. The major issue is that a losing position is being maintained and compounded when the market suggests that the original trading idea has failed. A prudent trader would cut the position and wait for a better opportunity. 

In addition, it's now the case that a higher return on your remaining money is required to recover any lost capital from the original losing deal. If a trader loses 50% of their money, a 100% return is now required to restore them to their initial capital level. Large sums of money lost in single trades or on single trading days might stifle capital growth for extended periods of time.

Averaging down will always have the potential to result in a huge loss or margin call because a trend can last longer than a trader can stay liquid—especially if new money is added as the position loses value.

Day traders are particularly vulnerable to these temptations. Due to the short timescale for transactions, possibilities are fleeting, and prompt exits are required for unsuccessful trades.

Preparing Forex Trades for News

Traders are aware of the news events that will influence the market, but what can't be predicted with any certainty is which way the market will subsequently move. As a result, a trader may be pretty sure that a news release, such as whether or not the Federal Reserve will raise interest rates, will have an influence on markets. Yet traders can never be 100% sure how the market would respond to this anticipated news. Other unexpected news announcements can also cause exceedingly irrational market moves.

There's also the fact that as volatility rises and traders set up new orders in the market, stops are triggered on both sides. This frequently leads to sharp whipsaw movements before a sustainable pattern can form (if one emerges in the near term at all).

News acts as a catalyst for market moves, but it can't predict direction. Taking a position before a news announcement might substantially impair a trader's chances of success for all of these reasons.

Forex Trading After Breaking News

Similarly, a news headline might impact the markets at any time, creating wild swings. While it may appear to be easy money to be reactive and grab some pips, doing so in an untested manner and without a good trading plan is a high risk strategy.

After news releases, day traders should wait for volatility to decrease and a clearer trend to emerge. This should result in fewer liquidity worries, more effective risk management, and clearer price direction. (For further information on this subject, read "How to Trade Forex on News Releases.")

Putting More Than 1% of Your Capital at Risk in Forex Trades

Excessive risk-taking does not lead to exorbitant profits. Traders who put big sums of money at risk on a single deal run the risk of losing it all. That means that they will have lost all their risk capital and will be unable to make any more trades. A popular guideline is that a trader should not risk more than 1% of what they can afford (the difference between the entry and stop prices). Professional traders frequently risk significantly less than 1% of their cash.

Day trading demands special consideration in this area, as does establishing a daily risk limit. This daily risk cap might be set at 1% (or less) of capital, or the average daily profit over a 30-day period. 

Example: Under these risk criteria, a trader with a $50,000 account (leverage not included) may decide to risk no more than $500 every day. Alternatively, this figure might be adjusted to be more in line with the average daily gain (i.e., if a trader makes $100 on good days, he or she carries out disciplined risk management to keep losses to $100 or less). Figures used in the example are for illustration only and may vary for different traders. 

The goal of this strategy is to ensure that no single trade or trading day has a substantial negative influence on the account. As a result, a trader knows that they will not lose more money in a particular deal or day than they can recoup in another by setting a risk limit equal to the average daily gain over a 30-day period.

Unrealistic Forex Trading Expectations

Much can be written about unreasonable expectations, which can arise from a variety of sources but frequently result in all of the difficulties listed above. Our trading expectations are frequently pushed on the market, but we cannot expect it to perform in accordance with our wishes. Simply said, the market is unconcerned with individual wants, and traders must recognise that the market may be choppy, volatile, and trending all at the same time in short-, medium-, and long-term cycles. There is no tried-and-tested procedure for profitably isolating each step, and assuming there is will lead to frustration and mistakes in judgement.

A trading plan is the best method to avoid unreasonable expectations. If it produces consistent results, stick with it - with FX leverage, even a tiny gain in points can lead to potentially rewarding results. As a trader's risk capital rises, the size of a position may be increased to provide larger returns, or new tactics can be deployed and evaluated.

Intraday traders must take what the market offers at various periods. For example, markets are often more volatile at the start of the trading day, which implies that tactics utilised at the start of the day may not work later in the day. As the day develops, it may grow quieter, and a new tactic may be employed. There may be a pickup in activity at the end, and yet another method can be adopted. If your P&L is positive at the end of the day, even if it does not match your expectations, you will be in a better position to succeed.

Forex day trading strategies

When day trading, you can employ any method that allows you to trade short-term opportunities. But in this article, we'll concentrate on two common strategies: trend trading and mean reversion.

Trend traders attempt to spot important market changes as they occur and then ride the following trend for as long as it lasts. Rather than focusing on fundamentals, trend trading uses technical analysis to identify higher highs and higher lows that signify the start of a new uptrend. Or conversely, lower highs and lower lows signalling the start of a downtrend. 

Trend trading may be effective in both the long and short term. When day trading, you're aiming to profit from price movement in a single day, either by capturing a little chunk of a broader trend or by discovering smaller trends.

Trends may be identified in a variety of ways. For example, you may simply observe price action to identify higher highs and lows, or lower highs and lows, or you could use indicators like trend lines, moving averages, and more.

Reversion to the mean

Mean reversion, on the other hand, is based on the idea that markets have an average level to which they will return following a big price change. If you can identify a market that has had a significant deviation from its mean, you can look to profit by trading its return to normalcy.

Most traders who use this method will compute a mean for their market using technical indicators such as moving averages or Bollinger bands. They'll then watch for when prices break up or down from this level and decide whether to go long or short.

Strategies for Trading Against the Trend

Counter-trend trading is a more complicated trading method that is best suited for experienced traders.
To successfully use counter-trend trading techniques, the trader must not only accurately forecast the conclusion of the present trend but also have the temperament to capitalise on the change in trend.

A counter-trend trader must be able to spot (temporary) shifts in trend direction and anticipate the strength of this movement with high precision.

Trading against the trend necessitates expertise and understanding of price movement and technical analysis tools.

Trading on News

News trading is one of the most classic, short-term trading tactics employed by day traders.

News traders are less concerned with charts and technical analysis. They are waiting for information that they feel will move prices in one direction or the other.

This might be a report providing economic statistics such as unemployment, interest rates, or inflation, or it could just be breaking news or random tweets from significant individuals.

Day traders that do well with news trading typically have a strong awareness of the markets in which they trade.

They produce insights to determine how the news will be perceived by the market in terms of how much its price will be influenced.

They will be aware of many news sources at the same time and will know when to enter the market.

The disadvantage of news trading is that significant price changes are typically infrequent. It is also very difficult to accurately predict the direction of a specific market following any news announcement.

Expectations of such occurrences are frequently reflected in the price in the run-up to the announcement. This fact, in itself, can provide trading opportunities. 
Not sure what the strongest currencies in the world are? Click here.

Risks of forex day trading

Despite having a short trading time horizon, intraday trading and scalping can be viewed as high-risk trading strategies. 

Generally, prices will vary within a narrow range over a short period of time. Because some markets may fluctuate just a few points every session, intraday traders employ high-risk trading tactics to boost their profit margins.

Leverage is used to potentially magnify profits (risk is also increased) generated on (very restricted) price changes.

There's also a tendency for day traders to increase the number of transactions they carry out. Because day traders aim for marginal profits in each trade, they will often open more frequent positions in order to meet their strategy targets.
It is critical to recognise that opportunity and risk are inextricably linked. To recap, the aforementioned techniques are classified as 'high risk,' which indicates that the possibility of losses is rather high, and it is typically not recommended that new traders begin with these strategies.

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Final thoughts

There are five frequent forex day trading blunders that traders might make at any moment. These blunders must be avoided at all costs by designing a trading strategy that accounts for them. Forex trading via Spread Betting is a lucrative opportunity for traders in the United Kingdom as spread betting is tax exempted for UK citizens. 

When it comes to averaging down, traders should avoid adding to holdings and instead sell losses swiftly using a pre-planned exit strategy. Furthermore, traders should sit back and wait for the volatility caused by news announcements to pass. Risk must also be managed at all times, with no single deal or day losing more than what can be readily recovered on another.

Finally, expectations must be handled appropriately by accepting what the market offers on any given day. Traders are more likely to succeed if they grasp the common hazards and how to avoid them.


People also asked

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Most day traders may be somewhat successful trading forex for a few hours each day. Of course, the more time you dedicate to it, the greater the prospective earnings.

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Because forex markets are global, you can trade forex 24 hours a day from Sunday evening to Friday afternoon. You can start trading when the Australian and Asian markets open on Sunday at 5 p.m. ET (US time) and continue trading when other markets open and close until Friday at 4 p.m. ET.

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Stocks provide a wider range of alternatives and risk levels than currency trading, but they require significantly more cash to get started. Forex trading can be carried out 24 hours a day, while stock trading hours are more constrained. You may gain (or lose) money in every market, but the essential thing is to understand your specific market and how to trade properly.

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