Forex Day Trading

Forex Day Trading

6 min read

Are you interested in Forex day trading? In this tutorial, we’re going to learn about day trading and discuss some of the ways to analyze the market from the day trading point of view. Trading Forex is going to be different than other segments of the market. However, the strategies remain the same. Let’s start with a little introduction to the day trading.

Day trading is a style of short-term trading in which you anticipate entering and exiting the market within a day. This style of trading is widely popular among Forex traders. Although, it can be adopted for other markets like commodities and stocks as well.

However, low volatility assets aren’t suitable because they may drag your position to several days. Remember day trading is different from scalping in which a large number of traders are executed within a short period of time for a very small amount of profit.

Whereas in day trading you hope to make one or two transactions for a slightly larger profit and can cover your trading goals. In Forex day trading, traders spent a lot of time to analyze the market and spot the trading opportunities. They generally start early in the day to see how the market is performing in various trading session and then execute their trades in a highly volatile trading session.

Trade Plan and Risk Management

For successful day trading, you need to formulate a basic trading strategy that defines key elements such as risk exposure, utilization of maximum equity, and criteria to enter and exit from the market. The criteria to enter and exit largely depends on your trading approach and technical analysis.

You may use several technical indicators and oscillators as well as price patterns to identify the potential levels. The time frame to analyze the market also plays an important role. Since it’s day trading it’s not mandatory that you only look at daily charts. You should look at longer-term charts like the weekly and monthly to see the long-term trends.

Then gradually compare that information with daily and 4 hourly time frames. This sort of analysis will put you in a better position to execute your trades with confidence. Risk management is another crucial component in any style of trading.

A conservative day trader generally doesn’t risk more than 0.5 to 1 percent on a single trade. For example, if you’re trading with an equity of $10,000, a maximum risk per trade will be $100. However, more aggressive traders do increase their risk percentage for making more profits. Regardless of an aggressive or a conservative trading approach a trader should maintain at least a 60 percent winning ratio to be successful. 

So how do you analyze the market from a Forex day trading point? Should you use a single indicator like a Moving Average or combine multiple indicators like Bollinger Band and RSI. The benefit of having multiple indicators would give you more reliable trading signals compared to using only one indicator. Along with the indicators you can also use various Price Patterns such as Japanese Candlestick patterns as well as the basic concept of support resistance.

Day Trade Using Single Indicator (Moving Average)

We’ve learned about moving averages in the technical analysis tutorials and now is the time to put it to test. You know that the moving averages provide the basic trend information, support and resistance levels, as well as reversal indications. The suitable moving average time for day trading is between 14 and 20. The average profit and loss target is between 50 to 70 pips. 

So using the moving average you’ll either enter when the price hits the moving average line or it goes above the line. In the first scenario, let’s assume the price is trending up and the moving average is below the current market price. In Forex day trading you’d open a long position when the price touches the moving average line.

Similarly, if the market is trending down and the moving average line is also above the current price, you’d enter a short position when the price touches the moving average resistance.

Now as you have already determined your target which is 50 to 60 pips so you will exit as soon as your target is achieved. The stop-loss for the trades would be at a distance of 40 to 50 pips. It will be below the moving average line in case of a long position and above the line in case of a short position.

Day Trade Using Two Indicators (Moving Average and RSI)

The point in combining two indicators is that a signal would have two confirmations. This way you can filter out the fake signals and improve the reliability of the analysis. The commonly used indicators are moving averages and the Relative Strength Index (RSI).

Once again the target profit would be 50 to 60 pips while the stop loss would be 40 to 50 pips. So you’d plot both the indicators together and start looking for signals. You won’t trade if one indicator is confirming the signal but the other doesn’t. So let’s assume, the market is trending down and the moving average line is keeping above the current price as well.

Soon the market price touches the moving average line giving a sell signal. Now at the same time, you’ll look at the RSI indicator whether it’s indicating an oversold zone. If it does the signal is confirmed by both the indicators and you can place a short entry. Once the trade is open you will set your take profit below the moving average line within 50 to 60 pips and also place the stop loss above the moving average line. 

The Bottom Line

Forex day trading is a great way to grow a small account because you don’t need much capital. With that being said, you’re going to need to be a good trader to grow that account. This means learning what Forex day trading strategies work for you. The practice it until you can successfully grow your account.

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