A lot can happen in a day. If you have the skill and experience, you can capitalise on many opportunities in forex within this period. Day trading is a short-term trading style less active than scalping, but repeated execution may occur in a single session (check out our guide comparing day trading and scalping here).
Also, it is not as slow as swing trading or position trading, offering far more set-ups. This also means that you know the outcome of your positions more quickly before starting the next day afresh.
Let’s explore more about intraday trading forex in this in-depth guide.
What is Forex day trading?
It’s all in the name. When you day trade forex, you seek to take advantage of intraday price movements by holding positions for a few hours.
The best periods for day trading in forex are the New York (from 08h00 to 17h00 EST) and London sessions (from 03h00 to 12h00 EST). These times are the busiest when analysts expect the most pronounced price movements.
This meticulous approach means that you don’t engage in the markets at random times to prevent overtrading.
An FX day trader will never hold their orders overnight or on weekends to safeguard against potential gaps, erratic spread changes, and negative swaps. An ordinary forex trading day will see someone open at least five positions daily, trading multiple currency pairs at once.
These typically include major pairs like EUR/USD, and USD/JPY that are the most liquid and have the tightest spreads.
FX day trading chartists target a minimum of a 1:2 risk-to-reward ratio. This means you plan to make $200 for every $100 you risk. However, many forex day traders may have a 1:1 risk-to-reward ratio or less by using a stop loss much wider than their profit target.
The time frames for day traders in forex range from the 1M (1-minute) to the H1 (hourly) charts, which offer the most opportunities. Yet, these have the most market noise, meaning the price action is fast-paced and prone to false signals. This is why currency day trading requires someone to monitor their charts throughout the day.
FX day traders rely primarily on technical analysis and less on fundamental analysis. This is because the former is significant in short-term movements, while the latter is relevant in the long term.
There are countless day trading forex strategies, chart patterns and indicators, given the popularity of this approach. Let’s dive into these in more detail.
Popular forex day trading indicators
Here, we’ll look at the most well-known technical tools used by day traders:
The moving average (MA) is a bread-and-butter technical tool in any financial market. It is based on mean reversion, a theory that prices will return to an average level in an established trend. This is the job of moving averages.
MAs consist of a dynamically advancing line inputted from calculating the average price (usually the closing) over a certain timescale. The most utilized moving average periods in day trading forex strategies are 5, 10, 25, and 50.
So, for instance, a 25-period MA reflects the average closing price over the last 25 days. The shorter the period, the more trend changes it shows (depending on the time frame).
While this attribute may help, it can lead to whipsaws or too many buy-sell signals in a short period.
Regardless, the main idea is to look at where the market is in relation to the moving average. When the price is above the MA, it signals an uptrend; conversely, it reflects a downtrend when the price is below the MA.
The candlestick chart below shows the 25-day MA on the euro 1HR chart.
Relative Strength Index
The RSI (Relative Strength Index) belongs to a class of indicators called oscillators (e.g., stochastics), with it being the most popular. An oscillator or momentum indicator measures the force of price movements.
Why is this important when you learn to day trade forex? Figuring out if something will go up or down is one thing. However, we need to determine how far it is likely to travel in that direction to net some sweet pips. The RSI consists of a line graph moving between 0 and 100 extremes.
When the RSI goes above 70, we refer to this as an overbought signal, suggesting a very bullish market. With rising prices, this condition may also tell us that the price may temporarily move in the opposite direction.
On the other hand, we call it an oversold signal when the RSI is below the 30, implying a very bearish trend. With the falling prices, the market may lose steam and travel in the opposite direction for a short while.
The RSI is primarily an indicator used to trade reversals by spotting divergences (covered later). The chart below shows the RSI on the 30M chart of USD/CAD.
In any day trading forex strategy, this indicator is multi-faceted. It helps analysts identify trends, overbought/oversold conditions, and range. Bollinger Bands consist of two standard deviations (the upper and lower band) away from a moving average (the middle band).
When the price pushes out of the upper or lower bands, it suggests massive strength in that direction. However, traders can expect the market to move back into the band structure.
When the price hovers around the middle band, the bands ‘squeeze.’ This suggests low-volatility periods where the market is likely to move sideways. Many believe it’s only a matter of time before the bands expand as the price picks up steam and breaks out.
Below is a chart with this indicator on the 5-minute AUD/USD chart.
Types of forex daily trading strategies
There are several ways to skin a cat as a day trader in forex.
The moving average effectively identifies the trend with any forex daily trading strategy. It’s a way to quickly establish a bias of whether you should go long or short. However, a moving average can also signal a trend change with the crossover system.
Here, you input two moving averages, a fast and a slow-moving MA, e.g., 50 and 25-period MAs. When either of these intersects, this can imply a trend change. This information can help you spot reversals or warn you to exit an existing position you took before the crossover.
We highlighted the different crossover points on the 1hr chart of NZD/USD with ellipses below.
Exploiting counter-trend movements is a staple of many forex day trading strategies. As mentioned in the last section, the RSI is often the go-to tool. There are several ways of using the RSI in these scenarios.
One way is with divergences, which refer to a misalignment between the highs/lows made by the RSI and the actual price. When the market rises, it will continuously make higher highs along with the indicator.
However, if the RSI suddenly shows a lower high, it’s a potential reversal sign. We call this a bearish divergence. Of course, divergence works both ways.
Let’s demonstrate an example of a bearish divergence. On the 15-minute chart of EUR/CAD, we can see the price trodding upwards, with higher highs (HH). However, the RSI printed a lower high (LH) at some point, resulting in a trend change.
Some traders also use the 50 line as an entry trigger. So, they would wait for the RSI to go below (sell order) or above (buy order) this mark on the indicator. The oversold/overbought conditions may also be other triggers to go long or short.
However, you should never act on this attribute alone, as you need other confirmation factors in your analysis.
Here, a day trade forex strategy can use the Bollinger Bands to trade a sideways market or even a breakout. As mentioned previously, you look for the squeezing of the bands to identify range. You can search for bounces between support and resistance or a breakout.
Let’s look at an example. The 30-minute AUD/CHF chart below shows the market moving between 0.63350 and 0.63900. Notice the contraction of the bands. As the price reached either side a few times, it went back inside the bands.
Eventually, the market broke out of this structure to the downside.
We usually associate trading the news with scalpers. However, day traders can also do the same thing. This is because they can hold an order for a few hours after a particular news event if it’s moving favourably.
It’s not unheard of for a day trading forex strategy to center around high-impact economic releases like interest rate, Consumer Price and employment number changes. These announcements can shift price several tens of pips in one direction for a short while.
However, very few economic events move the market significantly. So, you should know the worthwhile news to trade, and be prepared to react quickly. Finally, you must understand that the market won’t always move according to expectations based on the results.
Pros and cons of forex day trading
Here’s a look at the main benefits and drawbacks of this trading approach:
|The number of trading set-ups is regular, with short-lived wait times between positions.||Day trading is time-consuming and may not be compatible with people with jobs or busy activities.|
|Good Forex daytrading strategies can result in profits over shorter intervals (assuming your system is profitable).||A higher trade frequency doesn’t necessarily equate to bigger gains.|
|You can specialise and familiarise yourself in a handful of pairs.||Forex day traders can expose themselves to unfavourable market conditions due to how many positions they take.|
|With day trading, you don’t keep your positions overnight or over the weekend, lessening the risks of gaps, wide spreads and other price anomalies.||It can lead to overtrading and even become addictive.|
|–||Forex daily trading prevents you from taking advantage of long-term or big moves.|
|–||Market noise is common, resulting in whipsaws or false signals.|
|–||You may incur higher trading costs.|
Tips for better Forex intraday trading
Many newbies wonder, is forex day trading profitable or worthwhile? As with any approach, you must understand the pros and cons involved and work around them. Below are some useful tips.
Having the right personality and time commitment
Can you day trade forex with a traditional full-time job? It is difficult, if not impossible. Yet, day trading is feasible if you work from home and have uninterrupted computer access.
Still, you should understand that this approach requires zero distractions. Mobile apps will become your ally as you can react timeously to the market action. They can help you open and close positions for periods when you are away from your main computer.
Still, even with all the time in the world, not everyone is built for forex daily trading. Each trading style has a personality profile. A day trader has to be a quick thinker that can spend a while on the charts.
Day trading requires that you get accustomed to the fast-paced noisy charts. The speed of action needs someone that can process this data quickly to make good decisions. If you prefer not to close your orders in a few hours, day trading is not for you.
Mastering risk and money management
Even with the best forex day trading system, it won’t make you profitable without managing your downside. A key component is to always use a stop loss. If you are looking to not run your positions overnight (thereby not incurring swaps), you will always want to leave the market with reasonable losses.
A big reason that day traders lose money is not adding a stop loss, which is further amplified by using high margin or incorrect position sizing. New traders perceive that day trading is about being aggressive, which shouldn’t be the case..
Another massive issue is that many risk far more than they can afford to lose. A rule of thumb in forex is only to allocate up to 2% of your equity per trade. So, with a $1000 balance, you shouldn’t risk more than $20 for every position.
Implementing this approach means you can easily withstand potential dry spells or losing streaks. But, most importantly, you commit to a predefined and small risk amount while controlling your emotions or psychology. Once you can manage your losses, you can focus on maximising your profit potential.
You can achieve this in several ways:
- A higher risk-to-reward ratio (using a tighter stop)
- Strategically ‘scaling in’ to your positions
You must also appreciate that trading often doesn’t always increase the amount of profit you can make. While opportunities may seem abundant, be mindful of overtrading.
Ultimately, you should detail everything about risk and money management in a well-prepared trading plan.
Reducing trading costs
Forex day trading is a business, meaning that you will incur expenses. Despite FX being a low-cost instrument, high execution can rack up fees or commissions. So, day traders shouldn’t overlook this factor.
Here’s an example. If the average spread was 5 pips and you took 100 trades in a month, that is 500 pips in fees. How does this translate monetarily? Assuming you traded a standard lot each time on EUR/USD (where every pip is typically worth $10 a pip), that would be $5000 in spreads.
Luckily, there are several remedies to this situation. Firstly, forex day traders should stick with the major pairs and most of the minor pairs. Major pairs have the lowest spreads, making them a preferred option.
Some minor pairs may still be good candidates but the spreads may put a dent. Alternatively, you can opt for a fixed or zero spread account.
Your strategy should also seek to maximise your gains on every order. This starts with an above-average risk-to-reward ratio. If your gains are consistently great, you can easily compensate for losses and fees along the way.
Choosing optimal times and pairs
A forex day trading strategy is only as good as the times and markets it’s implemented. Although day traders can open multiple positions, you should do this methodically. It starts with choosing the busiest sessions and stable but volatile markets:
- Busy periods: When you’re studying how to day trade forex, timing is vital. As we mentioned previously, the London and New York sessions are the best times to day trade. These are intervals where two of the largest financial centres are active.
Another notable period is the session overlaps. In summer and winter, for the London and New York sessions, this is between 08h00 and 12h00 EST. Also, the summer period from 03h00 to 04h00 EST, as the Tokyo open morphs into the London open is a highly active session.
If you trade the news, there are no specific periods because it will depend on the reporting schedules of a certain country. You should pay attention to the economic calendar and be awake where possible.
- Suitable markets: One major benefit of day trading is that you can focus on a select number of forex pairs. Just like you can get -intimate with a friend, so too with currencies, allowing you to understand their behaviour precisely.
Still, not all markets are the same, with some better suited to day trading. You want a relatively stable pair that can also move fluidly and greatly. The major pairs (like GBP/USD, EUR/USD, and USD/JPY) are most preferred for this purpose.
However, it isn’t to say that FX day trading enthusiasts do not dabble with the minor pairs. Markets like GBP/JPY and EUR/NZD are more volatile (meaning greater price movements) than the USD-based markets.
However, you should understand they require larger stops and have slightly higher spreads.
As a beginner, you should never be persuaded that day trading currency pairs is a walk in the park or a quick way to get rich. The reality of this approach is a far cry from the often misleading marketing around it.
As with anything in forex, it can take years to turn day trading into a consistently profitable and successful career. This guide only scratches the surface of this endeavour but should give you an idea of the work involved.