Understanding Forex Day Trading

All Forex traders have the same goal, that is, to make money, however there are many ways to get there, and among the various strategies for making investments online is Day Trading.

What does Day trading mean? What is the difference between day trading and other trading methods, like scalping or position trading? How does day trading work and what are day trading strategies for Forex?

In this post we will answer these questions and explain how to day trade in as much detail as possible, taking into consideration the pros and cons of Forex Day trading. So, if you’re looking to find out how to start day trading, then read on.



What is Day trading?

Day Trading is an investment technique that comes directly from the United States but which has increasingly developed in Europe and across the world. This trading technique is known for its aggressiveness and for its high risk reward ratio.

We can say that Day Trading is a system that involves the opening and closing of different positions during the same day.

What is a Day Trader?

A day trader is, conceptually, a trader operating in the Short Term, since his/her trades remain open for a few hours at most.

Furthermore, he/she does not leave their operations open during the night: they prefers to close them in the evening and reopen them identically the next day.

As you can imagine, this type of trading strategy is very intensive since it involves carrying out a long series of purchases and sales within a single day, and ensuring that all positions are closed before the end of the session. There are certain day trading rules which must be followed.

How to Become a Day Trader

In the past, this operating style could only be adopted by large investment companies, while today the advancement and diffusion of technologies and the internet allows practically everyone to Day Trade. All you need is a computer or smartphone to open an account with an online Feign Exchange agency and start investing independently on their platform.

Yes, Day trading has really caught on among individual (or retail) investors with the advent of the internet, money exchanges via the web and the arrival of online brokers.

Furthermore, the leverage effect offered by some of these online brokers allows access to markets even with just a small amount of money to invest (in the past this was not possible).

So, if you’re wondering how to become a day trader, all you need to get started is an internet connection, a laptop or mobile and an account with one of the recommended Forex brokers we list here.

The daytrader avoids the night!

We said at the beginning that investors who adopt the Day Trading style close their positions by the end of the day, which means they do not keep their positions open at night. First of all to avoid the costs (commissions) associated with this practice.

Furthermore, in this way they do not suffer the “Rollover effect”. During the night, in fact, the market is subject to liquidity shifts that can profoundly change the value of the currency pairs or assets and cause unpleasant surprises for the trader who had gone to sleep the night before, leaving his operation at the mercy of events.



Day trading Strategies and Rules for Beginners

What does the Day Trading Technique consist of?

The Day Trading method consists in obtaining numerous small gains increased by a significant leverage effect in a very short period of time. It is therefore based on the level of market volatility. Earnings on the individual trade are usually not significant, generally less than 1% on each transaction.

You must be willing to sell at a loss when the market is about to close in order not to keep any position open and not take any additional risk. The aim here is therefore to carry out as many winning operations as possible and the least number of losing operations to end the day with a positive balance.

The Day Trading strategy therefore requires a certain level of skill and above all cold blood because you must be ready and willing to pass orders, resist stressful situations and have an excess of confidence in your trading abilities.

The conditions to make a good day trade

If you’re interested to learn Day Trading, you must be aware that this technique requires experience and preparation but also favorable market conditions. It only applies to assets with strong volatility and clear short-term trends. The more the volume of trades there are on a security, the stronger volatility will be and as a consequence the higher the chances that a day trading technique on that asset will work.

If you’re going to try this type of trading, we therefore advise you to opt for the most popular stocks and foreign exchange currencies on the market, in which a sufficiently large number of sellers and buyers trade on a daily basis.

If you’re trading in the foreign exchange market, the most popular FX currency pairs to try day trading on are Eur/USD, GBP/USD, USD/JPY, USD/CHF, USD/AUD. On the other hand if you’re trading in stocks then the shares listed on the large stock exchanges, like NASDAQ and DOW JONES US are the best products for this technique.

Futures can also be interesting products to the extent that they offer a more significant leverage effect, ideal for Day Trading.

How much money to invest in Forex Day Trading?

In order for Day Trading to be profitable, sufficient starting capital must be available, but not necessarily because it is also possible to use important leverage effects. However, to minimize the risks, avoid positioning yourself on too many values at the same time and concentrate on one or two active currency pairs at a time.

You can therefore consider starting a Day Trader career even with just a few thousand euros on your investment account. Always take into consideration, however that the spreads applied, trading charges or any other fees imposed by the broker do not exceed your earnings.

Choose the Right FX Broker for Day Trading

This is why it is important to choose the right Forex Broker, to make profits with Day Trading. The different expenses, in fact, imposed by certain brokers can interfere with your day trading strategy by absorbing an excessive portion of your earnings on each transaction.

You therefore need to look at the level of spreads levied by brokers, or transaction charges before making your choice and always choose an inexpensive broker.

Of course, the quality of customer service and the quality of the trading platform must not be neglected. In fact, you need to use an reliable and fast interface to ensure your orders are processed at the right time. The ideal would be to test your strategies with the demo accounts offered on most Forex Trading Platforms.

Difference between Day Trading vs Position Trading

Day Trading and Position Trading are two operating styles in which the main difference lies in the duration period of the investment.

While day trading is short term, opening and closing a trade within the same day, Position Trading is of much longer term. The investor thinks about the medium-long term period and carries out operations to keep them standing for many days, for weeks if not whole months.

There is a fundamental difference that conditions the two styles: in day trading the investor knows that, due to the reduced time, he/she will be able to settle only for moderate gains, but this gain can be obtained even several times a day and with consistency.

In position trading, however, the investor focuses on the long-term potential of an asset, hoping to earn a lot, but aware that this profit will take time to materialize.

There is also another important difference between these two styles.

Day traders base their operations essentially on daily observation and fluctuations of currencies and prices, and their strategies are the result of a wide range of technical analyzes. Known as Pattern Day Trader. This means that they will have to constantly monitor the financial markets and related news, to take the opportunity when it presents itself.

The position trader, on the other hand, makes his investments by looking at the economic future prospects concerning the asset he chooses to trade.

For example, if it is a stock exchange security, it will look at the company’s financial statements and also at the prospects of the sector in which it operates. If it is a currency exchange he will look at the coutries’ economic indicators, taking into consideration the political climate and policies that are being implemented, news coming out of the Central Banks and paying close attention to the economic calendar. His analyzes is therefore wide-ranging, and often take weeks of work before placing an order on the market.

Difference between Scalping vs Day Trader

Although often mistakenly confused, Forex day trading is a very different thing from Scalping.

The scalper adopts the strategy known as “pip and run” in which he places an order that he holds open for a few minutes, if not a few seconds, and as soon as that order goes into profit he closes it and leaves.

Each of the scalpers’ operations are therefore aimed at making very small profits. This “hunt” lasts the whole day, during which they can place several dozen orders, all for a very short time. This is why the scalper lives constantly in front of the monitor and graphs.

To place his orders, the scalper, unlike the daytrader, does not do a lot of analysis on the market, instead he acts quickly because he does not care about riding a trend but only gnaws a few pips thanks to small price fluctuations.

As you can easily guess it is an extreme form of trading. In fact, it has a much more accentuated speculative component than any other trading style.

Difference between Day Trading vs Swing trading

Another known style is Swing Trading, where each investment goes from a couple of days up to a few weeks at most. It is halfway between day trading and position trading, combining the distinctive features of both.

In fact, in Swing Trading the investor tries to grasp the temporary change of course in the market and then ride the new wave for a period of time which is neither too short (because it would limit the gains), but not too long to risk a reversal.

day trading is less than 24 hours as this graph shows


Pros and Cons of Day Trading

Nowadays most private traders do day trading, for a variety of reasons. Compared to the other methods of FX Trading, this strategy has it advantages and disadvantages which you need to be aware of before diving in. This way you can reliably consider if this style is for you before investing any money.

Let’s take a look at what are advantages and disadvantages of a day tradeing.

Advantages of Day Trading

  1. Compared to more extreme styles such as scalping, it requires a less constant and stressful presence in front of the investment platform; compared to position trading, however, it is more engaging and favors action over patience.
  2. It also requires less capital to invest than the latter. In fact, opening a position of a few tens of euros and keeping it steady for months – as the position trader does – would not make sense, so such operations require very large investments to be economically attractive.
  3. Connected to the question of less capital to invest, there is also a need for the day trader to minimize the costs of the individual transactions he performs through his/her own broker (which the position trader does not have, or in any case to a very small extent). In the case of currency day trading, for example, the cost of each operation is given by the spread and therefore you need to look for the broker who has the lowest spreads on those instruments that you intend to trade.

Disadvantages of Day Trading

Since the short-term movements of the quotations are substantially unpredictable, and rarely based on business matters of the companies, according to some, day trading is configured as a game of chance in disguise.

As we have just seen, the basic idea of day trading is to create good earnings by adding small earnings on many transactions. But a 2010 study conducted by Brad Barber for the University of California on Day Trading in Stocks showed that only 1% of day traders make good money. Barber’s study considered stock exchange trades over a 14-year time span between 1992 and 2006.
The poor success of day traders can be explained by two main causes.

  1. In the first place, day traders have very strong competitors, they compete against professionals who know the tricks and traps of the system. These professional traders have powerful technologies, and large amounts of data available. Then there are competitors that engage in high frequency trading, automated systems that target very small gains on many transactions. In short, people equipped for success.
  2. Furthermore, day traders also seem more likely to make some mistakes with an important psychological component, such as selling too early the growing shares and keeping the decreasing ones too long.

Tips for Day Trading

Here are some tips to apply to increase your chances of earning with Day Trading:

Insulate yourself from any distractions during your trading session. Make sure you’re in a room alone and switch off mobiles, TVs etc.

  • Never follow more than 4 active trades at the same time;
  • Stop your earnings before they reach 4%;
  • Stop your losses before they go down by 10%;
  • Take regular breaks to stay focused and keep your mind fresh and don’t give in to stress;
  • Do not practice day trading for more than a few hours a day. It’s a very intense trading exercise and can create pressure on your mental health if you practice it for long periods each day;
  • Train and develop a strategy before deciding to invest a large part of your money on Day Trading. The idea is to understand the concept properly and see if your trading style and risk tolerance agree with this type of technique because although this method may prove effective, it requires experience, concentration and a high level of risk tolerance, which can be very stressful and therefore, it does not suit every type of trader.

Is Day Trading Worth it?

Yes Day Trading is worth the effort if you know what you’re doing and stick to your strategy. Each trading style has its advantages and its shortcomings, so everyone should look for the one most suited to their attitudes, their availability of time and capital.

We should not think that Day trading, being less extreme than other operating styles, is easier. Not at all.

Interpretation and intuition skills are always required, as well as a wealth of experience and knowledge. It is necessary to know how to read the market, to distinguish between false signals and true signals, which is really difficult when working on a horizon of a few hours, as it’s not enough time for the market to express a strong trend.