Guide: How to Day Trade Forex Successfully for Beginners
Published December 30, 2021.
Foreign exchange day trading has blossomed in recent years, thanks to the abundance of online trading platforms and the easy user experience on these outlets.
Like day trading stocks, day trading in forex consists of buying and selling currency pairs within a single trading session. So, you will open positions at the start of a trading day and close those same positions the same day. This is done either once or multiple times per day, especially if you spot momentum or small market movements.
This post will break down the basics of forex day trading so that you can start as soon as possible.
What Is Forex Day Trading?
Forex trading is the largest and most actively traded market in the world today. This consists of purchasing one currency and selling another as you trade currency pairs.
For example, you will trade USD/CAD, GBP/JPY, or EUR/CHF. The quote attached to these pairs in the forex market will tell you how many euros are needed to purchase one Swiss franc, for instance.
So, a common query among beginners is how to day trade the forex market. Typically, the three most common tactics are:
- Scalping Taking advantage of short price movements.
- Moving Averages Indicators (simple moving average or exponential moving average) that project the direction of a price movement.
- Candlestick Patterns Investors will enter the market determined by a specific candlestick pattern, like pin bar, triangle, or inside/outside bar.
Now, because forex is regulated by the National Futures Association (NFA), there are not too many official rules you need to be concerned about as you endeavor on forex day trading.
That said, there are several recommendations from industry observers you need to adhere to before executing a GBP/JPY or EUR/CHF trade.
The first is that the minimum capital for forex day trading is $100. But market experts say that starting out with $5,000 is the best way to start.
The second is that 1% to 5% of your overall day trading account should be allocated to foreign exchange.
Remember, forex day trading is typically done during local market hours rather than buying and selling currency pairs all day long. Like a day trader who trades stocks from the opening bell to around 11:30 am, a forex day trader will execute transactions during periods of heavy volatility. Or, if you are a forex day trader situated in a different time zone, you might concentrate on forex trading during New York or London hours.
Best Forex Day Trading Strategies for Beginners
When you forex day trade, you need to assess several market conditions before you venture forward: liquidity, volatility, and volume. Once you know how the market is operating during a particular session, you need to employ one of your day trading strategies to ensure you are trading the right way.
But which forex trading strategy should you include?
These are the three best tactics to employ when you are day trading currency pairs:
1. Swing Trading
Are you noticing short-term trading price patterns? This might be your moment to profit from the up or down movement of a currency pair in intraday trading. Known as swing trading, investors can earn quite a bit of return by taking advantage of the market's price adjustment.
Scalping is a popular short-term trading strategy because it elicits routine profits based on fast movements in prices. Essentially, a scalping initiative consists of taking smaller profits repeatedly during a session. But you need to establish an exit strategy so you do not miss out on your opportunity to walk away with gains.
3. Money Flow Indicator
Is a currency pair oversold or overbought? Whatever the case may be, a money flow indicator will tell you how the asset is performing by combing through volumes and price movements.
Put simply, a reading of 80 or higher suggests the pair is overbought and a reading of 20 or below highlights the pair is oversold.
How Do Forex Trading and Day Trading Differ?
Forex trading is highly liquid and runs 24/5, meaning that you can execute trades at any time during the week. If this is the case, would a forex trader technically be the same as a day trader? Not exactly.
Regular forex trading could consist of swing trading (holding onto an asset for several days) or long-term investing (holding onto a currency pair for several months). However, forex day trading includes going in and out of forex positions in a single session as you monitor up and down price movements.
Now, the three primary types of forex trading:
- Day trading You do not hold positions overnight and will employ quick trades to turn a profit.
- Swing trading You are holding onto your position for a few sessions as you wait for current events, news reports, or political developments to impact the currency pair in your favor.
- Position trading You have a strategy and you are speculating, based on fundamental analysis and research, on positive long-term price movements of a particular currency pair.
Pros and Cons of Day Trading
- Plenty of volatility
- Instant results
- Reduced trading overhead
- A risk of overtrading in forex
- Greater odds of losing more trades than winning
- Addiction to day trading
Pros and Cons of Swing Trading
- Part-time trading is popular
- Time commitment can be minimal based on your schedule
- Your capital is not frozen for too long
- You will face the risk of overnight and weekly risks
- Timing the market is a challenge
- Trading costs could add up
- Risk of missing out on additional gains
Pros and Cons of Position Trading
- You will miss the volatility
- Gains could be greater with a specific price target
- Buy the dips
- Avoid the stress of day and swing trading
- Zero time needed outside of your research
- A minor drop could lead to a full bear market
- A winning trade could switch to a losing alternative
How to Find the Best Broker
So, how do you find the best broker for your trading needs anyway?
The most superior way to come across the top forex day trading brokers is by listing important criteria and what attributes matter to you. For example, forex day traders will generally home in on the lowest commissions and fees and a user-friendly interface. Many websites claim to offer these features to users, but the reviews suggest that IronFx, Fortrade, and easyMarkets provide these tools to clients.
How to Start Day Trading Forex Successfully
The best way to trade forex is by arming yourself with the tools, resources, and knowledge to successfully execute trades. This consists of following trends, knowing market times, and monitoring trading charts.
That said, let's become acquainted with these things.
A trend showcases the movement of a price in a specific direction over a period. These trends can be long- or short-term and upward, downward, or sideways.
The forex market is open 24 hours a day, five days a week, worldwide. That said, since most forex traders will trade between the hours of 8 am and 4 pm local time, investors and analysts typically view this period as when the market opens and closes.
Terms You'll Need to Know
If you come across a superb research note, or you have found a great community to monitor, you may be confused by some of the terms. To help you out, here are a few terms to become familiar with:
- PIP The percentage in point, or PIP, is the fourth decimal on a price quote for a currency pair.
- Bid/Ask Price The bid is the price a trader wants to sell a currency pair. The ask is the price a trader will buy a currency pair.
- Lot The size of the trade you will open (one lot is equal to 100,000 units).
- Leverage Money that is borrowed from a broker to open a position with an immense contract size.
- Long/Short Long is when you anticipate a currency to appreciate, while short is when you expect the price of a currency to fall.
Charts to Learn
One thing you notice when you establish a tailored forex day trading system is that you will come across a plethora of different charts.
For beginners, here are the top three charts you can utilize:
- Line Charts These charts generally display the closing price and are quite popular in business media with how easy they are to peruse.
- Bar Charts These charts are a little more advanced because they are used to spot key levels by identifying ups and downs, highs and lows, and opening and closing prices.
- Candlestick Charts If you are in forex, the candlestick is your best friend, since it lists the opening and closing prices (body) and high and low prices (wicks) for a specified period.
Step-By-Step Guide for Day Trading Forex
With all this information, here is also a step-by-step breakdown on how to start day trading forex:
- Learn Equip yourself with everything you need to know about forex and day trading, from strategies to brokerage accounts.
- Create a brokerage account You will need to have a brokerage account to begin day trading forex. You need to find one with the best spreads, lowest fees, and best user experience.
- Monitor If you are actively trading forex, you need to monitor the numbers, the news, broader markets, and the rest of the world that could impact currency pairs.
- Strategy Before picking and choosing what forex pairs to trade, you must have a trading strategy to maximize your profits. Without one, you will be going into your sessions blind and without a cane.
- Emotion It is normal to feel emotional about forex day trading. This is your money and your livelihood could accelerate or break down in a single session. Ultimately, it is imperative to check your emotion at the door when you are buying, selling, and trading forex.
Is Day Trading Forex Profitable?
How much money do you need to day trade forex?
These are some of the most common questions asked, and they are important to determine before you launch your adventure of day trading in forex.
Ultimately, day trading will only be profitable if you stick to it in the long run and take it seriously by doing your due diligence and research. As many financial experts will tell you, forex day trading is a job that requires hours of research and trading.
Now, the market needs to do its part, too. This means that you need to spot particular conditions.
For example, if there is a breakout (price movement that veers away from a defined support or resistance level), you need to take advantage of this development. Moreover, as time goes by and you develop a sense of how the market will move, you will eventually know when to buy the rumor and sell the news.
How to Ensure Success With Forex Trading
Indeed, there are many factors for being successful in forex trading. You need to study charts, identify patterns, keep track of the pip movements, and monitor the news headlines as part of your forex day trading system. By even abandoning one of these mechanisms, you could potentially lose out on a profitable trade.
In the end, there is not just one aspect to make money from forex trading. It is a house of different measures.
Now that you know the basics of forex day trading, you are ready for the next step. Continue with our post about the Best Forex Day Trading Strategies for Beginners.