Forex Day Trading: Tips, Strategies & Indicators

Forex day trading is the act of buying and selling a forex asset on the same trading day. Through forex, clients and traders will be able to exchange one currency for another and then profit from the difference made from that day’s price action.

Day trading allows incremental gains that can create massive gains if done continuously and responsibly. Through forex day trading, clients do not expect to double their money in a single day, but they expect to at least earn a percent or two to at least profit from the volatile forex market.

Each day trade lasts only for a few minutes or hours to avoid downside risk from overnight positions and unforeseen news events. The best day traders pride themselves on being good technical analysts aside from showing a good understanding of financial and economic news.

In becoming a good forex trader, one must master the basics first, such as the basic terminologies that are needed to trade forex. Terms such as pips, lots, and spreads should be defined immediately to the trader before they start trading.

Interested forex traders must also be aware that trading this asset class is quite different from trading stocks because of different market conditions, such as forex’s 24-hour market. In forex, the usage of margin and leverage is also commonly given how incrementally small forex pairs move relative to other asset classes such as indices and stocks.

Day trading might seem simple on paper, but this style of investment requires a lot of rules and self-control in tempering greed and managing emotions during losses. In day trading, clients must always keep in mind that they should only trade for the day without any expectations on what tomorrow’s price action might bring.

Strategies for day trading forex

We listed a few strategies below to help you jumpstart your career in day trading. Keep in mind that there are tons more strategies out there, but we will be just listing the most common ones that you can use right off the bat.

News trading

It is common in forex to use news updates as a reason to enter your trade. Seasoned forex traders use the economic calendar a lot to anticipate market-moving news that they can choose to participate in or avoid depending on their preference.

An economic calendar is a free tool that anyone can access through their broker or through a third-party website. In this calendar, you will see a full list of all the past, present, and future market-moving events. Depending on the calendar you’re using, you might even be able to see its forecasted impact on the market as well as a consensus estimate on the data that’s going to be released to the public.

Economic events such as a country’s unemployment rate, inflation rate, home sales, exports and imports, and bond auctions are listed down in the calendar. Not only this, but speeches by important financial and political figures are also featured. For example, announcements made by the US Federal Reserve’s chairman, Jerome Powell, and United States Secretary of the Treasury, Janet Yellen, have been really impactful on the market as a whole.

Usually, these news updates bring impulsive moves in the market that lasts a few minutes to a few hours. Using this timeframe, clients can either wait for a bit or enter a trade immediately to capture the heart of the move of the mini-trend that is created from a news update. Although some economic news changes the overall trade of a certain forex pair, day traders should not concern themselves with this and would just trade the price action on a day-to-day basis.

Subsequently, day traders choose to close a position opened for impulsive news once they think that the market has priced in this piece of information. Once they think the market has stopped buying or selling due to the news, they will close the position and look for a new one based on different strategies.

Trend following

Trend following, as the term suggests, is following a trend and riding it until it reverses. Research by multiple asset managers around the world claims that an asset that goes up will have a higher chance of continuing to go up rather than reversing.

With this type of trading, it is imperative to be sure of the trend of your chosen pair. Generally, there are three types of directional movement, and these are known to be the uptrend, downtrend, and consolidation.

Trend trading usually involves taking advantage of either uptrends and downtrends. Day trading trend traders usually use indicators such as the exponential and simple moving averages in conjunction with the relative strength index, the MACD, or the stochastics indicator.

Day traders would usually enter a trend trade if an existing trend reverted to its mean value as measured by the moving averages. Through this strategy, they are on the right side of the trend with minimal risk.

These kinds of traders do not chase prices, but they wait at the right moment to deploy their position to reduce their risk. If they are right, they will choose to hold the position until the trend breaks if prices go below or above their designated moving average on their chosen timeframe.

Momentum trading

Momentum trading, much like trend trading, aims to capture a move that is directionally biased. For uptrends, momentum traders should be looking for breakouts while they should be looking for breakdowns during downtrends. This type of trading can be used in conjunction with other trading strategies listed above to either start a new position or to add an additional one to further increase your exposure.

It is essential for traders that want to practice this type of trading to master both risk management and the art of price action to ensure consistent gains using this strategy. Additionally, this strategy works on any timeframe, but it is important not to constantly change time frames once a position has been opened to avoid bias and confusion.

To practice and use momentum trading, traders should plot-important support and resistance points on their charts. These points that determine breakout and breakdown levels, as well as the previous trend, will indicate if you’re going to go long or short on a trade. Traders can use the breakout or breakdown to initiate a trade, or they could wait until the price settles beyond their levels before entering a trade to avoid a fakeout or a fake breakout.

Countertrend trading

Countertrend trading is the act of trying to predict or anticipate a reversal of a trend. This type of strategy could be used directly after a successful trend following trade and poses little risk if used correctly.

There are a few ways to execute a countertrend trade but keep in mind that this strategy has a lower success rate than other strategies. This is due to the nature of assets continuously moving in the same direction for a longer time than anticipated.

One way to execute a countertrend trade is to use its true average range or the ATR. The ATR is a value calculated for the regular volatility that an asset experiences. For example, if the ATR of EUR/USD is 100 pips, most likely, it will move more or less 100 pips the next day as well.

The ATR exhaustion strategy states that if a forex pair moves 1.5 times the value of its ATR in a single day, it has a good chance to reverse and thus, would create a good opportunity for counter trading.

Another strategy is to use the oversold and overbought values of the relative strength index. Through these values and levels, one could see if an asset is oversold or overbought on their chosen time frame. Should this happen, the asset might reverse in the opposite direction.

Identifying breakout and breakdowns

To properly identify breakout and breakdowns, clients must be able to plot supports and resistances properly not only in a shorter time frame but also at a more important longer timeframe. The longer timeframes will provide better breakout points as these eat up either the supply or demand once these levels get taken out.

Additionally, it provides additional confidence that a breakout or breakdown is accompanied by fundamental reasons that confirm its movement. The presence of market participants in the form of trading volume that is higher than average also provides confluence that the market agrees with.

Ideal indicators for day trading forex

There are tons of indicators and indicator combinations that are available on the forex market that can make you successful, but the usefulness of these indicators would depend on your personality and trading style. To know which one works best for you, you could either practice first through trial and error, or you could also seek inspiration from the best forex traders out there.

Generally, the most common indicators used by forex traders involve oscillators, moving averages, and the relative strength index. For oscillators, the most popular ones include the moving average convergence divergence indicator and the stochastics indicator. For moving averages, clients have the option to choose between the exponential MAs or the simple Mas.

Rules for day trading forex

Although capturing the start of the impulsive move of a news update might seem enticing, it is better to wait for the market to digest the news article first before deciding on the trade. This is because of the confusion that market-moving news brings to all traders around the world. Sometimes, there is an over-exaggeration in price action that leads to overextended moves and quick price reversals that would cause you to lose more money even before you reach your profit-taking price.

Likewise, it is also detrimental for your portfolio to open a position even before an economic event. Due to the volatility of the market, you have a high chance of getting stopped out before the trade goes in your favor.

To trade with market volatility and participation on your side, you should only trade certain currencies at specific times of the day. These times of the day are preferable during the London, Asian, and New York session as these are the times that traders are most active. 

Additionally, traders that are interested in USD pairs should trade during the New York session, while those that would want to trade the JPY should trade the Asian session.

Day traders, in particular, should never risk more than 1% of their capital on any given trade, no matter how sure they are. This ensures the survivability and protection of your portfolio. Additionally, it is best to set expectations for your trade that are realistic and attainable at the same time.

How to start day trading forex

The first step to trading forex is to create an account with a broker. In choosing a broker, you must select one that is registered and is regulated by a government body. This broker must have competitive spreads and a wide array of assets that would ideally include all the major and minor pairs.

It would also be beneficial for you if they have all the services that a forex trader needs, such as charting software, an economic calendar, and access to both margin and leverage. Your chosen broker should also allow you fast, and easy withdrawals should you choose to move your assets elsewhere.

For trading forex itself, you have to do your research prior to entering a trade. With fundamental analysis, you can give a quick look at a country’s performance over the past few months and gauge whether the country itself is outperforming others. Next, by using technical analysis, you can then plot-important price points on a chart to know whether your chosen currency pair has better odds to go up or down.

Once you have decided on a trade direction, you should decide on how to enter a trade and what strategy you’re going to use. Knowing what price is the ideal entry for your asset will ensure that you maximize your gains and minimize your losses. Your ideal entry should also match the number of lots you’re going to purchase.

The last step to entering a trade is to input your ideal stop-loss points as well as take profit levels. With these two inputs, you can let the trade run until your position is closed automatically, or you could close it manually if a certain condition has been reached.

Keep in mind that day traders must manually or automatically set their portfolio to have zero positions before the trading day ends.

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