Day trading is a popular trading adopted by millions of traders worldwide. The ultimate goal of day trading is to enter and exit trades within the very same day to profit from short-term market trends. The forex currency pairs are perfect for day trading due to their volatile nature and high liquidity. Now, how can you get into forex day trading as a beginner? What are its basics? What are the pros and cons of following the day trading strategy in the forex market? You will get detailed answers to all these questions by the end of this write-up.
Forex Day Trading - Basics
Starting from the basics is important to make your foundation strong. So, let's explore the scope of day trading from the surface level. Just as we mentioned in the introduction, day trading is a very common trading that aims to make profits from small fluctuations in the prices of trading instruments. A day trader will close all their trading positions by the end of the day, leaving no open trades overnight. Hence, swap rates charged on overnight positions won't be applicable for day traders who follow the rule.
Another trading that follows a similar approach is scalping, but the pace of day trading is way slower than scalping, and the number of trades will also be lesser in comparison. Scalpers rely on tick charts or minute charts for their analysis, while day traders mostly depend on hourly charts for spotting ideal trade setups throughout the day. The time frame is longer, and day trading has more to do with the daily trends than scalping, which is all about trading during major sessions to take advantage of liquidity.
Forex Day Trader - Key Characteristics
Becoming a forex day trader is not everyone's cup of tea as they need to have enough knowledge about market fundamentals as well as technical analysis, which is used for spotting short-term trends that last for a day. A day trader can follow any trading approach that works for them. Some day traders completely rely on technical analysis, while some focus on fundamental analysis. Traders who plan their trades around a key economic data release or a relevant news event will rely more on fundamentals.
But in any case, the patience to watch charts all day is crucial to unlock your true potential as a day trader. Keeping track of real-time market trends is essential to catch the best trading opportunities with this short-term strategy. So, the ability to identify the right opportunity at the right time gives you a competitive edge in the dynamic forex market.
Steps to Begin Forex Day Trading
Step 1 - Learning and Planning
The first step towards day trading success is systematic learning. You should take time to observe the currency markets daily to see what kind of price trends you will get with this strategy. Then, once you get a grasp of the day trading techniques, you can start devising your own trading plan with some logical calculations. Day traders set daily profit targets to stay on track, and most of them plan their trades around the number of pips they target to gain by the end of a trading day. Pip calculations are helpful for executing trades with perfection, and for that, a pip calculator is the right tool, which does the calculation in seconds and gives accurate results.
Step 2- Test Your Strategy - The next step is to test your day trading strategy with historical and real-time data. You can use the backtesting feature on trading platforms for testing with historical price data. However, forward testing on a demo account allows you to test the viability of your strategy in real-time market conditions. See if you can reach your profit targets on a demo account; if not, keep revising your strategy to maximize the profit potential. Testing different trade scenarios and comparing the results is the best way to optimize your strategy. One tool that comes in handy to improve the profitability of your day trading system is a profit calculator, which allows you to determine the best price levels to enter and exit a trade.
Step 3- Go Live and Track Your Progress With a Trading Journal - The 3rd and final step is going live, which is trying your strategy on a real trading account. You may still make some mistakes in the initial period, which allows you to learn more to improve your performance as a trader. Find the best tools that you can utilize for day trading and keep a trading journal to record and assess your trades. Keeping track of your progress is essential to identify the shortcomings of your strategy and make necessary changes in time.
What is the Best Strategy for Day Trading? Which Indicators Should Be Used?
Now, one question that needs to be addressed here is the best strategy for day trading and the best technical indicators you can add to your charts for a better analysis. One popular strategy followed by day traders in the forex market is trend trading, as finding the real-time market trend and placing trades that justify that trend gives the best results in day trading.
So, here, you can use a bunch of different analysis tools like trend lines and indicators like Moving Averages to confirm a trend. Once you are sure that the trend is strong enough, you can open a trade position that closely follows the spotted trend. If you see a strong uptrend in the chosen currency pair, you will go long on that pair, and if the charts suggest a downtrend, you can consider opening a short position instead.
Trend trading strategy is easier to implement when the market is constantly trending, and if you notice choppiness in your currency pairs, you can also try out other strategies like range trading. Breakout trading can also be an apt strategy for day traders if you see frequent price breakouts happen while trading.
Some day traders also rely on strategies like mean reversion and money flows, which are quite different from simply following the trend or trying to trade a breakout. But these strategies may be a bit complex for first-time traders, and hence, you can think about these after gaining some hands-on experience at forex day trading.
Pros and Cons of Forex Day Trading Strategy
- Easier to Follow- Day trading strategies are considered easier to follow in comparison to other strategies like swing or positional trading, which requires more patience, and your exposure to risk is more due to the longer duration of trades.
- Higher Potential for Profits - The highly volatile nature of currency pairs gives day traders a higher profit potential.
- No Overnight Risk - Day traders close their positions on the same day. Hence, they don't have the risk of keeping their trades running overnight.
- Time-consuming - Day trading can be time-consuming as you must continuously analyze the charts and monitor your trades until they are closed.
- Sudden volatility - Day traders are surrounded by the risk of being caught up in sudden volatility, making them prone to losses compared to scalpers who enter and exit trades within a few minutes.
Should a Beginner Consider Forex Day Trading?
As we mentioned before, day trading is comparatively easier if you have enough time to study it. It is not as aggressive as scalping, and you get to make quick profits on a daily basis with limited exposure to risk. If you have the patience to learn about day trading and technical analysis, you can surely think of starting out as a day trader in the forex market.
Bonus Tip for Day Trading
One last tip I can give to profitable day trading in the forex market is picking a low-cost broker. As a day trader, you will be executing trades daily; hence, you must choose a broker offering tight spreads and low commissions because minimizing the cost of trading is important for maximizing your profitability in day trading.
To summarise, forex day trading can be ideal for anyone eager to make daily profits from short-term price fluctuations in the volatile currency market. But you should practice well on a demo account until you attain enough knowledge about various techniques that you can use for day trading. Finally, paying the most attention to risk management is essential for minimizing your potential losses and hitting your profit targets in the fast-moving market.