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. A day trader identifies a trend in the price, looks for an opportunity to open a position, and exits before markets close in the same 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 more about day trading

The forex market can be very liquid offering relatively tight bid-offer spreads. 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 perceived market inefficiencies. And, as a result, they typically 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 can be the willingness to do research. Day traders tend to have a good grasp of market fundamentals as well as a solid understanding of technical analysis and chart reading. They 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 a large institution. 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 a FX desk can give you access to substantial capital, often used 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 about the technology IG provides

How can you start day trading forex markets?

1. Open a forex trading account with us
2. Choose a currency pair to trade
3. Decide whether to ‘buy’ or ‘sell’
4. Set your stops and limits
5. Open your first trade
6. Monitor and close your position

With us, you’ll day trade forex by speculating on one currency rising against or falling compared to another using the spot (cash) price.

Some of the benefits of trading forex is that you can open and hedge a position using leveraged trading which enables you to increase your exposure by putting down a fraction of the full exposure as your initial deposit – called margin.

This means that leverage will not only magnify your profits, but it’ll also amplify your losses that can exceed your initial deposit. Leveraged trading, therefore, makes it extremely important for you to take necessary steps to manage your risk.

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 could take a long position. Alternatively, if you believe that the underlying will have a downward trend, you may take a short position. Note that with intra-day dealing, you’d close it before the day is over.

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.

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 recognized to avoid loss from a later, larger move 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 – a currency pair’s price will deviate away from and come back to a 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 see 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.

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.

Benefits and risks of becoming a forex day trader

Benefits

• There’s no overnight risk that could be caused by news or events breaking during extended periods away from your platform
• 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 forex 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 organized and focused.

Above all, day traders of FX should know the market well and be aware of the risks involved. Remember, forex 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 platform, MetaTrader 4 or ProRealTime to get exposure.

You can start day trading on a risk-free 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 forex trading account
• To become a successful day trader, you’ll likely want to use a trading strategy while researching news articles to stay in the loop of everything that happens

Footnotes
¹ Tax laws are subject to change and depend on individual circumstances. Tax law may differ in a jurisdiction other than the UK.
² Best trading platform as awarded at the ADVFN International Financial Awards 2022 and Professional Trader Awards 2021. Best trading app as awarded at the ADVFN International Financial Awards 2022.