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Forex Day Trading Explained

Reading time: 13 minutes

This article will provide an in-depth explanation of day trading, together with intraday trading, as well as outlining why professional traders choose to use day trading strategies, how beginners can learn to day trade in Forex, how often traders should day trade, and much more!

Day Trading In Forex

What is Forex Daytrading?

Forex day trading is the buying and selling of securities, but only within that same trading day. Day trading can take place in any market, but is commonly referred to in the context of either the Forex trading market or the stock trading market. In order to be successful as a Forex day trader, you need to have a decent amount of capital, and a good amount of knowledge of the market behind you. However, having this doesn't necessarily guarantee success. This is especially true when 'invisible hands' are at work, and when the prices fluctuate enormously during intraday Forex trading.

This phenomenon, which is used by Forex day traders, involves leveraging their capital in order to acquire an asset, and then getting rid of it as soon as the asset's price changes in a favourable direction. What day traders usually look for is a stock or a day trading currency which is highly liquid. Curious about the best Forex currency pairs for day trading?

Major currency pairs are often viewed as the best choice, as they have the highest Forex trading volume. During Forex day trading, especially for beginners, it is advised to focus on the EUR/USD currency pair, as this pair usually has the most favourable trading conditions, and its price tends to fluctuate a lot.

Why Do Traders Day Trade?

Forex day trading is usually used in order to eliminate the need to pay fees for keeping a position overnight. These fees are referred to as 'Swaps'. In some cases, the swaps could be positive, and a trading strategy based on acquiring assets with positive swaps is referred to as a 'Carry Trade', however this strategy is beyond the scope of this article. Day traders hold a lot of importance for the Forex market. Day trading Forex is a highly speculative activity, yet it keeps the market running smoothly. Forex day traders are the ones who provide the market with liquidity.

How to Day Trade in Forex

Day trading for most people is not as it is portrayed in the media. It is not the get-rich-quick scheme it is often shown to be. The guide to profitable Forex day trading could be considered controversial, as it is something that everyone has an opinion about. What everyone agrees on however, is that it is a very risky activity and should only be considered if one has an in-depth knowledge of the market, and a clear understanding of those risks. A successful day trader or a professional day trader will have the following qualities:

Capital requirement

A large amount of capital at the trader's disposal with an adequate risk/reward ratio is definitely needed. Even though day traders are looking for more return compared to the average sizes that traders achieve, it is still recommended to keep the trade size reasonably low.

Market knowledge

A complete knowledge of how the market works and what the main determining factors of market moves are is vital. A successful day trader needs to keep an eye on both fundamental and technical indicators.

Extraordinary discipline

In every part of life, discipline is important, but neglecting discipline in day trading may potentially result in huge losses. Success without discipline is practically impossible. You need to be able to monitor prices for extended periods of time without making any rash trading decisions. This is hard and requires lots of discipline. Sometimes seeing profitable market moves that you have predicted but did not execute is painful, yet it is better to waste an opportunity, than to guarantee a loss.

Strategy

One has to adopt one or many strategies in order to minimise losses and maximise profits. As market conditions vary from day to day, so should a day trader's strategy. A successful day trader has to come up with a new strategy almost every other day, or at least adjust their existing strategy to the new market conditions. In order to day trade Forex successfully, a creative mind is needed.

How To Day Trade in Forex for Beginners

The first step in becoming a successful day trader in the Forex market is simple, and it is not dissimilar to other trading strategies. As a beginner, it is advised to practice day trading with virtual money on a demo account, in order to get a feel for how Forex day trading works before committing to real money Forex trading. This may sound too simple, but it is vital.

Another important point for day trading is to choose a good Forex broker. The main attribute here is the spread and the commissions you have to pay. As a rule, a day trader executes a few transactions every day, and the cheaper this is for you, the more benefits you can get from day trading. Before choosing a brokerage firm, research their offers and track all of the possible expenses associated with day trading.

You may also request a bonus to get the best deal for your deposit (Applicable only for clients who are categorised as a "Professional client"). Admiral Markets provides market leading spreads together with low commissions. All of the trading accounts available with Admiral Markets are suitable for day trading, and arguably provide a high-quality experience, for beginner traders and professionals alike.

The possibility of losing your investment is high, so it is advisable to only use risk capital (money that you can afford to lose) when engaging in Forex trading. The Forex market offers high levels of leverage to traders. Leverage has both the possibility of high returns and high losses, and should only be used with discretion. Be disciplined and don't be tempted to overtrade.

Becoming a successful Forex trader requires a good understanding of charts and how they work. You must also define your trading strategies and stick to them. Like any other investment activity, trading in Forex involves a lot of risks, and proper money management principles should be employed when undertaking it. Although anyone can trade in Forex, it is definitely not for everyone. You need to have an appetite for, and an understanding of the risks and technicalities involved.

Forex Demo Trading Account

How Can You Learn About Forex Daytrading?

The best and the most effective way to learn about Forex trading is to practice it on a daily basis. The first step is of course to pick up the most suitable trading strategy for you. The most common strategies for Forex day trading are scalping and breakout trading. While the first strategy involves a lot of positions opened on 1 minute charts, it mainly concentrates on getting less than 10 pips of gain per trade, while keeping your stop-losses at nearly the same level. If you do not know what a 'pip' is, here is a brief definition:

Pip (Percentage in Points): This is the smallest change in price for any currency pair. Except for the Japanese yen and a few other currencies. The pairs are mostly shown with five decimal places. The fourth decimal point in a price quote is called a 'pip', while the fifth is referred to as a 'nano pip'.

  • If, for example, the GBP/USD currency pair changes from 1.4558 to 1.4559, the difference would be (1.4559-1.4558) =0.0001. The price would be said to have increased by 1 pips.

This is quite a nice strategy for traders that have a lot of time at their disposal. Trading breakouts can be a great day trading strategy too. With this strategy you are patiently waiting for big market moves, usually caused by the various changes in the relevant country's economies. Such changes are delivered either unexpectedly or via expected news releases. During breakout trading, a trader opens a position in the forecasted direction, and waits for the currency pair to escalate (or slump) by a large amount of pips.

This is an efficient trading strategy for those who keep up with economic and political events, but who cannot devote enough attention to the markets on an hourly basis. A trader will generally execute far fewer trades with the breakout strategy, especially when compared to a Forex scalping strategy. Nevertheless, this is a great strategy to consider and try out.

Clear Advantage of Day Trading

With the expansion of retail brokers (which, of course, should always be regulated), the population size of intraday traders operating in a specific intraday time frame (M1-H1) determines the profitability of the trader trading this time frame. As the number of traders trading certain intraday time frames increases, conversely, the competition also increases, and the markets may become more efficient and easier to trade. For that reason, the correlation matrix (which is available through the MetaTrader Supreme Edition plugin) is of great help, as it provides day traders with a specific currency strength gauge.

Intraday Trading Defined

Intraday Trading - EURUSD

Source: Average True Range (ATR) indicator applied on the EUR/USD H1 time frame - Admiral Markets MT4 - Data Range: 6 Jul, 2017 - Jul 25, 2017

Intraday trading deals with buying and selling pairs on the same day, usually during the main market hours and sessions. Major market sessions include London, New York, and Tokyo. Intraday trading is planned strategically, whereby profits are booked for the day. There are five different types of intraday trading:

  1. Positional trades
  2. Scalps
  3. Scalp swings
  4. Breakouts
  5. Counter trades

Positional trades are usually made during the same day. Traders want to profit on intraday price action, using the ATR indicator and pivot points. Profits usually go with 50-80% of the pair's average ATR (14), and the suggested risk is 0.5-1% per trade.

Scalping is a higher frequency form of trading, wherein traders focus on lower time frames, trying to profit from the market's volatility. Very often, traders make 15-30 scalps per day, whereas the profit is usually between 5-15 pips. The risk with scalping is usually 2-5% per trade, but bear in mind that if you cross 5% of your risk threshold, your account will be in a danger zone.

Scalp swing is a term sometimes used to describe the type of trading that exists somewhere in between scalping and intraday positioning. Trades usually last from 5 minutes to 1 hour, and profits are approximately 20% of the Average True Range – ATR (14).

Breakout trading refers to heavy and volatile price movement through support and resistance levels. Breakout trading is also a form of scalping, when trades are typically closed randomly or around the next pivot point. The previous day's high and low are two very important pivot points, for this is the definitive point wherein buyers or sellers come in the day before. Watch the market to either test and reverse off these points, or push through and show signs of continuation.

Counter trend trading refers to a type of reversal trading of the important historical/now moment support or resistance level, and some professional FX traders trade it when the price overshots the ATR (14) – going considerably below or above the projected levels. It can also be a form of EOD (End Of Day) trading. Profits are usually taken close to the Fibonacci retracement levels, as counter trending always starts with a retracement first. So, by using different intraday trading approaches, you will have a plethora of tools to use and profit from the market movement.

Volatility Is Your Friend

There is nothing wrong with attempting intraday trading. The only thing you need to keep in mind is to never risk more than 2% of your trading capital on any trade. Traders can avoid significant losses in their trading if they trade with proper risk management in place. When day trading is backed by a trend and high volatility, you won't be late to discover trading opportunities and book your profits thereafter.

How Often Should You Day Trade?

First, you need to have a clear trading plan. Trade by what your strategy tells you. Here are some useful rules that you can follow to assist you with your trading:

  • Monday open is not good for trading. A lack of liquidity can lead to sharp movements, without any logic.
  • London open is good to trade. That one trade can potentially make your day.
  • Breakout trading is applied to day trading when a new high or low has occurred.
  • Buy the first pullback after a new high. Sell the first rally after a new low.
  • The last hour of trading (usually in London sessions) might often tell the truth about how strong a trend truly is. Smart money usually shows its face during the last hour, continuing to mark positions in its favour. As long as a market has consecutive strong closes, look for the trend to continue. The uptrend is most likely to end when there is a morning rally first, followed by a weak close, and vice versa for a short trend.
  • Don't trade on bank holidays or on late Fridays.
  • Don't trade when the market is ranging 20-30 pips during the day.
  • Sometimes not having a position in the market equals to having a profitable position.
  • The first hour's range should establish the framework for the rest of the trading day.

How often you should day trade is also determined by your trading strategy. Let's say that your strategy makes 60% winning trades. If you skip day trading too many times, you are more likely to skip winning trades (60%) than losing trades (40%). Always try to find the balance, and the rules above should help you out accordingly!

Conclusion

Some may argue that Forex day trading is a field that should be left for the people that have great experience, and who can get fully immersed in the activity. Others say that day trading is the best way to make money in the least possible time, and therefore is the best type of trading as a result of this. Whatever the case may be, day trading is the field in which both pros and cons occur. While this type of trading is gaining popularity with each passing day, it is only effective for the people who are eager to commit a lot in order to succeed at it.

Most retail Forex traders are in fact day traders, and such traders do tend to generate the highest volumes. Becoming a day trader is an extensive process and once you commit to it, you will have to go through a lot of trial and error. Your discipline, stress resistance, and your confidence in your skills will be put to the test. If you are ready and understand the risks, why not apply for a live account with Admiral Markets and see what day trading is all about?

MetaTrader 4 Trading Platform

This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.

Risk Warning

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 83% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.