Day Trading

What is day trading and what does a forex day trader do?

Day trading is well-suited to retail forex traders that have the time and inclination to closely monitor their open positions in the market over a single day. Forex day traders typically open a position at the start of the day, based on various technical and fundamental indicators, and close their position before the end of the day for a profit or loss.

Contrary to popular belief, day trading the forex markets is not the same as scalping forex currency pairs. While forex scalpers will be prepared to place multiple short-term trades in the markets in a single day, day traders typically focus on one or two positions only per day.

But what is the key factor to keep in mind if wanting to learn day trading? In order for day traders to profit during the course of a trading session, volatility is a must. Hence why the forex markets lend themselves best to day trading. The global foreign exchange market is the most liquid of all the financial markets, including the stock markets.

It’s not as easy as opening any position and closing your trade for a profit. There are many forex trading novices that have tried to trade the markets blindly to no avail. That’s why it’s important to learn the characteristics of the forex market and develop sustainable, long-term forex day trading strategies instead.

Can anyone become a day trader?

The main appeal of day trading the forex markets is that anyone with the discipline, determination and financial wherewithal to invest can do so and the same goes for the willingness to learn day trading . Some forex brokers allow novice forex traders to deposit just £50-£100 into their trading accounts to get started. Some brokers may even reward new customers with a welcome bonus to boost the bankroll.

It’s also possible to trade the forex markets with minimal starting capital because some forex brokers offer leverage. This means that day traders can open positions worth several times their real-money deposit. By trading in this manner, forex day traders can maximise profitable positions in the market. It’s also important to note that if trades go wrong, losses are equally magnified.

As with most things in life, there is more than one way to do it. It’s the same when it comes to trading the forex markets. Given the unrivalled liquidity in the forex market, there is plenty of money flowing through the markets every second of every trading day.

It also means there are forex trading strategies to suit all kinds of trading personalities, including contrarians and those who prefer to follow the crowd.

Trend trading

Day traders that prefer to delve deep into the data and technical trading tools available in industry leading platforms like MetaTrader 4 and 5 will often use trend trading strategies. Technical forex traders will plot trendlines to ascertain emerging uptrends and downtrends in the markets.

The easiest way for technical forex traders to plot trendlines is with candlestick charts. They can appear complex on the first instance, but once you get the hang of them, they are invaluable to plot the points of significant support and resistance for specific forex pairs. It’s also possible to demonstrate when the momentum and weight of money is for or against a particular currency pair, which is known as a bull or bear market.

Countertrend trading

We’ve already mentioned that some forex traders consider themselves to be contrarians in the market. These traders typically focus on countertrend trading strategies. Countertrend forex trading involves trading against the recent momentum of the market.

Contrarian traders look to enter the market when the value of a currency pair has “overheated” i.e. worth more than its realistic value. Countertrend traders will enter the market in the hope of a market correction, allowing them to close their positions for a profit.

Range trading

One of the most skilled forex trading strategies, range traders establish the points of support and resistance in a forex market and are happy to go long and short on currency pairs between these parameters. Given that the value of all major, minor and exotic forex pairs is powered by the forces of supply and demand, range traders rely on support and resistance levels to find out where the market drivers lie on trading charts.

Those skilled enough to identify trading ranges are then comfortable enough to open and close positions within these parameters, safe in the knowledge that market drivers will maintain the support and resistance levels. Of course, there will be fundamental and technical reasons why some support and resistance levels are broken. In which case forex range traders must deploy risk management tools like stop loss orders to protect their bankroll.

There is lots to think about before you create a trading account with your chosen forex broker and make a real-money deposit. First and foremost, you should weigh up the pros and cons of day trading the forex markets to make sure the advantages outweigh the risks involved.

Ultimately, you will want to know if forex day trading is profitable. The reality is that it can be profitable, so long as you commit to learning your craft and avoid rushing into the markets too soon.

The advantages of forex day trading

First and foremost, day traders get instant results from trading. Given that no position in the forex markets is left open overnight, you will always know whether you’ve made a profit or loss at the end of every day.

We’ve already mentioned the lack of overnight risk and it’s a good advantage to emphasise. Many traders will have seen profitable positions from the day before eradicated when the markets move against them the following morning.

Forex trading within a single trading session leaves very little room for overthinking. Day traders have to make split second decisions to open and close positions in the market. There is little time to suffer from ‘analysis paralysis’ which can cause you to close potentially profitable positions and leave potentially damaging positions open.

The risks of forex day trading

Day trading is almost a full-time commitment. It requires several hours of your time daily. At the lowest end you will be day trading for between 10-15 hours a week and those taking it most seriously can spend upwards of 40 hours a week in the forex markets. If you don’t have the time, it can be hard to commit to day trading forex.

A rookie error many forex day traders make is to overtrade. They feel it’s essential to have an open position in the market. It’s this impulsivity that can quickly eradicate profits by entering positions that don’t fit your trading strategies.

Similar to overtrading, beginner forex traders can often struggle to accept losses as part and parcel of the process. In doing so, they embark on so-called revenge trades to try and win back losses. Day traders take a long-term view of their gains. Although they might not make a profit on day one, if they have made a profit by the end of the month or year, that’s all that matters.

Aside from developing the right mentality for forex trading daily, it’s equally important to choose a forex broker you can trust. At FxForex.com, we’ve invested time in reviewing the leading forex brokers, so you don’t have to. We’ve detailed all the pros and cons of each broker to help you go into your forex day trading with your eyes wide open.

It’s always important to choose a forex broker that’s regulated and licensed, ensuring much-needed protection for your trading funds.

Making a forex day trading plan

As we have already alluded to, forex day trading is as much a psychological battle as it is a technical battle. The most profitable forex day traders are those that have the discipline to stick to their trading plans and avoid bad habits creeping in.

It’s important to define parameters, indicators or trading signals that govern your forex trading decisions – and follow them to the letter. Don’t feel like your trading plan is set in stone. Re-evaluate it periodically to ensure day trading stocks fit your trading style.

Keep up-to-date on the latest news and economic reports

If you are a forex day trader that wants to plan trades based on macro fundamentals, it’s vital that you have easy access to the latest news feeds. Some forex trading platforms will embed news feeds into their software, while other day traders will prefer to subscribe to dedicated business news networks to get their news fastest and digest how any updates will affect market sentiment.

Within the widely supported MetaTrader 4 trading platform, it’s possible to set alerts and financial news updates. You can also set alerts when certain trading conditions occur, such as hitting predefined Bid or Ask prices.

Create a new live trading account with your chosen forex broker or practice risk-free using your broker’s demo accounts to discover whether forex day trading can work for you.