What Is Forex Day Trading

Forex Day Trading Explained

What is a Forex Day Trading Strategy?

Forex day trading is a type of short-term trading where traders open positions and close them all within the same day. They may make one or several trades within a day, but the idea to get in and get out of the market before the end of the day. Forex day trading works best with currency pairs with high liquidity and volatility. Trading styles vary from person to person. Forex day trading is not a good fit for everyone.

What are the Advantages of Forex Day Trading?

Forex day trading requires almost constant daily attention to the Forex market to catch trading opportunities. Since day trading takes place on the short term timeframes like the 15-minute chart, or even 5-minute and 1-minute charts, taking your eyes off the market for even a few minutes can be costly. You may miss entry/exit signals if not always paying attention.

This contrasts with swing trading where traders can be more flexible about when they trade and how often. Long-term traders often hold positions for weeks, months or years, requiring very little continuous attention to the market once their analysis has been made. Closing out trades before the end of the day can help to eliminate overnight and weekend risk for Forex day traders.

The temperament for the successful Forex day trader is often headstrong and confident. It requires discipline to apply such intense focus to the market for so long. If you get bored easily while waiting to trade, Forex day trading might be for you. One advantage of it is that you do not have to wait around for buying opportunities to materialize for hours or days. You can find something to trade almost every day and have the results by the end of the day.

What are the Disadvantages of Forex Day Trading?

Since day traders make more trades than swing traders or long-term traders, they end up paying more in fees and commissions. Since day traders make their profits on a higher number of trades, their ratio of profits to fees tends to be lower. Since day traders spend most of the day studying and analyzing the market, it is not a trading style suitable for someone with a full-time job.

The shorter timeframes that day traders restrict themselves limits their profit potential compared to other trading styles. Closing your positions at the end of the day puts an end to a trade that could have continued to deliver profits.

With the smaller profits that come with day trading, there is a tendency to abuse leverage in order to get as much bang for your buck. But just as leverage magnifies your potential profits, it also multiples your potential losses.

Another concern with Forex day trading is that the short timeframes upon which it is done exposes traders to a lot of market noise. Just as with sound, noise in markets is undesirable, meaningless jabber. When focused on a market at such a small scale, it can become difficult to discern meaningless noise from significant price action.

Forex Day Trading
Forex Day Trading

Forex Day Trading Strategies

Since volatility can lead to large price moves in a short amount of time, news trading is a popular Forex day trading strategy. Staying on top of interest rate changes, Consumer Sentiment, Consumer Price Index (CPI) and other reports can provide a powerful fundamental boost to short-term trading.

Just as in long-term trading styles, trend trading is also a popular day trading strategy. Just as longer-term traders identify a larger trend and look to buy in the dips on the shorter-term chart, day traders do this as well to take advantage of shorter-term moves within long-term trends.

Scalping is an advanced, and some might say extreme, form of day trading in which positions are held for only a few seconds or minutes. The idea is to profit from extremely small moves in the market. Having a forex broker with excellent execution is a must for any successful scalper so as to close trades quickly with a minimum of slippage. Currency pairs with high liquidity and volatility are also helpful in order to capture these small jumps in price. Scalping has the potential to be very profitable, but should not be attempted by beginning traders. Many market maker brokers even ban the practice of scalping, but their execution is generally so poor that you would not want to scalp on their platform anyway. I would always use an ECN forex broker for the best possible trading conditions including tight spreads and reliable execution at the best possible prices.

Forex Day Trading Conclusion

Forex day trading is a trading style that fits those are willing to pay constant attention to the market for about 8 hours a day. Day traders seek to open and close all their trades within a day without leaving any open overnight, eliminating overnight and weekend risk. One disadvantage of day trading is that the higher number of trades over a shorter period of time makes fees higher as compared with profits. Some common Forex day trading strategies include news trading, trend trading and scalping.

The methods of implementing a day trading strategy that are outlined within this article are just ideas. I would always ensure that I have good money management, trading discipline and a trading plan when using any forex strategy.

Furthermore, I would combine multiple technical analysis, fundamental analysis, price action analysis and sentiment analysis to filter all entries. You should trade forex in a way that suits your own individual style, needs and goals.

If you would like to practice forex day trading, you can open an account with a forex broker and download a trading platform. If you are looking for a forex broker, you may wish to view my best forex brokers for some inspiration.

Happy trading!