Day trading the Forex market sounds like one of the best jobs in the world. And yes, it is true, becoming a Forex day trader is something that has become more and more accessible over the last 10-15 years.
But of course, the reality of becoming a Forex trader means you need to put real money on the line. And this is challenge we are all faced with.
On one hand there is the suggested freedom and glamour of Forex trading and on the other is the real risk of losing your hard-earned savings.
Today we are going to look at several approaches to investing on the currency market, with day trading being perhaps the most popular.
What does Forex day trading mean?
Day trading refers to a strategy where a trader only holds a position on currency pairs over the short-term, from a few minutes to a day.
The main idea behind this trading method is that a trader open and close all his/her FX trading positions the same trading day to take advantage of market volatility without having the pay extra fees for holding positions overnight.
You may also hear people refer to this approach to the markets as intraday trading.
What are the main advantages and challenges of day trading in the Forex market?
There are several advantages for day traders in the forex market. Let’s have a look at some of them.
Advantage #1: Day trading reduces your overnight risk
By not having any positions open during the night, a day trader reduces overnight risk from unforeseen events that arise in other trading sessions.
For instance, while you’re sleeping, a central bank from the other side of the world could decide to implement changes in its monetary policy. If market participants weren’t expecting this decision, the reaction and market moves can be swift and volatile.
Remember January 15th, 2015, when the Swiss National Bank decided to stop the exchange rate of CHF 1.20 per Euro?
Investors in Asia must have been surprised with the flash crash on the Swiss Franc when they woke up and checked their trading accounts.
There was no doubt this was one of the biggest news announcements in the history of the Forex markets.
When market news like this breaks, you can be glad that you were square by the end of your trading session and held no overnight risk.
Advantage #2: Access to ‘other people’s money’ for a period of time
Another advantage of day trading is you are able to leverage your initial starting capital.
Essentially, this increases your market exposure, allowing you to invest more money than you own in your account.
But with higher leverage comes the opportunity for greater returns but also an increased risk. You must understand the risk warning in that you can lose more than what you start with, so trade at very low levels of leverage.
Day trading in Forex comes with great responsibility. Unfortunately, many set unrealistic expectations based on their ability to access leverage.
Don’t fall for this trap. Instead, trade conservatively, learn the trading basics and learn to trade Forex with a sensible foundation.
Like trading other instruments such as CFDs, Indices, Commodities and Cryptocurrencies, day trading forex pairs has its challenges.
Here are some that you need to keep in mind and be aware of if you want to day trade the forex market.
Challenge #1: Leverage, a double-edged sword
The main challenge to face while day trading is to wisely use the leverage you have access to. With leverage, market movements are amplified, which means your profits (as well as your losses) are magnified.
If managed properly, leverage can be used as a sensible option to improve your end of year trading results.
But it should come with tight risk and money management controls to protect your trading capital against potential losses.
The beauty of the MT4 trading platform is that you have access to stop loss and take profit orders.
Always be sure to place a stop on every trade, making sure to risk a small amount of your overall capital on any one trade at any one time.
So, don’t overtrade, use appropriate leverage, and control your risks.
Challenge #2: Time and energy consuming
Day trading is quite a stressful, tiring, and energy-consuming job.
You have to consistently watch the charts during the day to spot trading opportunities that respect your trade set-ups and monitor the economic calendar to be aware of the events that could trigger volatility.
Unless of course you are creating and executing your own Expert Advisors.
Expert Advisors or EAs as they are known, allow you to program in all your entry, exit and risk management parameters and have the computer automate every order into the market 24hrs a day.
This is done using a Forex VPS service which makes sure all your orders are ready to go when the market is open.
Day trading requires great stress control, concentration, dedication, and patience, so don’t think that day trading means ‘easy profits’.
You must treat it with the respect it deserves.
A few tips to improve your Forex day trading strategy
· Know your personality, your strengths and your weaknesses
· Be aware of the different psychological biases that can influence your judgment and behaviour
· Be patient, dedicated, committed, focus, and disciplined
· Only trade with the money you can afford to lose
· Wisely use market volatility, leverage, and margin trading
· Stick to your trading plan
· Keep an eye on the economic and Forex calendar
· Use Forex correlation, as well as inter-market correlations, to find imbalanced supply and demand relationships for more trading opportunities.
Risk management and your day trading
Day trading the forex market calls for strict money and risk management rules.
It is a well-known fact that forex prices can move quite rapidly and as a trader, you are trying to capture the different trading opportunities within the trading day.
It is a must to have your risk management strategy in place and to stick to it if you want to succeed in day trading the forex market.
Here are some money and risk management rules you can use:
· cut your losses off short and let your profits run
· use a risk/reward ratio of at least 1 to 1 and up to 2:1. Those medium to long term trend followers tend to go for 3 to 1 reward to risk ratios.
· adapt the size of your position to your trading capital and to market conditions
· use stop-loss and take-profit orders
· have realistic goals
· don’t invest all your capital in one trade
To make the most of your day trading the forex market you need to have a few trading strategies on hand.
This will ensure you can take advantage of the different trade set-ups that will present themselves throughout the trading day.
Whether you’re a beginner FX trader or an advanced trader, these are some of the key trading strategies that you can implement to be successful in day trading the forex market.
· trading around the news (news trading)
· momentum
· support/resistance
· pull-back
· break-out
· reversal
· pivot points
· swing trading
Use a demo trading account to test your day trading strategy
Remember to keep learning about trading, the Forex market and money management.
Successful traders will tell you, trading Forex is a lifelong journey which never stays still.
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