Forex Day Trading: Strategies and Tips

Forex Day Trading: Strategies and Tips

Day trading is a strategy that involves trading within the day. Sometimes it is possible to transfer positions to the next day, but it is rare because of swaps. Basically, the absence of a rollover fee is the main advantage of intraday trading. Let's consider the essence, strategies, and principles of intraday trading in more detail.

What is Day Trading

Day trading, as the name implies, involves making trades within one trading day, without carrying them over to the next day. As a rule, this type of trading is popular among newbies, because they think that quantity necessarily turns into quality, i.e. the more trades, the more profit received. It is also worth noting that newbie day traders are the ones who usually violate traders' discipline and ignore the trading plan because the pace of trading determines fast decision making which requires a certain experience. Moreover, a beginner is not yet ready to get rid of excitement and the thirst for fast profit, which is what attracts them to intraday trading.

The range of time frames used in intraday trading is wide, from M1 to H1, but newbies for some reason prefer M5 or M15, believing that this will help them timely react to every price movement and gain profit. Often, because of the market noise inherent in these time frames, their trades are closed at a Stop-Loss, generating losses.

This does not mean that intraday trading is unprofitable. Quite the opposite. Trading intraday can and will be profitable, but only in case of unconditional adherence to trading discipline, competent planning of actions, and denial of all emotions.

Day trading practically does not involve the use of fundamental analysis. The main thing here is not to give in to emotions and work out the necessary algorithms like a robot.

It is also important to be able to analyze the mistakes and look at the trading process from the outside. Do not forget about money management.

You can not use all funds from the deposit, because it is impossible to avoid losing trades. Allowed is 2-5% of the deposit, and if there are a lot of funds on the account, then no more than 10%. If the chosen trading strategy is tested on history, then one way or another, the trader will be in the black.

Most often the technical analysis is used in day trading, so it is recommended to test Support and Resistance levels, graphical and candlestick patterns, indicators, and oscillators on a demo account.

Strategies

Day trading is a complex style of trading. For this reason, the next principles should be followed:

  • Trading in the range of 40-60 pips is considered optimal. Usually, the price of currency pairs does not often change within a large range;
  • Besides technical analysis, trading based on news is also significant. An important economic news release can influence the rise or fall of price by more than 60 pips;
  • Trading in the trend, which can be clearly seen in higher time frames due to minimal market noise, is mandatory;
  • As volatility increases, strict profit and loss limitation is important;
  • To increase the chances of making large profits, you should trade in a volatile market. You should not forget that the potential loss will also be larger. The GBP/CHF pair has the highest volatility. To reduce the risks, you should choose the pair EUR/USD;
  • The Internet with high speed is necessary for trading in short-term periods.

Let us consider some strategies day traders find profitable.

Scalping

Scalping is without exaggeration the oldest and most popular strategy used in day trading. This simple strategy involves technical analysis of the financial asset you want to trade. Once you have determined the clear direction of the asset's price movement, you should open a position and close it after a few minutes.

For example, when the price of an asset moves upward, scalpers can enter into a buy position. Immediately after the price begins to correct, they exit the trade and enter a sell position on the asset. The buying and selling process continues repeatedly until the scalper's goal is reached.

Scalping is an ideal trading strategy during periods of low volatility. When volatility is low, assets tend to trade sideways, providing solid entry and exit positions.

Professional scalpers open and close dozens of positions in a single day. By doing so, they generate small profits from each trade in a matter of minutes. The chance to make a profit on each small price movement is the ultimate goal of this strategy. One of the advantages of a scalping strategy is that it limits your exposure to significant risks when entering and exiting a trade quickly.

Scalping also stands out among other intraday trading strategies because it does not require much actual knowledge of the asset being traded. The only thing you need to have a clear understanding of is the direction in which the price of the asset may move.

However, you should always approach scalping with great caution. For instance, you should never open a position just before the publication of important economic data. Markets tend to be extremely volatile when significant economic data is published.

Although not all brokers allow this strategy, many still allow their clients to use it. The low spreads offered by some brokers allow traders to enter and exit trades without significant financial costs, which is very important when using an intraday trading strategy.

Reverse Trading

Reverse trading is usually practiced by traders in a more or less calm market. At this time, market movement is often limited to a certain range in which the price moves in one direction or the other, without a specific direction. Traders determine the key levels from which the price bounces and place short-term trades to make small profits.

This approach usually uses support and resistance lines and fundamental analysis data.

Before you start reverse trading, you should make sure that there are no important news releases scheduled for the session, including speeches by politicians, because such events can trigger strong price movements and lead to losses.

Once you have analyzed the market for the influence of fundamental factors, you should proceed with technical analysis and determine the current support and resistance levels.

Key levels identified by traders using this strategy usually include the highs and lows of the previous session, pivot points, Fibonacci levels, and zones where these levels overlap. Such overlaps are known as "mergers" and represent an excellent range of price zones from which price will bounce during the trading session.

Price maneuvers can vary, but traders tend to take a small profit of a few pips rather than holding open positions for several sessions.

Reverse trading shows itself best when the market does not move in any one direction. However, you should trade with caution, because otherwise, you can incur substantial losses.

Momentum Trading

Impulse trading is less about "accurate" entries. It is more designed for the strength of the price movement and its duration. Traders are not looking for pullbacks or price breakouts from any level but prefer to move more or less in the general direction of the prevailing trend.

This type of trading is based more on fundamental factors, but also involves the use of technical indicators such as Moving Averages and oscillators, which provide trading signals.

Traders resort to impulse trading when they anticipate a prolonged movement in the price of the asset they plan to trade. For example, if traders see an impending interest rate change in a country, they will immediately buy or sell that country's currency when the change takes effect. Other examples include geopolitical events which can last for months or even years.

During such important changes, professional traders will be looking to open long-term trades that last several weeks or months.

Because of the time-consuming nature of this approach to trading, traders are not much concerned about entry points. They simply wait for the surface technical analysis to allow them to open a potentially profitable long-term trade.

A popular indicator for this type of trading is the Moving Average with a period of 200. As a rule, traders wait for the price to cross the Moving Average line on any side to enter the trade, and as soon as it happens, they enter the market.

Exits from the position are usually determined by the same fundamental analysis indicators as to when entering. Traders monitor economic and geopolitical events and make decisions about how to manage current trades based on this information.

Pros and Cons of Forex Day Trading

Like any other approach, day trading has both advantages and disadvantages that should be considered when you look for the best system to work with.

Let us start with the pros of forex day trading, and the first one is that you don't need a lot of capital to start day trading, as each trade can have a profit of just a few pips. The low level of risk for each position attracts cautious traders.

Among other advantages are:

High profits compared to alternative methods. If a trade is opened with the expectation of closing in a month, the cost will inevitably fall into a correction. Thus, a significant portion of the time an open position does not work for the benefit of the trader. It is good if the price passes 400 points within a month. But one day's value can pass 100 points. The ideal way to make a good profit is a series of profitable intraday trades. However, you should be prepared for losing trades. The real profit is lower than expected, but it is still higher than medium-term trades. The obligatory condition is the proper organization of trading by the trader.

Free time. The trader himself determines how much and in what way he works. Among other things, there is an opportunity to refuse a new intraday cycle, while with an open trade in the medium term it is necessary to monitor the price movement constantly.

In general, day trading opens up the possibility of more significant earnings.

Despite all the positive moments of day trading, we still must mention some disadvantages.

It is more suitable for professional traders. Too low predictability of the price movement becomes an additional factor of danger. You can inadvertently lose your money.

Small Stop-Losses and profits. It is impossible to place a large Stop-Loss. First, the price will not manage to pass too long distance during the day, and second, the risk of losing money increases. Some players report psychological pressure in connection with this feature.

Time. Speculation within the day demands lots of responsibility and readiness to wait for a long time for the appropriate moment to enter the market. Not every trader is ready to sit for a long time in front of the monitor waiting for the moment.

Discipline. Day trading is much more disciplined. A trader learns to control emotions. Only this approach will provide a high profit.

Risks Associated with Forex Day Trading

Despite the seeming simplicity, day traders must manage some financial and psychological risks:

Capital losses. Even if you closed most trades with profits, you had to pay significant upfront costs, such as hardware, software, and initial news services, before you could start trading. In addition, ongoing expenses such as ECN commissions (or commissions if the trader does not use an ECN), interest, gathering real-time information, financial analysis and charts, and communication costs, all of which you must account for.

Market movement. Michael Sincere, day trader and author of Start Day Trading Now, says it's hard to make money when the market is moving less than 100 pips in either direction relative to the previous day.

Mental Dependency. In this type of trading, it is very easy to give in to the excitement, as day trading is very similar to gambling. To avoid this, it is necessary to develop clear rules for trading.

The Best Forex Day Trading Systems

As we mention in most of our articles, there is no such thing as the best strategy since each trader interprets the market situation through the prism of prior knowledge and experience. Consequently, the best solution is to find the approach that suits you ideally. To do that, you should test several systems on the demo account, adjust them if needed and analyze the obtained information. Below you will find several ready-to-use strategies; see if you can find them helpful.

Breakout Trading

Day trading strategies allow for the drawing of Support and Resistance (S&R) lines on the charts. These levels are points from which prices tend to bounce. To trade behind these lines, neither buyers nor sellers dare. If price breaks through them, it indicates a strong trend. Trading on the breakout is not suitable for inexperienced beginners. Like all day trading, this style is designed for professional traders.

The easiest way to trade on the breakout is to place a pending order slightly above the support/resistance line, waiting for the price to reach it. The disadvantage of this method is that the level may be reached and then the price will reverse. Some indicators allow creating not S&R levels, but zones on the chart. Then the pending order should be placed above the zone of resistance or below the zone of support. It gives an opportunity to sift out erroneous signals. Time expenditures can also be considered as disadvantages.

There is one more strategy of trade on the breakout which is more effective and timesaving. Let's consider it as an example of a bullish trend. A bearish trend provides the opposite conditions. The price breaks out of the resistance line, and its reversal in the opposite direction takes place. After that the pending order is set a little bit higher than the maximum extremum.

Of course, this method has its disadvantages, too. If a little bit higher than the maximum extremum works, the transaction will immediately become unprofitable. In essence, it is the same rebound from the support line.

There is one more variant of the strategy based on the breakout. First, it is necessary to pay attention to the candle in which the breakout occurred, except when it was a Doji or Pin Bar candle. Of interest are full-body candlesticks with a long body, indicating that market participants are trading large volumes in the direction of increasing the price of the asset.

If the candle corresponds to the conditions described above, you should not hurry to open the position. It is necessary to wait for the closing of the next candle above the resistance line. In a bearish trend, the candle should close below the support line. In the case of a confirmation of the trend entry into the market should be performed slightly above the level. When the next candle closes close to it, you can open a trade immediately. If the candle closes not close to the level, a pending buy order is opened, but it should not be placed too close for it to work.

The peculiarity of intraday trading is the need to close loss-making trades quickly, respectively, a small Stop-Loss is set. If the confirming signal candlestick has a small shadow located outside the breakout, the Stop-Loss is set a little below it.

With a sell trade, everything happens on opposite conditions.

Pullback Trading

There is also a counter-trend strategy for intraday trading, which is suitable for experienced traders. Its principle is as follows: during a steady trend, the price fluctuates slightly in different directions. The ability to foresee them allows placing successful orders even against the trend.

Let us assume the presence of a bullish trend. Then the pullback will be the fall of the price for a certain period. In this case, at the point at which the correction took place, we should place a long position. As a result, we buy the asset at a cheaper price and sell it at a higher price.

The bearish trend provides the opposite conditions. In this case, it is necessary to wait for the moment when the price movement at the downtrend will be directed upwards, and after correction completion at the point of a trend reversal to make an opening of the position on the sale.

Identification of corrections is possible with the use of technical indicators, which build on the price chart line of S&R. If the price pulls back from it, rather than breaking through the level, as in the previous strategy, there is an opportunity to make a profit on counter-trend trading within the day.

Algorithmic Trading

Algorithmic trading, in simple words, is the automation of routine trader's actions, which allows reducing time for analysis of exchange information, calculation of mathematical models, placing orders. In addition, algorithmic trading systems eliminate the human factor from market operations, manifested in the form of emotions, conjectures, or "trader's intuition", which often reduce to zero all profitability of even the best strategy.

In their work, algorithmic traders use the existing probability of quotes movement in the necessary range. Historical data of a selected asset or a set of several instruments are used for the calculations.

Since the market is volatile, the developers are constantly searching for repeating patterns and calculating the probability of their occurrence in the future. Therefore, from a technical point of view, algo trading is reduced to the identification of algorithms for opening and closing positions, as well as the selection of trading robots to implement them.

However, no algorithm is perfect, given that financial markets are constantly evolving and changing. Such algorithms are only good for those who develop them. Testing algorithms on demo accounts is a must before using them to trade with a real deposit. Tweaking the algorithms from time to time is also important to ensure that they are up to date.

What is the Best Currency Pair for Day Trading?

There is no definite advice about which currency pair is better to trade with for any trader. There is no division of currency pairs into categories for newbies and professionals. However, there are several notices which are worth considering when choosing a currency pair.

There is an opinion that it is better to choose the most liquid and popular assets, but we do not think that this is the only right decision. The fact is that it is much easier to analyze not a big economy. For example, the NZD (New Zealand) has not so many major influences on the economy as the U.S. or EUR. The same is true for currencies like AUD, ZAR, SGD, CAD.

So, the best choice would be to determine your planned trading strategy and according to it, choose the most suitable currency pair.

All in all, you should not try to trade all the instruments at once - the dispersion of your mental abilities can lead to a lack of them when trading separate instruments, which is fraught with the loss of time, money, and nerves for the trader.

Forex Day Trading Tips

  • Liquidity, volatility, and trading volume are three helpers for the trader.

Liquidity allows you to enter and exit the market at a good price. Liquid instruments have better spreads and less slippage (the difference between the expected and actual order price).

Volatility is a measure of the expected daily price range. The higher the volatility, the greater the potential profit or loss.

High trading volume indicates interest in a stock regardless of which way the price goes. Often, rising volume indicates the likelihood of a powerful trend to emerge.

  • Don't put all your money into a single trade.

Your first step in developing a strategy is to assess how much capital you are willing to risk on each trade. Most successful day traders risk less than one or two percent of their account on each trade.

  • Use price patterns for entry and exit.

Knowing the price at which you want to enter and exit a trade can save you from trading incorrectly. One of the best ways to trade throughout the day is to use price patterns. Repetitive formations that you see daily are more likely to result in a certain outcome that you can make money on.

  • Define for yourself the criteria for an entry point.

The entry point at which you buy an asset should not be formed based on intuition but on a set of conditions that can bring you a positive result. Traders should develop their own criteria (entry rules) that will save them from impulsive and ill-considered trades.

  • Decide on your trading style.

Depending on your style, your trading objectives may also change. Experienced traders advise against mixing trading strategies because it's impossible to do several things equally well. Focus on a specific idea.

  • Use Stop-Losses.

When you trade with leverage, your equity is much more vulnerable to sharp price movements than the deposit of regular traders who do not use margin. Leverage helps you increase your trading results, but its value will not always keep you happy. That's why using Stop-Losses is crucial in day trading.

  • Test your trading strategy.

Once you've defined your strategy in day trading, start testing it on historical data. Manually go through past quotes, finding entry and exit points. "Paper" trading at least 50-100 trades will allow you to understand if the strategy will be profitable and if your expectations from it will be justified. If so, move on to trading on a demo account in real-time, and if the strategy is profitable, you can try it on real capital.

  • Limit your daily profits and losses.

Even though the forex market is highly liquid, there are days when the volatility is significantly reduced, and it is impossible to squeeze at least ten points out of the market. Do not try to grasp the immensity. Establish a clear value of intraday profit and loss. For example, 50 pips. Have you suffered a loss of 50 points? Do not try to win back, finish the day. If you got a profit of 50 points - the same. Don't try to snatch a "little more" from the market. Adherence to discipline will help you fight your emotions and, over time, will become a factor in stable trading.

  • 1-2 currency pairs are enough for trading.

Day trading presupposes prompt and clear trading decisions. A beginner opens 5, 10, or even more charts of currency pairs in pursuit of profit, and it only confuses itself. Only 2, maximum 3 currency pairs are enough to make an intraday profit.

As for a beginner, only one currency pair will be enough. Once the trade will show a stable positive result, you can move on to trade on one more currency pair.

Trade Risk-Free with a Demo Account

For beginners the advantages of trading on a demo account are obvious - they can gain experience without risking their own money. You can spend several years studying the theory but get completely confused when you take part in real trading. A demo account helps to get accustomed to the market more quickly and lowers the entry threshold for young traders - they do not need to have a special amount, which is not afraid to lose during the first trades.

With experienced traders, everything is somewhat different. As a rule, they use a demo account to test a new strategy. A demo account with the same broker with whom you plan to work later is a great way to take into account all the nuances, including intermediary fees when calculating profit. Do not forget that a demo account is an exact copy of one of the broker's rates, so the broker will charge you for the service according to all the rules.

The fact that the trader does not bear any risks considerably changes the psychology of trading. But sometimes it is even useful! A man becomes braver, he is ready to try risky strategies, to test unexpected new variants and instruments. Do not neglect to trade on a demo account, even when you finally master the market, but use this tool moderately and thoughtfully.

Another important advantage of demo trading is an opportunity to get acquainted with the work of the broker. How fast does it execute orders? How convenient is the chosen terminal? How does technical support work? Of course, everything may be somewhat different on a real account, but you will be able to get a general idea.

Conclusion

Intraday trading allows only experienced traders to make good profits. All considered trading strategies should be tested on a demo account. It will help to acquire skills of making the right decisions very quickly.

If a beginner decides to try day trading, it is better to choose pullback trading. However, it is important to understand what this breakout is and what trend will follow it. One should not pay attention to insignificant corrections, as it is impossible to gain a good profit on them, but it is easy to bring the deposit to zero.

Beginners should remember that you can count on profitable trading only after preliminary training, especially studying the methods of technical analysis. It studies the factors which create the price movement, such as money flow, public sentiment, supply and demand analysis, market correlations, and others.

About AdroFx

Being a well-established brokerage company, AdroFx offers the best trading conditions to its clients from 200 countries. Founded by experts with a couple of decades of overall experience, AdroFx is one of the best platforms on the market for shares trading. Either a newbie or experienced trader, both will find here what they are looking for since the company provides various trading accounts for different trading styles and goals.