Forex Day Trading: What Is It & How To Do It?
Day trading forex is a popular tactic among traders all over the world. But it's a time-intensive approach that requires plenty of analysis and regular monitoring. It's a strategy that's perhaps best suited to more experienced traders, but you can start your education right here. Read on to find out more about forex day trading strategies and the pros and cons involved.
Forex day trading: What to expect from our guide
- Can you day trade forex?
- Forex day trading strategies
- What are the best indicators for day trading forex?
- What are the pros of forex day trading?
- What are the risks of forex day trading?
- Which are the best forex pairs to day trade?
- Which instruments can be used for day trading forex?
- Learn more about forex and day trading with Tradu
Can you day trade forex?
Yes, day trading forex is commonplace among traders globally. When you adopt a day trading strategy, all positions are opened and closed within the same day. Some positions will remain open for a matter of hours, while others will be open for only minutes or even seconds.
The short-term nature of this approach means that significant profits on any individual position are few and far between. Instead, the idea behind day trading forex is to accumulate lots of smaller profits by opening and closing multiple positions within the same day or trading session.
Popular forex day trading strategies
You can day trade forex in a number of different ways. All involve opening and closing positions within the same day, but they vary in their implementation. The key is to identify which of the various forex day trading strategies are going to suit your situation in terms of the time you have available, how much experience you've built up, and the goals you've set. Common examples include:
- Trend trading: Analysing the patterns of a pair's price movement and taking up a position in accordance with that trend; for example, going long in a bullish market. Find out more in our guide to trend trading.
- Swing trading: Identifying where a pattern or trend is set to move in the opposite direction, before opening positions to capitalise on that swing. Find out more in our guide to swing trading.
- Range trading: Recognising the resistance and support levels of a pair's value and taking up positions within that range. Find out more in our guide to range trading.
What are the best indicators for day trading forex?
Forex day trading requires you to adopt a very narrow focus. You need to analyse how a currency pair's value fluctuates over a few hours rather than days, weeks, months or years. There are several factors you need to take into consideration, but the best indicators for day trading forex are the pair's volatility, liquidity and volume.
- Volatility: Sudden and significant movement in the performance of a currency pair can create opportunities to make a profit – or incur a loss. The short-term nature of forex day trading means substantial fluctuations are less common, although some pairs are traditionally more volatile than others. Check out our guides to the most volatile currency pairs and the least volatile currency pairs.
- Liquidity: Forex is the most liquid market in the world, with trillions of dollars worth of trades being executed on a daily basis. And the most popular currency pairs – such as USD/EUR, USD/JPY and USD/GBP – offer high liquidity. This enables you to open and close multiple positions within a short time frame.
- Volume: The most popular currency pairs are traded in extremely high volume, which in itself offers plenty of opportunities. With so many trades being executed, you have more data from which you can identify trends, shape your analysis and inform your decisions.
What are the pros of forex day trading?
- No overnight fees: All your positions are opened and closed within the same day, so you're not subject to the fees some brokers charge for maintaining your positions from one day into the next.
- No gapping: If a pair's value has shifted between the market closing one day and re-opening the next, you can incur a loss. But when day trading forex, you won't have any overnight positions to worry about.
- Trading on leverage: You can day trade forex using leveraged products like contracts for difference (CFDs). These allow you to take up larger positions while only putting up a percentage of the capital that would be required for a conventional trade. This can offer the opportunity to amplify your profits. Find out more about trading on leverage.
- Trade both ways: CFDs are derivative instruments, so you can speculate on the value of a pair going up or down, depending on market sentiment and your research and analysis. This enables you to profit from bullish and bearish markets.
- Lower volatility: The short-term nature of forex day trading means significant price movements are less common, especially for positions that are only open for a matter of seconds or minutes. This means the risk of incurring a heavy loss on an individual trade is reduced.
What are the risks of forex day trading?
- Additional charges: If you are executing multiple trades in a day, the transaction fees charged by your broker could soon start to mount up and eat into your profits.
- Trading on leverage: This can be both a benefit and a risk. When you day trade forex using leveraged products, you are exposed for the full value of the position, not just the deposit you put down. So, if the market moves against you, your losses could be amplified.
- Lower volatility: This can prove an advantage in that it lowers your risk of incurring a substantial loss. However, it does mean that significant profits have to be accumulated more slowly, and if you do suffer a sudden and unexpectedly heavy loss, it can wipe out a lot of the capital earned from multiple profitable trades.
- Time-intensive: Day trading forex requires frequent monitoring of the markets and their prevalent trends to help you make decisions with sufficient regularity. This can place a major demand on your time, and you'll need to ensure you can devote the required resources to implement your strategy properly.
Which are the best forex pairs to day trade?
When devising your forex day trading strategy, choosing the right currency pair(s) will depend on several things. For example, if your risk appetite is high and you're seeking the possibility of securing greater returns, you might take up positions in some of the more volatile currency pairs such as AUD/JPY or USD/ZAR.
You'll also need to take into account your level of knowledge of the two currencies and their economies. If you have little understanding of the South African economy and its influencing factors, for instance, then trading USD/ZAR may be fraught with greater risk.
If you're prioritising liquidity and volume, the majors are the preferred forex pairs to day trade. According to data from the Bank for International Settlements, the USD/EUR is the most popular pair and accounts for 22.7% of all daily over-the-counter exchanges, at a value of $1.7 trillion. Second and third on the list respectively are USD/JPY (13.5%, $1 trillion) and USD/GBP (9.5%, $714 billion).
These majors, linked to the most powerful economies in the world, tend to offer greater stability and lower volatility. However, that doesn't automatically make them the best forex pairs for you to day trade. Your strategy needs to be bespoke to you and built around your specific objectives.
Which instruments can be used for day trading forex?
You can day trade forex using CFDs, which are both derivative instruments. This means you are speculating on the future performance of a currency pair without taking ownership of the underlying asset.
CFD trading is where a buyer and seller enter into a contract where they agree to exchange the difference in a pair's value from the point at which the contract is opened to when it is closed.
Both are leveraged products, which offers opportunities and risks. Trading on leverage allows you to open larger positions for a relatively small outlay, but it's important to remember that you are exposed for the full value of the position and not just your initial deposit.
So, this can have the effect of amplifying your profits if the trade works out in your favour. But if it doesn't, your losses will be multiplied too. Find out more about CFDs in our articles below:
Learn more about forex and day trading with Tradu
Our proprietary platform can offer all the tools you need to put your forex day trading strategy into play. You'll have access to live charts and analytics to help you identify trends and inform your decisions. It takes just a matter of minutes to open your account and if you want to build your knowledge further you can check out our day trading guide as well as a host of other related articles.