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Forex Day Trading Systems, Strategies and Tips

Reading time: 18 minutes

This article will provide traders with definitions of day trading and intraday trading, it will explore different day trading systems, how traders make profits with day trading systems, some suggestions for the best Forex day trading systems, and some useful tips for you to use in your daily trading.

Day Trading, Strategies, Systems & Tips For Forex

Intra-day trading is a set of Forex day trading strategies that demands professional traders to open and close trades on the same day. Considering that markets can only move so far within one day, intra-day traders use relatively riskier trading techniques to accumulate their desired profits.

Day trading Forex strategies are more action packed and require traders to be present at the trading station throughout the session. It's widely accepted that the narrower a time frame a trader works within, the more risk they are likely to be exposed to. That's why day trading can be described as one of the riskiest approaches to the currency markets.

It's not really the different Forex trading strategies that day traders have to use that increases the risk. In fact, the overall logic is the same for almost any interval out there. Rather, it is that Forex day trading rules tend to be more harsh and unforgiving to those who don't follow them.

Mistakes are more costly, and they have the potential to occur more frequently, since the act of trading itself is of a higher frequency. If you're a beginner trader, why not learn to trade step-by-step with our educational course 'Forex 101' ? - featuring key insights from professional industry experts.

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Strategies

The two factors that no intra-day trader can do without – irrelevant of the Forex day trading strategy they intend to use – are volatility and liquidity. It might seem like a good thing for any kind of trader, but short-term traders are far more dependent on them. Volatility is the magnitude of market movements. When trading short-term, solid volatility is a must.

This basically reduces the selection of instruments to the major currency pairs and a few cross pairs, depending on the sessions. Speaking of sessions, since volatility is session dependant, knowing when to trade is as important as knowing what to trade. Liquidity is equally important. Intra-day trading is very precise. A long-term trader can afford to throw in 10 pips here and cut 10 pips there. A short-term trader can't, because 10 pips could be the whole profit projected for a trade.

This precision in Forex comes from the trader's skill of course, but rich liquidity is important too. If there is no liquidity, the orders will simply not close at the desired price, no matter how good the trader is. This once again limits intraday traders to a particular set of trading instruments and trading times.

Scalping

Scalping is a day trading Forex strategy that aims to achieve many small profits based on the minimal price changes that may occur. Scalpers go for quantity trades, opening almost 'on a hunch', because there is no other way to navigate through the market noise. Scalping can be exciting and at the same time very risky. Scalpers must achieve high trading probability to balance out the low risk to reward ratio. Probably the hardest part of scalping is closing losing trades in time. A scalper simply can't afford to wait for the market to come back.

If you are aiming to become a scalper, consider developing a sixth market sense – look for volatile instruments, good liquidity, and perfect execution speed. If mastered, scalping is potentially the most profitable strategy in any financial market. It is only the adjacent risks that prevent it from being the best Forex day trading strategy.

Reverse Trading

Reverse trading

Source: Scholastic example of reverse trading - USD/JPY Chart

Reverse trading is also known as pull back trading, counter trend trading, and fading. The risk comes from the basic principle of trading against the trend. A reverse trader has to be able to identify potential pullbacks with a high probability, as well as to be able to predict their strength. Although not impossible, it does require a lot of market knowledge and practice. The 'Daily Pivots' strategy can be considered a special case of the reverse trading strategy, as it specialises in trading the daily low and daily high pullbacks and reverses.

Momentum Trading

Momentum trading

Source: Multiple Momentum line breaks - GBP/USD Hourly Chart

This is a pretty simple day trading Forex strategy that specialises in searching for strong price moves paired with high volumes and trading in the direction of the move. A high level of trading discipline is required in momentum trading, to be able to wait for the best opportunity to enter a position, and maintain solid control to keep focus and spot the exit signal.

Day trading is often advertised as the quickest way to make a return on your investment in Forex trading. However, what the the adverts fail to mention is that it's the most difficult strategy to master. As a result, many beginner traders try and fail. Through years of learning and gaining experience, a professional trader may develop a personal strategy for Forex day trading.

Forex Day Trading Systems

A Background of the Forex Day Trading System

Forex day trading is strictly carried out within one day, and trades are always closed before the market closes on that same day. Those who trade in this way are referred to as day traders. A Forex day trading system is usually comprised of a set of technical signals, which affect the decisions made by the trader concerning buying or selling on each of their daily sessions. The system can help traders to navigate the market much more efficiently and confidently, with the aim of allowing them to gain more profit.

In the past, the activity of Forex day trading was limited to financial organisations and professional speculators. The majority of day traders were the employees of banks or investment firms, who specialised in equity investment and fund management. However, with the introduction of electronic trading and margin trading systems, the day trading system has now gained popularity amongst 'at-home traders'.

With easy access to Forex trading, now almost anyone can trade Forex from the comfort of their own homes. People choose to go into day trading for various reasons. However, a factor which is likely to have made this activity much more popular over recent years is the fact that day traders do not incur the 'Swap', which is a fee that is incurred when a position is kept open overnight.

How Do Forex Day Traders Make Profit?

Day traders leverage large sums of capital to make profits by benefiting from small price changes among the highly liquid indexes, stocks, or currencies. In other words, these traders are not looking for large dips and peaks in the prices. Instead, they are happy with small, moderate movements, but their trade sizes are bigger than the ones owned by traders that invest over longer periods. As a day trader, the main aim is to generate a substantial amount of pips within a particular day.

Ideally, you should generate returns on both the highs and lows of the assets. The entries in the different Forex day trading systems make use of similar kinds of tools which are utilised in normal trading - the only difference is in the timing and approach. With day trading, you generally expect to make less profit per trade, yet you expect to achieve far more trades.

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The Best Forex Day Trading Systems

There are many different Forex day trading systems - it is important not to confuse them with trading strategies. The main difference between a system and a strategy is that a system mainly defines a style of a trading, while a strategy is more descriptive and provides more detailed information - namely entry and exit points, indicators and time-frames. A brief overview of some of the most commonly used systems is given below (Please note: scalping, fading, and momentum are also trading strategies as well):

  • Scalping: In this system, the buying or selling takes place instantly after the trade achieves profitability. In this trading type, the target is to attain profitability when you are up by just a few pips. You can expect to trade a lot and generate quite a large volume. However, the income per trade is rather small.
  • Fading: This system involves the shorting of stocks, an index or a currency pair, immediately after upward moves. In this form of day trading, the price target is set when buyers start to step in again. In other words, you are aiming to make pips on the market moves that try to restore the past price of an asset.
  • Daily Pivots: In this system, the profit is gained through the volatility of the daily prices of assets. The buying or selling takes place during the low period of the day, and closing of the trade occurs at the high period of the day. The price target here has a similar pattern as mentioned above.
  • Momentum: In this type of Forex day trading system, trading is usually performed on news releases, or by locating the strong moves which are trending, and which are supported by high volumes. The price target in this strategy is when the volume starts to diminish, and the appearance of bearish candles takes place. You are generally looking into acquiring an asset a few hours before news is released, and then subsequently getting rid of it after the market has moved enough into your direction.


What is the Best Forex Day Trading System?

As you may have gathered by now, dealing with a day trading system can be quite a challenge. There is a lot to learn and prepare for that many of us simply don't have the time, experience, or knowledge to do. Therefore, when you are starting out, it's useful to know what the best trading system is going to be. While it's always nice to have a Forex trading strategy to work from, you need to have something beyond that, to help you actually make the grade and start earning some capital.

Because the best Forex trading system that will be suited to you will fit your own market and needs, finding the ideal one can be hard work. However, the best thing to do is to remember that the majority of Forex trading systems are built around various strategies and tend to run with their own foundations, fundamental aspects, and characteristics.

The community of traders using day trading systems is loaded with so many different people, with varying setups, therefore finding the best day trading system is pretty hard – and it depends on so many little factors that there is simply no blanket answer to provide to you. However, you can feel safe in the knowledge that finding the right trading system will typically come from conducting your own research.

Being able to dictate what the best FX day trading system is for you also comes from your own experience – what do you currently know about the actual regime? Do you need something that can help you get into the system from the very start? Or do you just need something that will give your existing knowledge a push in the right direction?

Whatever you pick, you need to start looking at the FX trading systems that are out there – some of them will make outrageous claims that you simply cannot trust, but it should be easy enough to start making the right choices and decisions based on how realistic they sound. Remember, the program has to sound authentic – if it's not built around actionable information, and doesn't provide you with the details that you can actually benefit from in the long term, move onto the next one.

Be prepared to look around and find the right balance for your individual needs – what you know, what you can afford, and what you are willing to invest will all dictate what the top trading systems are for you. In other words, the best system for trading Forex is the most suitable one.

When it comes to trading short-term, you would need to it to be convenient, and you would need to feel confident using it, as this is an activity you would be performing for a few hours almost every day. It is suggested that you try out all of the aforementioned systems on a demo trading account first, before engaging in live account trading. This is applicable even for experienced traders that are considering switching from one system to another.


Forex Day Trading Tips

The practice of day trading is the least popular among professional traders, and the most popular among rookie traders. If you are a rookie, here is the most important Forex day trading tip of all: get some experience with long-term trading. First try to prove yourself by being consistently profitable with a live account for a relatively long period of time, using long-term trading strategies.

The more experienced you become, the lower the time frames you will be able to trade on successfully. If however, you still decide to or even unconsciously slip into day trading, here are a few Forex day trading tips that might help you out. Day trading for beginners usually starts with research. They tend to look out for different ways to improve their trading, and dedicate a vast amount of time to searching for the right starting point.

FX beginner traders are always searching for the perfect indicator or trading system that provides setups with a 100% success rate. Even some experienced professional traders do it from time to time. Unfortunately, perfect systems don't exist, and the only real 'Holy Grail' is proper money management.

The best day trading software for beginners is arguably the MetaTrader (MT4) trading platform, as it offers trading with micro-lots. Here are a few tips if you are trading with Admiral Markets:

  • Open a demo account using the MT4 day trading platform.
  • Choose one of the strategies shown in the webinars section of the Admiral Markets website.
  • Trade the chosen system on a demo account until you are consistently profitable.
  • Try to trade the demo account exactly like you would trade with a live account.
  • The habits you develop in the demo should subconsciously carry over into your live trading.

Develop a strict trading plan and follow it strictly to manage your risks properly. Smart traders exercise risk management strategies within their trading, in order to minimise and manage the risks effectively. As mentioned above, day trading Forex is riskier than long-term trading, mostly because of the quicker pace and higher frequency of trades. Day traders tend to experience more pressure and have to be able to make decisions quickly, and accept full responsibility for the results.

A Forex trading plan is an absolute must for a day trader. Keep an eye out for averaging down. Simply put, averaging down refers to keeping a losing trade open for too long. To avoid it, cut losing trades in accordance with pre-planned exit strategies. Remember, averaging down when day trading Forex eats up not only your profits, but also your trading time.

What about a stop-loss? There are two kinds a day trader must consider using.

A physical stop-loss order is placed at price level in accordance with the risk tolerance, which you should know from your trading plan. Approximately 1-2% is a good level for this. Basically, this is the most you can afford to lose in one trade. The other kind is a mental stop-loss – and this one is enforced by the trader, when they get the feeling that something is going wrong.

Have you ever entered a trade and watched the market make an unexpected turn, and then suddenly realised that the trade is no good and it's time cash out? That's a mental stop. The trick is not confusing it with just panic. That's why both physical and mental stops need to be thought through before entering a trade, and not after.

Retail day traders, specifically those who manage their own rather than somebody else's money, have another rule that their stop-losses must comply to. They set a maximum loss per day that they can afford to withstand financially and mentally. If that point is ever reached, they proceed to remove themselves from the market for the day altogether. They know that no good comes from emotional trading. Inexperienced traders, in contrast, don't know when to get out.

They often feel compelled to make up losses before the day is over, which leads to 'revenge trading', which never ends well for them. Exceptions to all these rules are possible, but must be managed with specific care, and the results must be accepted with full responsibility. Good results must not serve to reinforce regular exceptions. Bad results should be considered as a good reminder as to why these rules exist.

The trend might be able to sustain itself longer than you can remain liquid. Let's consider volatility spikes mixed in with drops in liquidity. When news releases are due, traders should refrain from trading altogether, unless these are the specific market conditions that their trading strategy requires.

Do not trade around the major news releases as the results could be disastrous. The bottom line is this – even if you somehow manage to know what the news will be, there is no way to predict how the market is going to react in the first couple of hours. Bullish news can cause a bearish market jerk and vice versa.

Eventually, the market will return to its trend, but until it does, the environment isn't safe enough to trade. Determining your perfect day trading system for currencies is a hard task. It takes a lot of trial and error, yet it can pay back enormously too. Once you have determined a perfect system, it is then time to select the most appropriate strategy for it.

A strategy will provide you with more detailed information for executing your day trades, while relying on the defined technical indicators and objects. What is also recommended is to try implementing a few systems, and compare which one is the most interesting and comfortable for you. Don't run for profits straight away, the main idea when selecting a system is to be confident in what you are doing.

Also keep in mind that a trader might not be able to protect their account with stop orders around the news. If there is no liquidity on the market, the order won't close. It will continue sleeping until the first available counterparty is willing to trade. So basically, it is only at their price that you will trade. However, the best day trading strategy in Forex is always to trade at your price.

We hope that you have enjoyed reading this article, and have come away with a better understanding of Forex day trading systems and strategies. If you would like to learn more about day trading and trading Forex in general, make sure to read the following articles listed below:

When is the Best Time of Day to Trade Forex?

Best Days of the Week to Trade Forex

How Does the Forex Market Trade 24 Hours a Day?

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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.

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