Forex day trading strategies for beginners

3. Scalping

Scalping is a very short-term strategy where traders aim to take small but frequent profits, focusing on achieving a high win rate. The theory is that you can just as easily build a big trading account by taking smaller profits time and time again, as you can by placing fewer trades and attempting to lock in profits in the long run. Scalping requires a very strict exit strategy as losses can very quickly counteract the profits.

Scalpers often close positions before the end of the day because the smaller profit margins from each trade can quickly be eroded by overnight funding charges.

Learn more about scalping

4. Mean reversion

Mean reversion is based on the theory that prices – and other measures of value such as price-to-earnings (P/E) ratios – eventually move back towards the historical mean.

The strategy uses technical analysis, such as moving averages, to identify assets whose recent performance has differed considerably from their historical average. Mean reversion traders will then take advantage of the return of the price to its average.

5. Money flows

The money flow indicator signals whether an asset might be overbought or oversold using the asset’s trading volume and price. It works by comparing the number of trades from the previous day to the current day, to determine whether the money flow was positive or negative. A reading of 80 or higher generally indicates overbought conditions and is a signal to sell, whereas a reading of 20 or below usually indicates oversold market conditions and is a signal to buy.

How to start day trading forex in Australia

1. Create a day trading plan
2. Learn how to manage day trading risk
3. Open and monitor your first position

1. Create a day trading plan

Before you start to day trade forex, it’s important to outline exactly what you’re hoping to achieve and be realistic about the targets that you set for yourself. A trading plan defines your objectives and how you’ll work towards achieving them.

Among the factors that you can include in your trading plan are position sizes, risk tolerance, trading strategies, hedging correlated positions, and level of volatility. In preparation to start trading, it’s important to be realistic, eg, noting that day trading is usually not a viable substitute for employment income. It also requires actively monitoring positions and market movements, which means there's a large time commitment.

Another point to consider is how you’ll use fundamental and technical analysis to decide when you’ll enter and exit the market.

• If you choose to look at fundamental analysis, your day trades will likely revolve around information from sources such as macroeconomic data announcements and breaking news
• If you decide to use technical analysis, you’d likely focus on chart patterns, historical data, and trading indicators

2. Learn how to manage day trading risk

Creating a risk management strategy is a crucial step in getting ready to start trading. Traders can put measures in place to minimise any potential losses. As markets can be volatile, with unpredictable movements, the use of risk management tools such as stops and limits is vital for traders of all experience levels.

There’s nothing wrong with predictions that don’t pan out – and taking a small loss as a result – but incurring a big loss due to inefficient risk management is perhaps the quickest way to end a journey as a short-term trader.

There’s debate over whether a trader should target a high win-loss ratio or look more closely at the risk-reward ratio. Successful day traders will often have low win rates, even below 40%, but will look to target a risk-reward ratio of at least 1:2 – meaning that the trader expects to double the money that they’re willing to risk.

3. Open and monitor your first position

Once you’ve drawn up a trading plan and you’re ready to get started, you can open your first position. You can place both long and short positions within a single trading day.

• If you think that the market price is going to rise, you’d ‘buy’
• If you think that the market price will fall, you’d ‘sell’

Remember, as a day trader you’ll likely be opening and closing multiple trades in a day, so it’s important to keep up to date with relevant market events or breaking news.

At the end of the day, it’s time to close any trades that you still have running. Trades must be closed before 10pm UK time to avoid overnight funding charges. Keeping a record of successful and unsuccessful trades throughout the day can be a useful practice. You can analyse your performance day by day and you might spot lessons to be learnt – allowing you to act accordingly, going forward, for more favourable results.