When it comes to forex trading, there are different trading styles to choose from based on your goals and preferences. Day trading is one of the most popular trading styles in the currency market. The increased accessibility of the forex market, along with its high liquidity, makes it perfect for day trading. You will get a good amount of trading opportunities throughout the day, and you will be able to make enough profits by being consistent and disciplined. In this article, you will be getting some valuable insights about trading along with a 5-step trading guide to follow for day trading success in the forex market.
Basics of day trading
The basic concept of day trading is opening and closing trades on the same day. You won’t keep any position open overnight; thus, day trading is not subject to overnight risk. It is a short-term strategy that uses shorter timeframes for analysis. But if we compare it to another short-term strategy, scalping is less intense and slow-paced. Traders will enter multiple trades a day and close the position at the right time before the day ends. Liquidity is very important in trading as you need to enter and exit positions with ease. Hence, major currency pairs would be the best instruments for forex day trading.
The time and price at which you exit a trade are crucial in day trading, and you must have enough market knowledge to spot ideal trading opportunities throughout the day. You need to enter the trades with an exit plan that minimises potential losses and maximises gains. Basic tools like a profit calculator can be useful for making trading decisions as it allows you to calculate the potential profits and losses in advance. Risk management is an essential component of day trading success. Â
What do day traders do?
Day traders mostly rely on technical analysis to find trading opportunities and will spend a lot of time analysing the charts. Hence, chart reading is an important skill to have as a day trader. Swing and position traders will only be entering a few trades and will hold on to a position for longer. However, day traders want to make profits on a daily basis and will ignore the long-term trends. They will be trading during major sessions or session overlaps to take advantage of the liquidity.
As a day trader, you need to look for currency pairs with tight spreads and enough trading volume. It would be better to avoid exotic pairs as they are too volatile and less liquid. Major pairs like EUR/USD and GBP/USD are very popular among day traders due to the low spreads and the fact that their prices keep moving throughout the day. Many think that day trading is a simple style to follow, but it takes time and effort to become profitable as a day trader. It is not free from risk but can be very rewarding if you follow the right approach.
5 Simple steps that can make you a successful day trader
- Self-assessment
Before pursuing day trading as a career, you need to do a deep self-assessment to check where you stand and whether it suits you. You need to be sure about your abilities to perform well as a full-time trader. Day traders have to stay active throughout the day and dedicate a lot of time to monitoring the market and actively managing their trades. It may not be the ideal trading style for someone short on time and busy with other professional commitments.
Day trading is a time-consuming trading style, and you should be able to focus on the trading process and make sound trading decisions every day without fail. You should be ready to learn and face the inherent challenges and risks in trading. You can use various trading tools to assist you in decision-making, but being confident in your knowledge and skills is important to attain long-term success.
- Asses your capital requirements
The next step that you need to take for day trading success is assessing your capital requirements and arranging enough funds. It is not just about calculating the funds you need for day trading but also about checking your financial status before getting into full-time trading. You can’t expect to make profits from the first day itself and should be prepared to encounter losses in the initial phase. You should be able to support yourself throughout the beginner phase.
Thus, you need to make sure you have enough money to meet your personal expenses even if you don’t get much profit from trading. When it comes to trading capital, you don’t need to have a huge amount of capital to begin with, but it should be enough to reach your profit targets. You can make use of leverage to grow your account, but be mindful of the risk that comes with it and play it safe until you gain enough experience in the market.
If you are trading in a different currency than your account’s base currency, then you should use a currency calculator to determine the value of another currency in yours. This will give you a better idea of how much you are putting at risk at a time. Moreover, when you are trading with leverage, you need to pay a lot of attention to margin requirements and their calculation. Margin is the minimum amount of funds that should be kept in your account for placing and running a trade.Â
The margin requirement for a trade depends on the currency pair chosen, trade size, and leverage available. Using a margin calculator will tell you the margin needed for a trade within split seconds, allowing you to arrange trading funds in advance.
- Learn about the currency market and how it works
Market knowledge is a must for day traders as they won’t be able to make profitable trading decisions unless they have an idea about the direction in which the market is moving. The Forex market is very different from any other financial market, and it has a lot of peculiar features that you should know about as a trader. Macroeconomic conditions and geo-political factors always have an influence on currency prices. You may not be performing any fundamental analysis as a day trader. Still, you need to have some surface-level knowledge about market dynamics to stay profitable in the long run.
The forex market can always undergo changes, and you must adapt to these market shifts as and when needed. You should keep an eye on major economic data releases and news events that impact the currency pairs you trade with. You should also learn about market trends and how often they repeat. Many day traders make the mistake of solely focusing on shorter time frames. Still, I suggest starting with longer timeframes as it allows you to learn more about the market by observing the price changes over a specified period.
- Understand your trading instruments
The next step is understanding the instruments you want to trade, which is important for devising a suitable strategy. You can either stick with trading with forex currency pairs or diversify by exploring other assets. There are also various currency indices and forex futures that you can trade with. You don’t need to pick all of these for day trading, but make sure that you have enough knowledge about the ones that you have chosen. I would suggest just starting with one pair and trying to master it before choosing another pair or instrument.
- Devising a trading strategy
The last but most important step that determines your success as a forex trader is devising a trading strategy. You need to be clear about your trading goals and risk tolerance. The strategy should be personalised and must be backed by a sound risk management system to safeguard your capital by minimising the losses. One tip I can give you here is having at least 2 distinct strategies as one can function as a backup if the first one doesn’t yield desired results or the market situation changes, not favouring the strategy.
But you should not be switching from one strategy to another without a valid reason. Staying consistent and making calculated moves without deviating from your original trading plan is important. You need to remain logical and avoid falling into the trap of your emotions while trading. Day traders spend a lot of time at their desks; thus, they are more prone to engaging in emotional trading and overtrading, which must be avoided by staying disciplined.
Final Words
To sum it up, becoming profitable as a forex day trader is possible for anyone with sufficient knowledge, skills and a solid trading plan. The aim of a day trader is to make daily profits, but having a long-term approach is the key to success.
