How to day trade forex: Introduction and strategy

Day trading is a short-term trading strategy and involves making trades over the course of a few minutes to a few hours. Here, we look at what day trading is and how it can be applied to forex.

Charts (1)

Forex day trading is a popular way of trading currencies on the shorter timeframe charts. Read on for more about day trading forex, how to apply it to a strategy, and managing their risk effectively.

Forex day trading

What is forex day trading?

Forex day trading is a way to trade currencies on an intraday basis, using shorter-term charts (for example, 15-minute charts). Traders will manage positions over a matter of minutes to hours, often with the assistance of technical analysis tools that can assist with entry and exit points. It’s a way of trading that requires focus and discipline in fast-changing markets.

The timeframe for a day trader is shorter than that of a position trader, who will keep their trade open for several months up to even a year, or a swing trader whose position may last for a few weeks. However, it is longer than a scalper, who will be exiting a trade within minutes, or even seconds.

Forex vs stocks day trading

When it comes to forex vs stocks for day trading, there are a few differences for traders to consider.  Here’s a big one: with markets such as stocks, since a day trader’s positions will not be held overnight, they won’t be affected by fundamental occurrences like specific news events that can hit prices before the market opens or after it closes.

But since forex is a 24-hour market, fundamentals can affect price action at any given time, and traders should be mindful of this if following a purely technical approach.

There are other key factors that differentiate day trading forex with day trading stocks and other markets, involving leverage levels, trading volume, accessibility, and more. Here are some other general differences between forex day trading and stocks day trading for US traders.

Forex vs stocks day trading

Forex day trading

Stocks day trading

Volatility

Higher

Lower

Liquidity

Higher

Lower

Leverage

Higher

Lower

Accessibility

Higher

Lower

How to start day trading forex

In order to start day trading forex, people must first understand that this is a challenging endeavor that requires meticulous preparation. To have a chance of profitability, traders must be aware of the combination of fundamental and technical drivers of currency markets, as mentioned. But they must also start with sufficient capital in order not to bust their account.

This may vary from person to person, but while a few hundred dollars may be sufficient to merely experiment with a real money account, an account size of at least $5,000 may give a better opportunity for an income that will sufficiently compensate the time invested.

Traders also need to ensure that they will be able to access the charts for the entirety of the time they plan to spend trading per day. An unexpected trip away from the computer or mobile, no matter how quick, could mean vital information on price action is missed. 

Crucially, traders need to understand the risks involved and ensure they employ a risk management strategy to protect them as best they can. This means not trading more than a fixed percentage (perhaps 1 or 2%) of their available capital per day, starting small, applying well-thought-out stops and limits, and sticking to a strategy.

It’s easy to open an account with City Index and start day trading forex. Get started today!

Forex day trading strategy

A successful forex day trading strategy may involve up to around five trades throughout the day, with each lasting from a few minutes to a few hours. There are a great many strategies available but, whatever the approach, day traders should generally look to trade at the most liquid times, around 8AM-12PM ET.

Prior to opening a position, it’s essential to identify the market conditions in which a strategy will be played out, as multiple timeframe analysis can give the bigger picture of price action. In the below example, 20 and 50-period EMAs are used on a one-hour chart to ascertain a wider trend, with the intention to open and close positions on a 15-minute chart.

Day trading on the higher timeframe

For the below example, we’ll look at a simple moving average crossover strategy. A trader may choose longs when the 9-period EMA crosses above the 21-period EMA, and when price is above the 200-period EMA. Conversely, shorts may be taken when the 9-period EMA crosses below the 21-period EMA, and when price drops below the 200-period EMA.

Here, a long green candle completes above the 200-period EMA, coinciding with a bullish EMA crossover, making it a reasonable entry choice long.

In this case, a tight stop may be placed just beneath the crossover, while a more aggressive choice of stop placement would be further down at the recent swing low. However, a stop that is too tight may exit a trade prematurely, while losses may mount quickly if a stop is too far away. With time, traders can find the balance that works for their style.

Day trading strategy using moving averages

You need to set their profit target when you look to enter such a trade. Some look for a profit target of 2x risk before they exit, and some will wait till a bearish crossover is generated, although with the latter, the market won’t always make big moves, and a bearish crossover that signals an exit may not present itself when you want it to. Here, a target of 15-20 pips and a stop just below the EMA crossover may provide a risk-reward ratio of around 1:3.

While this example uses moving averages, there is a dizzying range of other day trading approaches available, and a variety of other technical indicators such as Fibonacci retracements, MACD and RSI. These may each offer a specific insight into overbought and oversold levels and key support and resistance areas.

As well as trend trading, day trading strategies can also be applied to ranging markets, where price is mostly going sideways. This can result in a more neutral stance than in trending markets, meaning traders may consider taking both buy positions near levels of support and sell positions near resistance.

Breakouts, when price breaks through an established support or resistance level, can also deliver fresh momentum, with the chance for large pip moves, that may be exciting to day traders too.

Forex day trading takeaways

  • Day trading forex comes with risks, so strong risk management is essential
  • Trading highly-liquid pairs at high-volume times is important on short-term charts
  • Multi-timeframe analysis can help give a ‘bigger picture’ on price action
  • Technical indicators can assist with entries and exits, particularly with confluence
  • Ensure you pay attention to the charts at all times!

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