Forex Day Trading Explained

May 31, 2021 13:15 UTC
Reading time: 24 minutes

what is day trading

 

What is Day Trading?

Have you ever heard about intraday trading or day trading? If you to learn, this article will give you a detailed explanation about day trading for beginners.

Day trading is a trading system that consists of opening and closing trades in the same day.

This type of trading can be practised in any market, but is most frequently applied to the Forex-, stock- and index markets.

Why?

The day trader takes advantage of the small price movements within the day or session. The trader opens positions during the day or the session and closes these before the end of that day. The trader takes advantage of the market movements during the day session. Therefore, these traders prefer liquid markets such as the currency-, stocks- or index markets.

A prerequisite for success in intraday trading (or any other type of trading) is having sufficient market knowledge.

Some of those new to trading ask themselves, 'is Forex good for day trading?'. As you now know, because of its liquidity, many new traders start day trading in Forex. If you are interested in learning how to day trade in Forex, you can apply all the information you learn in this day trading article to any market, including Forex.

The Basics

How does day trading work?

  • There is no set formula for success as a Forex trader. Adequate market knowledge and having a trading plan are both essential, but do not guarantee success.
  • Risk increases when prices fluctuate sharply throughout the day.
  • Commissions & fees for keeping positions open overnight, commonly referred to as Swaps, do not apply to intraday trading. Mostly, swaps amount to a fee payable but in some cases can be positive and the trader may receive compensation.
  • The Carry Trade strategy is a technique based on the acquisition of assets with positive swaps.
  • In applying intraday trading strategies the trader avoids exposure to the risks associated with large price movements or price gapping overnight - at which time we cannot control the market or it is closed.
  • Intra day trading normally entails opening multiple trades and holding these for short periods of time to make small profits. Day trading positions account for an integral part of the daily trade volume and provide liquidity to the market.

How to trade Intraday?

The first step to getting started with day trading is to gain access to the right day trading tools. Many Traders ask, what platform is best for day trading? What is the best day trading software? Whether you are looking for the best day trading platform in the UK or anywhere else in the world, MetaTrader 5 has you covered.

MetaTrader 5 is an elite trading platform that offers professional traders a range of exclusive benefits such as advanced charting capabilities, automated trading and the ability to fully customise and change this day trading platform to suit your individual trading preferences.

Click the banner below to start your FREE MetaTrader 5 download!

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Whilst intraday trading might be profitable it is not easy. Intraday trading, as any form of trading or investing, carries risks and should not be assumed without prior training and a vast understanding of the markets. Experienced traders can attest to the fact that a trading plan which includes detailed risk management rules, is essential. Based on this plan, the trader scans the markets for trading opportunities, the best entry and exit points and assesses possible trading opportunities for a healthy risk/reward ratio.

Interested in getting started with Day trading? Let's discuss the key factors that market veterans list as pivotal for their trading successes!

Understanding the Dynamics of the Stock Markets in Intraday Trading

A thorough understanding of the market's dynamics and the main factors driving market movements is essential. Intraday traders monitor technical and fundamental indicators to gain insight into the market sentiment and possible future price development. Solid insight into what moves the markets enables the trader to identify the most favourable opportunities and make informed trading decisions.

A Disciplined Approach for Intraday Trading

In all aspects of life, discipline is important. Lack of a disciplined approach to intraday trading can result in large losses. Trading without a systematic and disciplined approach is essentially gambling. Therefore long term success in trading without discipline is next to impossible. A trader must be able to monitor prices during certain periods without acting on emotions and making reckless decisions.

This is why traders must follow a set trading strategy that clearly specifies the conditions for entering the market. The trader would scan the market based on the parameters set out in his strategy and would only act when a set up meets his rules.

When the markets move vigorously traders can be tempted to place trades to 'get in on the action' or be reluctant to enter into a position after a few losses. Acting in accordance with one's trading plan can be challenging and requires discipline.

Sometimes the market follows the course you expected, but just because you were able to predict a certain movement does not mean you should use your gut feeling as an indicator to place trades. Even though it can be painful to miss an opportunity you had anticipated, making random trading decisions will ultimately result in losses.

Sticking to a strategy is the only way to gain profits consistently and establish long term success. It is also the only way to monitor and improve your performance.

A Tailored Trading Strategy for Intraday Trading

In the previous section, we have touched on the importance of basing investment decisions on a trading strategy. While the disciplined application of a triaging strategy is a key factor to trading success, it stands or falls with how well suited the strategy is to current market conditions.

Market conditions can vary from day to day and the applied strategy must be suited to the current circumstances in the markets. As intraday trading is executed on lower timeframes, the overriding market trend can differ from one day to the next. The trader would thus need to check daily if his strategy is attuned to the new market conditions and would need to adapt or fine-tune accordingly.

Successful day traders are disciplined in their approach yet flexible when it comes to their trading strategy. The market dictates how, when and under which conditions they enter a trade.

Day Trading Strategies

Trend Trading Strategies

Trend trading techniques are generally favoured among novice traders. Looking for trading opportunities in the direction of the general trend is commonly viewed as the simplest and most reliable approach as markets move in line with overriding trends 80% of the time. In applying trend trading strategies the trader seeks to find sharp movements, trading on large volumes that follow the direction of the trend. As the saying goes: the trend is your friend.

eurusd h1 chart

Source: Admiral Markets MetaTrader 4, EURUSD, H1 chart. Data range: from May 12, 2021, to June 1, 2021. Accessed: June 1, 2021, at 17:38 am BST - Please note: Past performance is not a reliable indicator of future results or future performance.

Intraday trading is often described as the fastest way to make money in the stock market and has thus gained a lot of interest over recent years. What most recommendations fail to mention is that this particular trading style is complicated and requires constant monitoring of the markets. Day trading can be very lucrative but also carries a high risk and is not suitable for every trader.

Counter Trend trading strategies

Counter trading is generally viewed as a more advanced trading style and best suited for experienced traders. To successfully execute counter trend trading strategies, the trader would not only need to anticipate the end of the current trend but also time disposition to take advantage of the change in trend. A counter trend trader must be able to identify (temporary) changes in the trend direction with high precision and predict the strength of said movement.

Counter trend trading requires experience and mastery of price action and technical analysis techniques. Day traders wanting to experiment with these trading strategies can use a demo account or trading simulator to get acquainted with the basics of counter trading. They can gain experience in a risk free setting.

Click the banner below to set up your FREE demo account today:

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What are the best indicators

Many trading indicators can be used to support the day trader in his trading activities. Which indicators can be referenced as best indicators for day trading is largely dependent on the chosen trading style & instrument and the personal preferences of the trader. Combining different tools and techniques can confirm and fine-tune signals generated to improve the reliability. An example of a popular combination of day trading indicators is:

  • The Fibonacci indicator - the Fibonacci tool indicates the areas of interest for the next trading session
  • The MACD indicator can be a good complementary indicator.

What Risks are Involved?

Generally, the tighter the time horizon chosen for trading, the larger the risk. Hence, Intraday Trading and Scalping are considered to be riskier trading styles. Price will move within a limited reach over a short time period. As markets usually only move a few points in a session, intraday traders use high risk trading strategies to increase their profit margins.

Such strategies entail:

  • High levels of leverage to attempt to multiply profits made on (relatively limited) price movements
  • Increase in the number of trades - as day traders aim for small profits per trade they would generally open more positions to reach their profit goals

It is vital to remember that opportunity and risk go hand in hand. To reiterate, the aforementioned strategies are classed as 'high risk' which means the likelihood of large losses is relatively high and it is generally not advised that aspiring traders start with these strategies.

What is the best approach then? Educate yourself. We offer FREE online trading courses - enrol by simply clicking on the banner below and signing up!

forex 101

Best Times to Trade

As mentioned, having a sound trading plan is essential for success in trading. An adequate trading plan is more than just a strategy, it also specifies risk management measures and a trading schedule. The level of volatility can differ greatly during various trading sessions and on certain times of the day.

It is important to know the characteristics of the times and sessions during which you trade and to adapt your strategy accordingly.

Some useful guidelines to help you figure out the best time to trade intraday:

  • Monday is a quiet day in the markets. Day trading requires sufficient price movement over a short period of time. If the trading volume is low there may not be enough price movement to execute said trading strategies. Furthermore, the lack of liquidity can lead to sharp movements.
  • Opening of the London trading session is generally a favourable time for short term trading as we usually see a lot of activity during this time period.
  • The last hour of trading (in the London session) often showcases how strong a trend actually is. How the trading day ends is believed to be indicative of the continuation of the current move. It is thought to be likely that a breakout to the upside will end when it is followed by a low closing price and vice versa for a bearish trend.

A breakout strategy can be used when a new maximum or minimum has been reached. Buy at the first pullback after a new high or sell at the first pullback after a new low.

  • Don't trade on public holidays or late in the day on Fridays.
  • Don't trade when the market has moved beyond a 20-30 pips range over the course of the day.
  • Sometimes not holding a position in the market is as good as holding a profitable position.
  • The first hour's range is used as a benchmark for the range in which the price will move throughout the rest of the trading day.

How frequently you trade is dictated by your trading strategy. Let's say your chosen strategy has a win ratio of around 60%. If you don't trade setups that meet your rules you are more likely to miss out on winning trades (60%) than losing trades (40%). Be consistent and trade the opportunities that meet your rules, the aforementioned guidelines will help you identify the most favourable times for trading.

Day Trading Tips for Beginners

The first step to becoming a profitable day trader is straightforward and not much different from other trading styles. As a beginner, it is advisable to start with a demo account to gain familiarity with the workings of this trading style, the dynamics of the markets and the functions of the trading software.

The trader must learn how to conduct proper analysis and knows how to open, close and manage trades. This seems pretty straightforward but experience has shown that these steps are easily bypassed by enthusiastic beginning traders. If you are interested in learning more about Forex trading, check out our beginner's guide to Forex!

Another important consideration is selecting a reliable forex broker. Intra day traders carry out a large number of orders daily and the spreads and fees can add up. These costs are an important factor and can affect your trading results. Different brokers charge different fees and commissions - choose a broker that is transparent and trustworthy.

As with any form of trading and investing there is a possibility of losing your investment, so it is wise to only invest money that you can "afford to lose". Make sure you know what you stand to lose should the trade turn against you. Traders may not always be aware of what they are risking, especially when using leverage.

In August 2018, ESMA defined differences between professional- and retail traders and capped the levels of leverage available to the latter category. This regulation is geared to prevent new traders from losing large amounts of money when applying leverage techniques.

How to Get Started Trading

It's time to look at what we need to do when we are learning how to day trade.

  • The first thing that a beginning intraday trader should assess is his or her risk tolerance level. Your aversion or appetite for risk will greatly impact your trading decisions and is a leading factor in finding a suitable trading strategy.
  • Develop a trading plan and stick to it!
  • Short term trading strategies such as day trading usually entail a great risk exposure due to the higher number of trades. Regardless of the trader's risk profile, the aspiring day trader should test any new strategies in a risk-free environment, such as a demo account, a trading simulator or through backtesting.
  • Short term trading strategies require that the trader makes multiple decisions over a short time span. As such traders rely heavily on technical analysis techniques and indicators.
  • An adequate intraday strategy takes into account key factors such as volatility and liquidity.

These are the key aspects of learning how to be a day trader. Volatility refers to the intensity and frequency of the market movements. Short-term trading requires high levels of volatility as price needs to move sufficiently in a limited time frame.

This determines which markets and instruments are suitable for such trading styles. Another factor that should always be considered when selecting trading instruments is market liquidity. If the liquidity in a market is insufficient, orders can not always be executed at the desired price. Whilst a long term trader can afford to lose 10 pips, a short term trader who is aiming for profits of a few pips does not have the same luxury.

When learning how to start day trading in the UK or anywhere else in the world, most day traders will focus on the most liquid markets and assets, such as the major Forex pairs, the most important indices and blue chip stocks.

  • Since markets generally only move a limited amount of points in a trading session, intraday traders use high risk trading techniques to increase their profits. Bear in mind that the possibility of greater profits goes hand in hand with a greater risk.
  • Intraday traders should be very conscious of major news events and data publications as these can turn market conditions in a matter of seconds. As a novice trader, it is wise to avoid trading in unpredictable market conditions.

Is Day Trading Illegal?

Now that you know how to become a day trader, perhaps you've heard about various illegal practices in the trading world and you are asking yourself, Is day trading illegal?

As you now know, day traders are rapidly buying and selling stocks throughout each day with the hope of their share prices to continue climbing or falling for the few moments they own them. This allows them to earn fast and relatively small profits throughout the trading day. Day traders often use leverage to enter trades on borrowed funds with the hope of reaping greater profits (as well as taking on the risk of greater losses).

Day trading is not illegal. However, it is very risky. This is an important point to keep in mind when starting forex day trading or day trading stocks. Traders who incorporate risk management and education into their trading strategy, while remembering to never trade on their emotions have the best opportunity of becoming successful at forex day trading and day trading stocks in the long run.

What is Swing Trading vs Intraday Trading?

What is Day Trading and Swing Trading? As you now know, a day trader makes several trades in a day and bases most of their decisions on technical analysis and advanced chart systems. Their objective is to earn a living from trading commodities, stocks, or currencies via making minor profits multiple times per day. Day traders usually don't hold a position overnight.

Swing trading is a style that capitalizes on swings in commodities, stocks and currencies that occur over a period of several days. A swing trade might last from several days up to several weeks. A trader is unlikely to make swing trading a full time career. However, some day traders also swing trade. Anyone with some education and available capital for investing could realistically get into swing trading because of the long time frame of each trade. Unlike the minute-long trades a day trader may make, the several day or week-long trades a swing trader make free them from having to watch their computer screen, analysing charts all day. This allows for time to have a separate full-time job.

What are Day Trading Options?

What are day trading options? An option is a financial derivative. This is a legal contract that gives you the possibility to sell or buy within a pre-determined date. The seller has an obligation to fulfil the terms of the agreed transaction. Such terms will be to either buy or sell once the buyer decides to ‘exercise’ his option before the expiration date.

Options for day trading are available in many markets. You can day trade stock options, futures options, ETF options and more. Traders often refer to such traditional options as ‘vanilla options’.

Benefits

There are many reasons you can earn well day trading options:

  • Low-cost – Day trading options allows you to enter and exit your positions quickly and with lower risk than stocks. It’s also much cheaper to buy an option than the underlying asset, like buying shares in a company. As such, you can trade with the same quantity of shares with less capital.
  • Diversity – Options are cheaper than buying the underlying asset. This means that you can benefit from more investment opportunities. The same amount of capital may do more for you with options than trading stocks.
  • Options can excel where other securities fail – Where some market sectors will fail, options can succeed. One reason is that you aren't required to exercise your option to make a profit on it. Sometimes, volatility brings profit.

Day trading options trading has many features and it can be a profitable way to trade.

Drawbacks

Despite these benefits, there are also challenges when day trading options. Fortunately, many of the following obstacles can be mitigated:

  • Wide spreads – Unlike stocks, the spreads for options are usually wider. This is a result of options markets having less liquidity. Wider spreads can result in smaller day trading profits.
  • Less price movement – You may realize that price movement with options can be limited by the time value of your option's premium. Time value is the portion of your option's premium that is attributable to the duration of time left before the expiration of the contract. Despite the price rise of the underlying security, the gains may be countered by a loss in the time value. Fortunately, time value in day trading options is quite restricted.

Such drawbacks can scare some traders away, but if you consider each one before you start day trading options, you can make adjustments to account for them.

What is Buying Power in Trading?

What is day trading buying power? Buying power is the funds that an investor has at their disposal to buy securities. Buying power is equal to the total amount of cash held in their trading account as well as their available margin. A typical margin account offers double equity in the trader' buying power. Greater buying power increases potential profits and losses.

What Stock is Good for Trading?

What stock is good for day trading? Before we answer this, we must consider how to pick a stock for day trading.

When searching for a good stock for day trading, many traders consider volume and volatility. Some prefer large volume with little volatility. In this case, the price moves in small increments, which they scalp.

Trend and range in trading are other factors many traders consider. Some traders focus solely on range (range traders) while others focus solely on trend (trend traders). Some traders effectively focus on both. Range is the difference between a stocks high and low prices within a specific period of time. Trend is the general direction of a stocks price movement, usually up or down. Trend traders often try to predict trends or breakouts to identify trading opportunities.

What is Forex Trading?

What is day trading Forex? Without knowing, some traders ask, 'is forex considered day trading?'. It's not day trading, but it can be used in day trading. To understand what day trading Forex is, we must simply understand what Forex is first. The foreign exchange (Forex or FX) market is an international marketplace for the exchange of national currencies for one another. Because of the global span of commerce, trade and finance, the Forex market tends to be the biggest and most liquid asset market around the world.

Therefore, day trading Forex is the act of purchasing and selling Forex within one trading day, as opposed to trading stocks.

What is the Best Technical Indicator for Trading

What is the best technical indicator for day trading? You will want to consider combining sets of more than one indicator on your chart to help you identify points to enter and exit trades. For example, the RSI and the moving average convergence/divergence (MACD) indicators can be combined on your chart to suggest and reinforce potential trading opportunities. As such, the MACD can be a helpful convergence divergence day trading indicator.

What are the Best Moving Averages for Trading

What are the best moving averages for day trading? Toni Turner, author of the 'A Beginner's Guide to Day Trading Online,' states that the most popular moving averages traders use for day trading are the 10, 20, 50, 100 and 200. The 5–SMA is For hyper traders.

What is the Best Brokerage Account for Trading?

What is the best brokerage account for day trading? When opening an account for day trading, you will want to consider a broker offering low spreads, low commissions and access to the markets you wish to trade.

For example, the Admirals Trade.MT4 account offers access to 11 different markets (currencies, index Futures CFDs, stock CFDs).

Additionally, many of Admirals accounts offer the following:

  • Expert advisors - use automated trading strategies and customised coded indicators
  • MetaTrader Supreme Edition Add-On - access advanced tools such as a built in economic calendar, advanced order types, correlation matrix, market session maps and more
  • One-click trading - enter the market without any additional confirmations to speed up your trading process
  • Volatility protection settings - access a unique set of advanced tools to help you minimise risk while trading
  • Negative balance protection policy  - this means you are covered in the event your account moves into a deficit on an abrupt market move on leveraged positions

And much more! You can find an in-depth comparison of all Admirals trading accounts in our article, How to Choose the Best Forex Trading Account.

If you're ready to trade on the live markets, a live trading account might be more suitable for you. Admirals offers professional traders the ability to trade with 80+ currencies, with access to a range of Forex majors, Forex minors, and exotic currency pairs. To open your live account, click the banner below!

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How to Read a Candlestick Chart for Day Trading

At some point, most traders need to learn how to read candlestick charts for day trading. You can gain a clear and in-depth understanding of how to do so in our article, How to Read Candlestick Charts.

How to Use Bollinger Bands® in Day Trading

Many traders also want to learn how to use Bollinger Bands® in day trading because this indicator can be helpful. Bollinger Bands® are generally used to identify price breakouts and consolidation. Traders watch the upper and lower bands of the indicator to identify when the price is consolidating and preparing to breakout. You can learn more about how to use Bollinger Bands® here.

How to Find Support and Resistance in Day Trading

Many traders will also eventually learn how to find support and resistance in day trading. The support price level acts as a floor supporting the price from falling below it, while the resistance line acts as something like a roof - this is a level the price is struggling to break through during a specif time period. Many factors influence how support and resistance levels become established, such as volume or human emotion and psychology.

You can find more information about how to identify support and resistance levels in day trading in our article, Support and Resistance Indicators with a Trading Strategy. The Fibonacci retracement is one useful method.

How Much Can You Make Day Trading?

Many are attracted to day trading by the potential of earning a lot of money. Beginning traders often ask, 'how much can you make day trading?'. There are many examples of very successful traders, but gaining profits consistently is not easy. Those who aim to make a living from trading should consider that a larger starting capital is required. Due to the risks associated with trading, capital can be lost in a matter of seconds.

Unless you have a strong background and experience in trading, most traders won't start off having their profits from day trading as their main source of income. Our advice is to educate and train yourself. Always test all your strategies on a demo account or trading simulator, where you can practice in real time market conditions in a risk free environment to avoid putting your capital at risk. From here it is an easy transition into live trading.

Experienced traders will attest to the fact that long term success is dependent on constant fine-tuning and improvement. The markets are always in motion and the best results come from a strategy that finely attuned to the current situation. Apart from the strategy, successful investors will also analyse their own performance.

Traders ask themselves the following questions:

  • Is there a position I shouldn't have taken based on my strategy?
  • Have I followed my strategy and trading plan?

It is as important to follow your trading plan as it is to evaluate it at the end of a trading session.

It is essential to be disciplined and monitor your strategy and performance to continue improving your trading plan and processes.

Your goal should be to reduce the number of trading errors you make each day. Ask yourself:

  • Is it a good day?
  • Is it a regular day?
  • Is this a regular day in terms of your trading system and your backtesting test?

The Admiral-Connect trading tool provides easy access to the aforementioned data and other insightful information about your day trading session. This Expert Advisor is part of the Exclusive Admirals MetaTrader Supreme Edition plug-in. Click on the banner below to start your FREE download:

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Admirals is a multi-award winning, globally regulated Forex and CFD broker, offering trading on over 8,000 financial instruments via the world's most popular trading platforms: MetaTrader 4 and MetaTrader 5. Start trading today!

This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.

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