Forex Day Trading – Everything You Need To Know!

There are many different ways to trade on the foreign exchange (Forex) market, from using prop firms for financial support to working with a smaller budget; pairing currencies you are familiar with to taking a bigger risk with those you do not know as well.

You also need to choose between long-term investing, waiting to see how your purchase pans out and deciding when to sell for the biggest gains, and day trading, which is much faster-paced.

What is long-term trading?

This requires the trader to use a lot of analytical and risk management knowledge to ‘play’ the market in order to achieve gains. For instance, if traders can start to see patterns emerging, they can predict when they should buy more or sell.

Keeping trades open for long periods, including several years, gives traders the opportunity to weather certain difficult times, and wait until things pick up again.

It is also best suited to traders that are more risk averse or find it hard to make decisions, as they do not have to act quickly or under highly pressurised situations. Instead, they are more able to take their time before deciding what course of action to take.

However, many people get into the industry because they get a buzz off making a trade. Therefore, sitting on one for several weeks, months or even years will not give them the excitement they were hoping for.

What’s more, being successful at long-term trading requires a clear strategy and conducting lots of research before cementing your plan. This is because so much rides on the tactic, so a lot of analysis and evaluation needs to be conducted.

Those who are more impulsive, love the thrill of trading, and do not want to spend hours thoroughly researching each trade might be better suited to day trading.

What is day trading?

As the name suggests, this involves buying and selling multiple currency pairs within one day.

This means traders can take advantage of small fluctuations in the market, making relatively small amounts of profit with each trade.

Though they will not make big wins with their trades, as they are doing it several times a day, these add up and can become highly profitable.

Therefore, it does not require long-term strategies and much consideration about risk management, as it is not regarded as investing. Subsequently, it does not need traders to be on the lookout for trends.

Instead, it appeals to those who like a fast-paced environment, can make quick decisions, and are attracted to the pressurised, thrilling nature of trading.

Those who do day trading have to give all their time and focus to the job, as they may need to make several trades in a day. Consequently, day trading tends to be a career move, as they have to show their dedication in order to act as quickly as the market changes.

It also requires traders to be skillful, as they have to analyse the market very quickly. Additionally, they need to be confident and have a good understanding of Forex, as they have to make quick decisions multiple times a day.

The Forex market is particularly attractive to day traders, as there are countless currency pairs they could trade with. Therefore, currencies can be easily bought and sold, and day trading avoids them fluctuating dramatically overnight.

Things to understand when day trading

As day trading can be so highly-pressurised, you should make sure you do your homework before you get going.

Although you do not need to focus on things that will affect long-term market movements, you need to understand what might make currencies fluctuate in value throughout the day.

For instance, you need to be aware of market volatility. This is how quickly the value of a currency moves. If it is highly volatile, the price is likely to change a lot during the day, which can be good news for traders if they are keen to take risks.

It is also wise to be aware of how trading volume, which is how many times an asset is bought or sold during a set timeframe, can affect the market. If there is a high trading volume and it is being traded a lot, this indicates it is a particularly interesting asset to traders.

The liquidity of a market is also important to understand, as this is the ease and speed at which trades can be entered or exited. Day traders look for high liquidity, as this allows them to conduct several trades in one day.

What are day trading strategies?

Although day Forex traders do not use the same long-term game plans as investors who are happy to wait a while for their assets to pick up in price, there are still some strategies they can employ.

These are specific to day traders, which help them keep their focus even in hectic working environments.

The trading styles include the following:

1) Trend trading

Trend trading involves looking at the direction the asset price is moving in, and can work for both short-term and long-term traders.

However, day traders need to assess how they think the trend will play out in a day, as opposed to over a lengthy amount of time. This means traders might act on a small part of a larger trend or on mini trends.

Traders could use trend lines or moving averages, or simply try to predict whether the growth line will continue to increase or if the price will carry on declining. If the trend is going up, this is a good time to buy.

However, it is falling, it is wise to sell and take the short position.

Traders who are good at this type of strategy tend to have nerves of steel, as they have to make educated guesses about where they think the trend is going.

2) Scalping

Scalping is ideal for traders who want to make small wins multiple times a day, as some trades can open and close within just a few seconds.

It works by exiting as soon as the market improves even just a tiny bit, so you can cash in on the profit. Similarly, as soon as there is a marginal drop in the asset value, you sell to minimise the size of the loss.

Therefore, you take small but several profits a day, helping to build a big trading account.

Traders with this form of strategy close up by the end of the day, as they do not want overnight fluctuations in the market to affect their profits, no matter how small.

It is important to have a strict exit strategy with scalping, as you need to leave as soon as small changes occur. This can also be very time-consuming and requires the trader to be incredibly disciplined, as they have to act quickly and in adherence to their plan.

If they do not respond promptly, a substantial loss could wipe out any profits they have made that day or even over a few days, so it involves not being distracted by anything during a trading day.

3) Swing trading

Another day trading strategy that is worth considering is swing trading. With this gameplan, traders are interested in the small reversals that are made throughout a trend.

Trades never go in a linear direction, and typically swing back and forth in a short time frame.

This means they need to act as soon as they spot these reversals to take advantage of them.

For instance, they might buy when an asset is following an upward trend, but sell as soon as this begins to swing downwards before improving again.

4) Mean reversion

Similar to this, the mean reversion strategy works on the theory that prices tend to move back to their mean value.

Therefore, traders look for assets that have moved away from their historical average, knowing they will naturally return to this.

5) Money flows

This strategy makes use of volume information, as well as its price. It looks at the number of trades being made on an asset over a couple of days to determine whether it has been oversold or overbought.

A reading above 80 suggests it has been overbought and, therefore, it is likely many traders will sell it shortly. Therefore, it is a good time to sell if it has been overbought the previous day, before the volume, and subsequently, the price falls.

However, if it has a reading of 20 or below, this indicates it has been oversold, and now is ideal to buy.

Starting as a day trader

Once you have decided what strategy to adopt and what currencies you want to work with, you can begin your new career as a day Forex trader.

It is important to keep in mind what you want to achieve and remember that it could take time before you start earning a tidy profit.

You should also stay up to date with market or economic trends and try to learn how quickly you need to enter and exit trades to stay competitive with other traders.

However, after a few trades you will soon get the swing of things, and could find the past-faced and adrenaline-fuelled environment of day trading is just for you.

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