How to day trade forex markets

The basics of day trading and forex

Forex day trading combines the fast-pace worlds of intraday speculating and foreign exchange trading – in the hopes of profiting from a currency pair’s daily price fluctuations.

Forex day traders take advantage of small market movements by speculating on the price of different currency pairs at least once within a day. An FX day trader will identify a trend in the price, look for an opportunity to open a position, and exit before markets close in a day.

This kind of trading focuses on small movements, often likened to similar short-term trading strategies such as scalping, but often with fewer positions opened and longer timeframes of exposure.

Learn all about day trading

The forex market is very liquid, with trillions changing hands each day at a moment’s notice. This makes forex a popular market for traders that want to get exposure because of its volatility, without holding on to their positions overnight.

Day traders employ a wide variety of techniques and strategies to take advantage of the perceived market inefficiencies. And, as a result, typically need to react quickly to small movements in the market using technical and fundamental analysis.

Characteristics of a forex day trader

The most important characteristic of a forex day trader is the willingness to do research. Day traders need to have a good grasp of market fundamentals, as well as a solid understanding of technical analysis and chart reading. They’ll perform their due diligence regularly and take measures to understand market movements for different currency pairs, including the unique risks involved.

You’ll find different types of professional day traders, some who work alone and those who work as part of large institutions. Traders that work alone tend to have more freedom to explore different trading strategies because they don’t have to abide by company regulation. They can target large gains or simply be modest in their approach.

However, they generally don’t have the same capital backing that traders who work for a large institution have at their disposal. Working for a large institution like an FX desk gives you access to substantial capital, often needed to take a bigger position.

A day trader needs an edge over the market, which is why they use different tools and refine strategies based on ever-changing conditions. This process is repeated until it produces consistent profits and limits losses effectively. Some of the instruments that traders use to get an edge include the following:

• Round-the-clock access to a trading desk
• Multiple news updates and analysis of the market
• Availability of analytical software

Learn how to maximise your trading success

How can you start day trading forex markets?

1. Learn more about day trading, forex trading and what it involves
2. Open a CFD trading account
3. Pick an FX market to day trade
4. Open your position

With us, you can get exposure to forex using CFDs. This derivative product enables you to speculate on the underlying asset without taking ownership of the asset.

CFD trading

Trade CFDs to exchange the difference in price from the point at which the contract is opened to when it is closed. With CFDs, you’ll speculate rising and falling markets by going long or short.

You can trade FX with us using the spot (or cash) price and options. Because CFDs are leveraged, you'll get full exposure, with just a small initial deposit – known as the margin.

It’s important to note that you stand to lose more than your initial deposit because your profit and loss are calculated using the full size of your position. That’s why you need to take steps to manage your risk effectively.

Strategies and indicators for forex day trading

Trend day trading

Trend day trading involves studying charts to identify the direction of a market and speculating if the price will rise or fall depending on which swing that the trend takes.

You’ll monitor indicators that give rise to swings in the upward and downward trajectory using different tools such as trendlines, distribution line, moving averages and more.

When there’s an indication that the underlying is trending upwards, you’ll take a long position. Alternatively, if you believe that the underlying will have a downward trend, you’ll take a short position. Note that with intra-day dealing, you’d close it before the day is over.

Learn more about what trend trading is

Swing trading

Swing traders assume that prices never go in one direction. Instead, they aim to make money from both upward and downward fluctuations in a shorter timeframe.

You’ll rely on technical analysis to spot the direction that the market is taking by looking at two types of swings: ‘swing lows’ and ‘swing highs’. A swing low refers to a major price low, while a swing high is used to highlight a major price high.

When using swing trading strategy, you’ll typically hold your position for shorter intervals compared to trend traders, who seek to take advantage of long-term market trends.

Discover everything you need to know about swing trading

Scalping

Scalping is a short-term trading strategy that involves building a large trading account through taking smaller profits often. Day trading scalpers prefer incremental wins, opening and exiting their positions when the price changes before markets close, as overnight funding charges can quickly eat into their bite-sized profits.

As a scalper, you’ll hope to limit your risk by ensuring that you exit your position soon after a profit is recognised to avoid loss from the market moves against you. You can get exposure from the market rising or falling because scalping is a non-directional strategy.

Find out more about scalping forex

Mean reversion

Mean reversion trading strategy is based on the theory of averages – that a currency pair’s price will always deviate back to an historical ‘mean’.

When the market reverses to the mean, the price trajectory turns around from one course to the opposite direction. If there’s an upward trend, you can expect a downward trend, or vice versa and an average level will appear in the long run.

Day traders who use this strategy use chart indicators to spot when recent performance differs from its historical average and trade on the assumption that it’ll revert to its normal trajectory.

Explore mean reversion in more detail

Money flows

Money flows uses volume and price rather than just an asset’s price to determine the direction that the market will move. You’ll compare the number of trades from the previous day to the current day, to determine whether the money flow was positive or negative.

A positive money flow tends to appear when the price is rising and it’s negative when it’s falling. Day traders use this strategy to decide whether an asset may be oversold or overbought.

Study money flows trading strategy

Benefits and risks of becoming a forex day trader

Benefits

• There’s no overnight risk that could be caused by news or events breaking while markets are closed, leading to gap moves upon the next open
• Volatile markets offer day traders an opportunity to act quickly and take a position when changes occur

Risks

• FX trading has higher leverage than other assets. Higher-than-normal debt level can put a company into a state of leverage that is too high, which is riskier and therefore more costly
• Since you're relying on market volatility for fluctuations in the value of currency pairs to day trade, you run the risk of losing money if the market turns quickly
  

Should you start forex day trading?

Day trading FX is certainly popular, but it’s not as easy as it may seem. Successful day traders are usually analytical, disciplined, not impulsive and non-emotional while they’re trading. They set their personal goals and manage their time effectively, so it’s also important to be organised and focused.

Above all, day traders of FX should know the market inside out and be aware of the risks involved. Remember, forex day trading is a highly volatile market, and you should monitor your position effectively to exit in time.

What to know before you start day trading forex

Day trading forex requires a lot of research into the market and a useful strategy before you get exposure. The market has low margin requirements, and your trading volumes will be dictated by how volatile the market is.

Day traders need software that enables them to take a position and exit quickly. This is important because you’ll trade spot FX whereby you won’t hold your positions overnight. With us, you can choose between using our award-winning platform¹ or pick MT4 and ProRealTime to get exposure.

You can start day trading in a virtual environment with us by creating a demo account to test out a new strategy. You’ll be able to open a position with $10,000 in virtual funds to help build your confidence.

Forex day trading summed up

• Forex day trading is the practice of opening and closing positions within the same trading day
• You can get into day trading forex by tracking the movement of currency pairs to discover patterns to help you determine the direction of the market
• There are multiple day trading strategies that you can use, including trend trading, scalping, swing trading, mean revision and money flows
• You can day trade forex with us using our CFD trading account
• To become a successful day trader, you’ll need to use the best trading strategy and research news articles to stay in the loop of everything that happens

Footnotes
¹ Best Finance App, Best Multi-Platform Provider and Best Platform for the Active Trader as awarded at the ADVFN International Financial Awards 2024.