The number of Forex trading methods and strategies in our time is enormous. Of course, in 2020 there are only more such methods. However, among the most popular and effective trading strategies is clearly distinguished day trading: this strategy is used by millions of traders around the world because it combines speed and efficiency. At the same time, it should be noted that day trading is not the easiest way to trade in Forex, so we have prepared a special article about this trading style, with which you can understand whether it suits you or not. In addition, we will tell you why day trading has gained such popularity among traders and, as a bonus, will go through some Forex day trading tips to help you make your trading more efficient
What is day trading?
Day trading is buying and selling the same financial instrument within one day. The number of trades, in this case, does not matter: the day trader remains such, no matter how many positions he has executed, the essence is that all of them must be closed before the end of the trading day. The purpose of day trading is to extract profit, not very large, but frequent, from small market fluctuations, while minimizing losses. On paper, everything looks like day trading is a great way to trade in financial markets with low risk, but its universality and simplicity is deceptive. A day trader needs a lot of knowledge and experience, as well as the ability to discipline and distribute profits.
At the moment there is a whole lot of day trading strategies that allow you to make good money in Forex, with almost minimal risk.
We will now go through some examples of trading styles that are known and actually work. Now there are a lot of them, but now we will list those systems, which have been used a lot of times. They are considered to be the most successful.
Scalping is a group of strategies based on generating small profits from each trade. The essence is that there are a lot of such trades. Accordingly, the profit is gradually accumulated. For example, a trader earns on average 5 USD per trade. If he manages to make 20 such deals in a day, his daily income will be 100 USD.
Scalpers trade on market noise. It is about working on the smallest time frames: M1-M15. The most difficult part of scalping is to close loss-making positions. With this strategy, a trader has neither the strength nor the resources to withstand drawdowns.
If you decide to become a scalper, make sure that you have strong nerves. Not every person can withstand intensive trading throughout the day. While some trades are bound to be loss-making.
Reverse trading is about working on corrections. Actually, this is the main problem of this approach. A trader needs not only to correctly determine the beginning of the reversal but also its depth. And it is necessary to do it daily. Trading on reversals is considered even riskier than scalping. Beginners are highly discouraged from using it.
Momentum trading is considered a simple intraday trading strategy. The essence of the system is to identify strong jumps in quotes, which occur with a strong increase in trading volumes. It should be noted that this approach is better suited for stock and commodity markets. At Forex there is not always an obvious connection between volumes and quotes of currency pairs.
The strategy of momentum trading requires special consistency. A trader needs to wait most of the time, without making extra movements. Theoretically, this approach can bring high profits. However, as we have already written above, it is not applicable to Forex, because it is a non-centralized market, and volumes do not play such an important role as on the stock or commodity exchange.
Forex Day Trading Systems
A Background of the Forex Day Trading System
Day trading is closely linked to understanding what events occur in the market during the day. Immediately after the opening of the market, many traders are ready to place orders, and this leads to some volatility, which can already be used by day traders. With experience, the day trader learns to recognize such market trends, sifting out all other "random" changes. Beginners in the sphere of day trading should not enter the market in the first 20 minutes after its opening, because the volatility at the beginning of the day can easily confuse an inexperienced trader. It is best for beginners to orientate themselves towards daytime hours when the volatility drops slightly. In general, the situation is as follows: "rush hours" give a lot of opportunities for day traders, while the "more free" hours are safest for trading with minimal risk.
There is no sense to argue with the fact that day trading gives a lot of opportunities for making a profit, but, as it has already been said, this type of trading is not simple. In order to make it easier for you to understand the essence of day trading, we have prepared some important factors for you to consider.
Risk. First of all, it is necessary to understand that day trading is a very active form of Forex trading, which implies minimum expectations and maximum actions, so you will need to constantly "keep your hand on the market". Positions in day trading are often opened spontaneously, so it is best not to risk more than 1% of your capital in one trade - in this case your account balance will be safe and risks will be reliably minimized and distributed. For example, if your account balance is $10,000, the amount per trade cannot exceed $100.
Discipline. With all its activity, day trading requires maximum focus and discipline. In other strategies, mistakes are also costly, but one mistake rarely leads to a complete collapse on the "domino principle". In day trading, however, everything is just like this: one wrong step can bury everything, so before you start trading using this system, you should pay close attention to your own discipline. If you notice that you are no different in your ability to make quick and easy decisions, you may have to work on yourself before you can finally start day trading.
Strategy. If you believe that day trading is a single strategy, then you are wrong: there are many different types of it. Yes, trading time will in any case be limited to one day, but otherwise you can vary your approach to the market. Trading by the trend, trading on corrections, breakdowns, and even on the news (although this is not recommended) - all this can be done in day trading.
Time frames. By default, it is assumed that short-term strategies use the minute range M1, but this is far from being a dogma. It is possible to get good and sufficiently fast results at longer intervals as well. We have talked about the open position time above and let's give it the following definition: for scalping, a trade should last no longer than 4-5 price bars (Japanese candlesticks) of the working time frame. Now let us consider them in more detail:
M1. The lowest and "noisiest" with orders of 2-3 minutes and profits up to 5-7 points. Despite the fact that the strategy shows the trend line and graphical patterns of Price Action on history, the pace of real trading does not allow adequate technical analysis. The time frame is the fiefdom of automatic advisors and arrow indicators.
M5. There is much less "noise" here than on M1, but there are still many false signals. It is suitable for news strategy and confirmation of the entry point of the next time frame.
M15. You can start using technical analysis. When moving from M5, you may see a decrease in profitability, which theoretically should not be, because of the higher the time frame, the fewer false signals. In this case, the strategy is not to blame. It is all about the trading psychology that will be discussed separately.
Technical indicators. As we all know, technical analysis works with past price data, which means that all its trading instruments will have a minimum, but lag in terms of the current situation on the market. Keep this in mind when starting trading on a minute time frame! The purpose of the settings is to remove the lag as much as possible and filter out the market "noise" in the final strategy. Precise selection of parameters for a particular trading asset and turns an ordinary indicator, such as moving averages, into a "scalping" one. The presence of the Momentum indicator and tick volume indicator in the strategy almost does not affect the accuracy of the signal. In both cases, the range of past periods is too small and the trading system cannot make any predictions on them. However, moving averages, price channels, such as Envelopes, and oscillators show consistently good results when set up correctly. With this in mind, carefully test non-standard scalping indicators. Make sure that you are looking at a really copyright product.
How Do Forex Day Traders Make Profit?
Traders on the exchange and OTC markets can be classified according to different criteria, one of which is by trading strategies. The trading system covers a large number of parameters, including the frequency of trades and position duration.
Basically, no matter what day trading strategy is used, the algorithm of the trading itself is the same:
Traders define the entry point to enter the market. Day traders trade on low time frames (H1, M30, M15, M5, and M1), as in this case it is extremely important to determine the entry point with the smallest error, because the volume of the trade is large and each point matters.
A position can last from a few seconds to several hours, as long as the market movement is relevant. For a trader, a normal profit target is 10-20 trade points.
The number of positions per day may vary from 2-3 to 15-20, depending on the personal characteristics of a trader's trading strategy.
If we are talking about the exact amount of profit that can be received from day trading, the answer to this depends on the trader himself and on how the trader implements his trading plan. Many traders are extremely active, often opening and exiting a position within a few seconds. Other traders use limit orders and close their positions on the same trading day.
In the Forex market you can earn large sums in a short time, but you should never lose sight of the fact that these large sums can turn into losses in a volatile market within seconds.
In fact, earning money in day trading depends entirely on the quality of a trader's trading plan, on how well it is implemented in practice, and on the discipline of the trader himself. Day trading becomes even more difficult when a trader comes to the market unprepared.
The development of day trading system Forex traders use largely depends on a trader's approach to market analysis. Technical traders usually use charts and support and resistance levels to determine entry and exit points. In this case they can rely on action price signals, as well as on a number of indicators and signals, which warn them when to enter or exit a trade.
Fundamental traders rely on economic news, which is listed in the economic calendar of the country. Important data, such as a country's GDP, employment figures, or interest rate decisions taken by a country's central bank, can increase the volatility of a currency pair, which is generally the best trading environment for day traders.
The Best Forex Day Trading Systems
Day traders, in an effort to maximize daily profits and to diversify the portfolio, often use one or more trading styles and methods. Here is a list of most popular and effective Forex day trading systems:
Scalping is the easiest but quite effective method. It consists of setting a certain threshold for closing a position. For example, if a trader sets a plan to close positions 5x5, then when the trend position changes by 5 points in plus or minus the trader closes the position in any case. In the first situation, he gets a profit, in the second loss.
To make the chances of getting profit exceed the chances of the opposite result, the trader uses the methods of technical analysis. And setting the Stop Loss on the position as close to the price as possible allows getting the maximum possible profit. At the same time, it is important to follow the rule for losses - as soon as the trend movement is 5 points, the position is closed. The threshold to be reached by the position is set by each trader based on his own experience.
When scalping, it is important to choose the right moment to enter the market. Usually this is done when the trend is moving confidently. In this case, the position quickly reaches the necessary level of profit and closes, or the trader sets a Stop Loss and monitors the further progress of the trend, moving the Stop Loss if necessary. Once the trend changes direction, the position closes.
It should be said that assets in day trading should be characterized by high liquidity. If an investor can afford to invest in quiet stocks with a 20% annual growth, then the day trader should choose the most volatile assets or assets with bright trends to make the most of the day's fluctuations. The higher the fluctuation, the higher the potential profit.
Daily Pivots: the system of trading at Pivot levels aims to profit from the intraday volatility changes. Pivot levels can be defined as pivot points. It is a kind of technical indicator that is calculated as an average of three prices: the maximum, minimum, and closing prices of a currency pair.
The point here is to buy at the lowest price in the day and sell at the highest one.
Now many traders use the formula of Pivot levels, in addition, an automatic calculator to calculate them can be easily found online.
Fading: means trading against a trend. If there is an upward movement, followers of this style will sell, if there is a bearish momentum, they will open buy positions.
This intraday system is trading against the market and its prevailing trend, while using other strategies traders tend to get in motion.
Fading can be used in three cases:
An asset is overbought.
Investors who bought in advance, are ready to fix the profit.
Newly acquired investors are at risk.
Trading against a trend can be very risky, and a trader applying it must be prepared for large losses. But at the same time, this technique can bring unexpectedly large profits. The main principle of trading against the trend is to place two limit orders: buy limit - below the current price, and sell limit - above it.
Despite the risks that accompany trading against the main market trend, a trader can make a good profit if the price reverses, as it is assumed that a strong upward or downward movement will register several such reversals.
Momentum: this system is based on finding an asset that shows a strong movement and that is likely to increase. The strategy expects the trend to continue, not to reverse.
A trader who follows this tactic will buy in case of an upward movement and sell in case of a downward movement. Unlike traders who work at the Pivot daily levels, who buy an asset at a low price and sell at a high price, investors who use a momentum trading system buy expensively to sell even more.
Momentum traders use technical indicators such as MACD, RSI and the Momentum Oscillator to determine where the price is moving and when to open a position. They also pay attention to the news and take into account position volume.
According to the widely known financial analyst Larry Light, trading by momentum gives an opportunity to beat the market and avoid losses as long as investors follow the trend and focus only on those stocks that show growth.
What is the Best Forex Day Trading System?
Having gone through the different Forex day trading systems you should be confused by now and wondering which one is the best to get the most out of trading. Of course, finding the perfect system is a pretty painstaking thing to do, but rest assured, it worth it since once you find that Holy Grail the whole process of trading will be a pleasure, left alone the profits you will enjoy.
When choosing a system, as well as when choosing a car or a life partner, you should be guided by your personal preferences. While studying this or that system, ask yourself: do you like it? Will you feel comfortable and confident trading according to it? After all, if you do not have confidence in the system, after the first losing trade, without which you cannot do anything in trading, you will begin to doubt, miss signals that could lead to profits, distort the pre-defined rules, etc. You should feel confident in the system, it should fit your temperament and risk appetite.
Before you start looking for the system to suit you, we strictly remind you that there are no one hundred percent profitable algorithms of work - each trading scheme has a certain level of risk and possible profit. The same system can be an effective tool in the hands of one trader, but not bring good earnings to another user. This is due to the influence of psychological factors, discipline in the market, the mood of market participants.
All in all, the best thing you can do is to test, test, and test. Unfortunately, there is no other way to obtain that "the one" system fitting your needs and abilities.
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Forex Day Trading Tips
Here are some simple tips to help you avoid the most common mistakes in day trading:
Try never to sell an asset cheaper than you bought it. Practice shows that sooner or later the price will return to its previous level.
Avoid panic, especially when there is a sharp drop in value, it is always accompanied by waves of corrections. If you wait a little bit, you can sell more expensive.
Trade only with a fixed spread. Let it be a couple of points higher than the floating one, but it gives you the guarantee that the system will not stop making profits when it expands sharply. For example, during the release of important news.
Keep up to date on the asset you are trading. The information thrown in at the right time can have a significant impact on the trend.
You should understand that short-term trades do not enter the interbank market and are conducted exclusively within the broker. Therefore, NDD (No Dealing Desk) accounts are not suitable for scalping, as they initially do not have a fixed spread or requotes.
One-minute trades do not cancel a thorough analysis of the current situation. Often behind the "trees" of day trading, a trader stops to see the "forest" of the market, which can lead to trouble at any time. Fundamental events can take away in a couple of minutes what the trading system has been earning for days or vice versa you can miss the growth of average volatility, when you can increase Take Profit and get more profit.
To sum up, the theory is again far from practical and short-term strategies, despite their external simplicity, require experience and knowledge. You can quickly get only losses, and in order to make some profit you should work hard and persistently.
Trade Risk-Free With A Demo Account
A demo account at Forex is a training tool that allows you to get the necessary skills to trade on the financial markets, learn the peculiarities of trading. In essence, a demo account allows you to practice before real trading. The tool is used for the following purposes:
Training. A demo account allows you to learn the details of trading absolutely free. A beginner does not need to be afraid of losing his own funds or look for an opportunity to start trading with minimal investments. With a demo account any beginner can learn how to use the technical indicators and practice to analyze price movements risk-free. With the help of training, a beginner will be able to learn the basics of fundamental and technical analysis.
Testing new strategies. Professionals use a demo account to test the new technique of behavior. The market is a platform where every step should be thought over because chaotic behavior in trading is fraught with large losses. That's why it is highly recommended to develop your own strategy and try it out without risk of losing.
Learning to work with the software. All traders know that it is impossible to make a single trade without special software. Each automated instrument has its own peculiarities and before placing real funds it is recommended to learn the subtleties of trading on a training account, especially since its absolutely free.
Moral preparation for real trading.A demo account is an excellent condition for gaining success in real trading by means of improving your trading strategies. To start practicing and testing the systems we have discussed in this article, open a demo account right now.