A Complete Guide to Day Trading Forex

What is Day Trading?

Let us be clear about what exactly day trading Forex means. It can be defined as sitting in front of a trading screen for a meaningful continuous period of time and making trades that should substantially be closed by the time the trader closes up the computer and is done for the session.

A day trader might be scalping, meaning going for fast trades with very small profit targets of under 10 pips or so, or they might even be swing trading, trying to catch a daily move for as much 200 or so pips. Both can be day trading if these trades are opened and closed within a single session.

The Pros and Cons of Day Trading

There are potential advantages and disadvantages in choosing to be a day trader.

The major advantage of day trading over longer-term trading is probably the same for most people: that day traders usually close out their trades at the end of your day trading session, switch off, and forget about the market until the next session.

Many are attracted to the peace of mind this can offer, especially over weekends when Forex markets are closed – although there are a few brokers now which offer Forex trading over the weekend, not to mention cryptocurrencies which trade over the weekend too. Day traders can also enjoy the advantage of not having to pay overnight swap fees if they do not leave any positions open over 5pm New York time, when swaps are usually paid or charged.

Perhaps most importantly, a successful day trader can make more money than they would by using a longer-term trading style.

The major disadvantage to day trading is that it is very challenging, and for less experienced traders, it tends to be less profitable than longer-term trading styles.

The Challenge of Day Trading

Day trading is very challenging, both technically and emotionally. There are so many things that have to go right in order to consistently make money that it becomes very easy to lose. Most traders who try to trade like this are not successful. That does not mean that you cannot be, it just means that you have to be skilled, organized, and emotionally stable in order to have a good chance of winning.

It is not recommended for new traders to begin trading in a day trading style. Day trading Forex is very popular because it is exciting, because there can be a lot of action, and because it is easy to see all the intraday price movement and think this can be converted into lots of profit. A skilled trader might be able to do this, but it is nowhere near as easy as it looks. New traders are better advised to begin with position and/or swing trading, which is a much easier way to extract money from the market, and to build up their trading skills in the meantime. Once they have built competence, they can later move into day trading if they want to.

If you are going to day trade Forex, you are going to need to be organized and systematic as to how you go about it. Here I will set out a guide explaining how you might approach it. You need to plan several things in advance before the trading starts.

A Day Trading Plan

First of all, decide which hours you are going to trade. You need to be somewhere calm and quiet where you will not be interrupted and where you will be comfortable. When day trading, being able to get in and out of trades quickly is essential, so you do not want any external problems or distractions.

Before you begin to trade, you should check an economic calendar to see if there are going to be any high-impact data releases concerning currencies you are going to be trading. Keep in mind that when you are looking at stop losses that might be no more than 10 to 40 pips away, unexpected economic data can make a great trade a losing trade in a split second. Is there any point in being so closely exposed to a random stop loss to the point where trading becomes gambling? Probably not, so exit trades that are close to stop losses before the relevant news release.

It is probably a good idea to be prepared to trade any of the three major currency pairs: EUR/USD, GBP/USD, or USD/JPY. Before you start trading, you should look at a long-term chart and mark key trend lines and support and resistance levels that are anywhere near the current price. If there is one pair that has been more active and directional than the others lately, then this is the one to focus on, especially if there is high-impact news scheduled for one or ideally both sides of the pair.

Secondly, depending upon the time of day that you are trading, it is a good idea to put lines on the chart marking the highs and lows of previous sessions, especially the ones which really stand out as inflection points. Some traders also like to mark session opens, but I personally believe they are far less important.

A good day trading strategy will involve being flexible and taking advantage of your continuous presence in front of the screen to quickly identify low-risk entry points with tight stop losses. Another part of a day trading strategy will involve being ready to get out of a trade quickly if it turns against you, without being overly hasty in doing so.

Real-Life Example of a Day Trade

As an example, see the chart below. I was considering trading GBP/USD beginning at the London open. In the course of my preparations, I marked the high and low of the previous Asian (Tokyo) session with pink lines:

This was an unusually large Asian session range, and London was opening (shown by the green horizontal line) right in the middle of it. An unusually large Asian session range is usually a sign that it is going to be hard to break out of the Asian range, so a profitable day trading strategy here was to look to fade (trade against) the pink lines. Looking at the pink lines, it can be seen that the lower pink line looked more solid than the higher one, as it had been respected three times over the Asian session. Another reason why that low looked interesting, is that it was only about 10 pips above key long-term support at 1.5750, which was also a key psychological number. For all these reasons, it was logical to look for a bullish turn in price there to give a long trade entry.

Slightly more than an hour after the London open, the price reached the Asian session low, and turned around quickly, giving a nice long trade. Note that the turn candle in the 5-minute chart below was quite easy to identify as such, because:

It bounced quickly and strongly off the low.

It was the first strongly bullish candle after the entire move down.

It was not touching either of the moving average lines, suggesting the price had become “over-extended” and was due to snap back in the long direction.

I entered long when the price broke above that candle’s high. This trade gave a maximum of 38 pips for a risk of 7 pips, which is a great reward to risk ratio. It is the possibility of achieving trades with this kind of reward to risk ratio that can make day trading really worthwhile.

A Profitable Day Trading Strategy that Works

Creating a good day trading strategy is quite simple: just take any trading strategy that works on higher time frames such as the daily time frame, and use shorter time frames to take the entries that are already being signaled.

For example, one trading strategy that has a great track record over many years is trading 50-day breakouts on the EUR/USD and USD/JPY currency pairs, using a stop loss equal to one day’s average true range over the last 15 days or so.

You can apply this to day trading by, for example, waiting until the EUR/USD ends the New York session at a 50-day high, and then opening a day trading session the next day and looking for a long trade.

You already know that the daily chart and long-term trend are telling you that the odds are in favor of a long trade, so look only for a long trade. The great thing about day trading like this is that if you catch the turn that day, you might be able to catch a move of say 200 pips of profit if you leave the trade open over several days, but using only a 20-pip stop loss instead of perhaps an 80-pip stop loss you would need when trading this strategy on a daily chart.

I said earlier that day traders close out all their positions at the end of a day’s trading session, but there is no rule saying you have to do this – as long as you make sure there is a reasonable hard stop loss order in place before you switch off. If the price is trending strongly, why not leave at least some of your winning trade in floating profit to run overnight?

The real secret of day trading is that it enables you to make bigger profits through the use of relatively tight stop losses. In the above example, by succeeding with a 20 pip stop instead of an 80 pip stop, you would multiply your profit, your reward to risk ratio, by a factor of four.

The reality is that Forex trading is rather simple. Think about it: you place a trade and either it goes in your favor or not. Every trade you take has a roughly 50-50 chance to work out, maybe as high as 60-40 if you really do well. Markets will either go higher or lower. You can help move the odds a little bit more in your favor if you can find tighter spreads. The spread is essentially the same thing that a casino does on a roulette wheel, with those two green numbers making sure that the red and the black players don’t automatically win half of the gains each. The casino acts as a market maker, keeping everything that hits those two green numbers while the red and the black players throw money back and forth at each other. This is essentially how most Forex platforms work. That is why I say there is “a roughly 50-50 chance to work out.” Due to spreads and other trading fees, it is probably a little closer to 49%.

In the end, a trade either works out or it does not. If you have a little bit of trading acumen, then you can tilt the odds a little further in your favor. Or perhaps you have the ability to hold onto gains much longer than the average trader, and therefore your profits are much larger. In the end, there is no specific magic strategy. That does not mean there are not some things you can do to increase your profitability and the likelihood that you are going to become a profitable trader.

The Importance of Money Management in Day Trading

I’m going to use two words that many traders around the world hate to hear: money management. I know it seems like a very boring topic, but at the end it is the only one that truly matters. I know most of you have probably read articles about how only risking 1% on a trade is much better than 10%, mainly because it allows you to take a string of losses, something that will certainly happen eventually.

How would you feel knowing that professional traders very rarely risk more than 1%, and often risk much less than that? I can feel you rolling your eyes. However, this is the reality of a professional trading, and most professional trading shops will not allow you to lose more than a couple of percent per day. There is a reason for this: you need to be able to preserve your trading capital to stay in the game. Even a good trader can lose five trades in a row. Think about how brutal that will to be if you lose 10% of your capital every time you make a bad trade. It will take you a long time to get that back, even under the best of circumstances. Most traders fail at that point and then do something truly desperate, cranking up their true leverage and losing the rest of it.

Money management is by far the biggest part of succeeding in this trading world. I know you have heard this before, and I also know you are probably tired of hearing it. However, there is a reason you heard it more than once.

The Importance of Back Testing in Day Trading

There are a multitude of trading systems out there that are freely available for you to try on the Internet. It can be simple moving average crossover systems, or something as simple as buying a hammer or selling a shooting star at a large, round, psychologically significant number such as 1.20 on a chart. It does not necessarily matter much what your system is, but you need to give anything you are doing the opportunity to work overtime.

If you are not willing to demo trade any system for a significant amount of time, you are simply looking to gamble. The statistics will not lie given a large enough sample, and then you will know whether something works. Once you prove that something works over the long run, then it is ready to go live. However, this is where psychology comes in, so you need to learn to trust your own system. If it truly works out over a long time covering a wide range of market conditions in a Forex demo account, it should do the same in live markets. If we have a sample of 1000 demo trades that has a success rate of 61%, if you try 1000 live trades, your success rate should be somewhere close to that same 61%.

The real question you are going to run into is whether you can believe and trust your system. I truly believe that the psychology of trading is an underserved part of anybody’s system. Unfortunately, that is something that most people will ignore. They are too worried about being right about the market, and not listening. This is why most aspiring traders will fail.

Final Thoughts

As you can see, I went through a process to get to that nice winning trade I outlined earlier. I looked at the 4 major Forex pairs and the economic calendar and decided to focus on GBP/USD that day. I looked at a session low and major support and went for a bounce based upon the candlestick formation and the moving averages. If instead the price had broken below that Asian session low, pulled back and then begun to move down strongly, I would have looked to go short. The pink lines are pivotal points, but you can trade against them or trade with a break out past them, depending upon what the price action is telling you.

Successful day trading is all about looking at the big picture and being flexible, and then spotting the opportunities where for a risk of say 10 pips or less, there is an opportunity to win maybe 30 to 40 pips at least. Catching the turn at the low or high in the day early in a major session for a Forex pair can be a good way to go about achieving this, entering just in front of a low-risk small turn candle, with the stop loss just the other side of it.

FAQs

How much do Forex Day Traders Make?

The amount varies greatly, but the important thing to understand is that Forex day traders do not tend to make profits every day. Day traders have losing days and winning days, but the profitable ones end up winning overall because their winning days are better than their losing days.

Can I trade Forex with $10?

Yes, there are many Forex brokers with no minimum deposit requirement or who require only $10. However, you cannot really trade properly with such a small sum unless you open an account with a Forex broker offering nano-accounts who lets you trade with very small position sizes.

Can you start day trading with $500?

A deposit of $500 is more than enough to enable day trading in Forex with most Forex brokers.

Who is the richest day trader?

The richest day trader alive is probably Paul Tudor Jones with a net worth estimated at $4.5 billion, although it not clear if he still day trades.