Top Day Trading Strategies for Forex Traders

What Is Forex Day Trading?

Forex day trading involves buying and selling currencies within a single trading day. This means closing out positions at the end of each day and starting afresh the next, without having to hold the trades overnight. Typically, forex day traders will buy and sell multiple currency pairs within the same day, or even multiple times within a day, to take advantage of small market movements.

It’s important to note that day trading, including forex day trading, is not suitable for part-time and inexperienced  traders, as it requires a great amount of focus, dedication and especially time, since day traders need to be present in front of the screen the entire time their trade is open. Day trading involves making fast decisions and executing a large number of trades for a relatively small profit each time. It’s generally thought of as the opposite to most investment strategies, where traders seek to benefit from price movements over a longer period of time.

What You Need to Know Before You Start Day Trading Forex

Unlike investing, where the focus is on longer-term market movements, day trading focuses on the factors that can affect intra-day market behaviour. These include:

• Liquidity - this is how easily and quickly positions can be entered and exited. High liquidity is extremely important for day traders, as it’s likely they’ll be executing multiple trades throughout the day.
• Volatility - the volatility of an asset, or how rapidly the price moves, is an important consideration for day traders. If there’s high volatility expected during the day, the movements can create a lot of opportunities for short-term profits.
• Trading volume - this is a measure of how many times it’s being bought or sold in a given period. A high trading volume shows that there’s a lot of interest, and is useful for identifying entry and exit points.

Top Forex Day Trading Strategies

Day trading is a trading style, and not a trading strategy itself, as it only stipulates that traders don’t keep a trade open overnight. Below, we’ve listed a few popular strategies that can be used when day trading forex.

Scalping

Scalping is a trading strategy that requires the trader to place multiple trades, which seek to close out small profits over extremely short time frames. For example, a scalper may seek to profit from a one or two pip movement in the EUR/USD over a time period of just 30 seconds. They would then seek to repeat this process multiple times throughout the day, so the small profitable trades could add up to a much larger amount.

Scalping is a strategy that requires discipline and a very good risk management system. The reason for this is connected to the fact that scalpers close many transactions with small profits, and their risk management system should not allow them to hold losing transactions for too long, simply because a large loss may cover a very big number of previously made profits. Moreover, scalping calls for discipline, because it often requires opening a very large number of transactions per day, and trading on short-term time intervals, such as the one and five minute intervals where the market may be very dynamic.

Most scalpers will close positions before the end of the day, because the smaller profit margins from each trade will quickly get eroded by overnight funding charges.

Trend Trading

Trend trading is based on identifying the current direction of the prevailing trend and then trading in that direction. Day traders first need to establish a trend and then move to a smaller time frame chart and look for trading opportunities in the direction of the overall trend.

Using indicators on the shorter time frame chart can give traders an idea of when to time their entries.

Range Trading

Range trading is a trading strategy based on identifying overbought (resistance) and oversold (support) areas on the chart. The first and most important step in range trading is to identify the interval in which to trade, which includes analysing trend channels, price patterns such as triangles or rectangles, previous highs and lows and oscillators such as Stochastics or MACD.

Once identified, traders will establish positions based on support and resistance areas, where buy positions are executed at support levels and sell positions at resistance levels.

A day trader who is using range trading and is looking to go long will buy around the low price and sell at the high price. Most range traders will use stop losses and limit orders to keep their trading in line with what they perceive to be happening in the market.

Range trading requires enough volatility to keep the price moving for the duration of the day, but not so much volatility that the price breaks out of the range and starts a new trend.

Reverse Trading

Reverse trading, also known as pull back trading, counter trend trading or fading, attempts to profit from a reversal in trends in the markets. For example, if there has been a downward trend in the price of an asset and a trader spots a signal that a price increase is coming, they will aim to make a profit from the reversal of that trend.

This type of trading is considered a more advanced day trading strategy, as it requires a lot of market knowledge and trading practice.

Momentum Trading

Momentum trading is one of the more straightforward day trading strategies, which is based on searching for strong price moves paired with high volumes. Momentum traders will enter a position to take advantage of the price movement and exit the position once it seems the movement has lost momentum.

The difficulty lies in knowing when to enter and exit a position, so momentum traders need to be patient and wait for the best opportunity to present itself. As soon as they open a position, the trader must keep sharp focus in order to spot the exit signal.

Momentum day trading, though straightforward, is one of the most difficult techniques to master, and is not recommended for beginner traders.

Breakout Trading

Breakout trading is again based on observing the trends. Traders will look at the range a pair has made during certain hours of the day and then place trades on either side, hoping to catch a breakout in either direction.

This technique is especially useful when a pair has been in a tight range for a while, because that’s often an indication that a big move is about to happen. Experienced traders will recognise this pattern ahead of time and make their move as soon as the breakout takes place.