Forex Day Trading Explained

Astronauts, firemen, police officers.

There are a lot of interesting jobs out there. But not many children tell their parents they want to be a forex day trader when they grow up. 😂

Trading your Great British Pounds in for Japanese Yen may sound like a boring part of an international trip, but for a growing number of traders it’s a full time job.

Forex trading, or foreign currency exchange trading, has experienced a 50% increase in trading volume when compared to last year. This spike has been accompanied by a bevy of new investors, and if that sounds like you, then you’re in the right place. We have distilled all the essential information on forex trading in one place.

Even if you are a long-time trader looking to branch into a new asset, we’ve got you covered. The goal of forex day trading is to generate consistent income; we’ll be looking at the ways a successful trader can accomplish that.

How long does it take to make a meaningful amount of money? How do you start trading? If you want to know how forex trading works, and how much forex traders can make, read on.

How Forex Day Trading Works ✅

Forex day trading is like other kinds of day trading. Investors buy an asset and then wait for small price movements throughout the day to sell the asset for a higher price than they bought in at. Simple, right?

Well, while the concept may be simple, there can be a lot to it. Forex traders need to know about the currency they trade, the active times in the market, the world news in the currency’s country, bank policy, and much more. Day trading forex largely involves trading the news. Let’s make our way through the basics.

If you are used to long-term investing, you know that some investors may hold an investment for several months, years, or even decades before seeing significant gains. But waiting years for your Coca Cola stock or index fund to tick up a few percent sounds pretty boring. 😴

That’s why day trading takes an entirely different approach. Traders live or die by the returns they generate in an aggregate of trading sessions. They monitor the market and their orders constantly, closing losing positions, and opening favorable ones. Because the trading period is short, investors have limited time to recover from losses.

It would be ideal if traders could come out as winners after each session, but they often don’t. What’s important is that a trader’s overall returns outweigh their losses.

Investors accomplish this in several ways, but one tactic is by having winning traders that are larger than their losing ones. For example, an investor might try to have every winning sale generate 10% in returns and cap losing sales at 5% in losses.

Having larger winning trades means that even if a trader loses money on half of all their trades, they will still generate a profit. It’s like magic… but backed up by math.

Another key tool in a day traders kit is the platform they use. Investors are living on the margin between the buy and sell price of assets, but there are other costs to be aware of, like broker commissions. The top day trading platforms help increase profitability by having better research tools and different fee structures.

Currency Pairs and Time Zones 💱 🌎

A typical forex day trader, and especially newer traders, are going to focus on a specific set of currencies, called pairs. Trading between pairs is how forex traders make money.

One popular pair is the United States Dollar (USD) to the Euro (EUR). These currencies are popular because they are major world currencies, and the markets are in corresponding time zones.

Time zones are essential for forex traders because forex trading is driven by market activity. Increased trading volume correlates with increased liquidity and volatility, and an increased potential for profit. Traders want to be active when the markets are the most active to take advantage of this liquidity and volatility. 📉

The variety of currencies means there are many ideal times an investor can trade and turn profits. The USD/EUR is one of the most popular pairs but trading just these two currencies would ignore some major Asian currencies. Some traders will adjust their active hours to tap into the ideal hours for forex trading.

If you are used to trading stocks on the NYSE, you may have noticed something weird here. As opposed to the normal 9:30 a.m. to 4 p.m., with a frenzy at the opening bell, and a lull in the mid-day, each forex pair has a unique schedule.

The foreign currency market is open 6 days a week, 24 hours a day. Specifically, from Sunday at 5 p.m. EST to Friday at 4 p.m. The extended trading hours means that it’s easier for people with full-time jobs or other daily commitments to get into the market.

While the timeframe may be different, you will still notice some trading frenzies and slumps in a day. While there isn’t necessarily an opening bell, you will normally notice increased volume when countries come online for trading. There is a lot of nuance in the schedules, it can be helpful for new traders to stick to one pair at first to better understand what is normal in a session.

Important Trends for Forex Trading 📰

A forex trader will be active during the busy times in the currency they choose to trade. They will buy into the market at a time they think they can easily enter and exit a trade, often called a round turn. Traders are waiting for price movements to make trades, but how do they know what the best prices are to buy and sell? This is where trends come in.

Trends are a useful way for investors to predict market prices. While predicting future prices sounds like an awesome superpower that is sure to get you loaded quickly (but why would you be here if you could do that).

A lot of new investors will rely on an overall upward or downward trend in the market to generate gains, but there are many kinds of indicators. Researching different trends will get beginners started on the right foot when first learning about forex trading.

While trends may be useful to understand movements, there are many events that can impact markets. These can be things from world news events to new bank policies, and even the rising concern in the inflation rate can increase market volatility. Forex investors must be informed on many aspects of the financial world to avoid bad deals, and just as importantly, to know where to look for the good ones.

How Much Do Forex Traders Make? 💰

Now that we know a bit about day trading, let’s address a common question: What can I expect from forex trading?

There is no straightforward answer to what you can achieve in forex trading. It will depend entirely on the amount of capital you have going into trades, and how many trades you make in a day. Let’s discuss two important factors to better understand what a forex trader can achieve.

The first area is your risk tolerance. Forex is like many other areas of investing: higher risk will bring higher reward. If you are willing to put more on the line, you could make more money. Depending on your forex broker, you may also be able to leverage your capital to increase gains.

However, it is uncommon and normally unadvisable for investors to put more than 1% of their total capital into a single trade. For $10,000 that would just be $100. If you put more money into the market, you have the potential to lose significant sums.

The second factor is your broker’s spreads and commissions. Traders must account for how much of your profits will be taken by their brokerage. A lot of brokers will either increase the bid/ask spread of buying forex to make it more difficult to make a profit in forex. If a broker doesn’t increase the spread, they will often charge a commission for your trades.

If you want to know how much a forex trader makes, then we will need to run some numbers based on our information. Let’s look at some theoretical examples using different sums of money.

Let’s assume that a trader is putting up 1% of their overall capital into each trade of a standard lot of EUR/USD. They use stop-loss orders to limit their losses to the total amount they are investing and they aim to execute 100 orders each month.

As you can see, the more capital that you can put into trades, the more profit you can potentially generate. But these numbers are only theoretical. If you were to aim for higher percentages on winning trades, then you could increase your gains. 

You should also consider other costs such as commission fees. It’s even possible to lose more money in the forex market than you initially invested when dealing with transaction costs and leverage. Investors should try to inform themselves of all the possible risks.

How to Start Day Trading Forex 🚀

We always try to be cautious when embarking on a new financial project. Forex day trading shouldn’t be any different. So before jumping into the market we should work out a plan, try out some demo accounts, research brokers, and finally, start trading.

1. Create a Trading Plan and Define Your Comfort Level 📝

One of the most important qualities of a good day trader is a cool head under pressure. A lot of people aren’t born with the ability to stay emotionless, especially when their money’s on the line. That’s why it is essential to have a trading plan.

A trading plan is a way to work out the maximum amount you are willing to win and lose on a trade—by figuring out your margin of risk, you will become a better trader. While it may seem counterintuitive to put a cap on the amount of money you want to make on a trade, it helps increase your performance overall because having several trades that are returning consistent profit is better than waiting on one highly profitable trade that may never come.

Your trading plan should be able to adapt to new market conditions. As the moods of investors are always changing, causing sways in exchange rates, you should be able to tap into these shifts while staying within your goals.

2. Practice with a Demo Account 👨‍💻

Before you start trading for real, try using market simulation software or a demo account. A demo account is a great tool to help you learn a broker’s system—this tool is essential for new, young traders who want to test the forex market risk-free.

Demo accounts track the market in real-time, so it is just like trading. The one distinction is that you won’t be on the hook when your trades go south. The inverse of that is true as well. 

No one wants to miss out on real gains. While it may feel painful when you make a good trade on a demo account but don’t see any of the profits from it, just remember, it is better to win fake money than to lose real money.

Demo accounts will let you practice creating stop-loss orders and using hotkeys. Hotkeys are a great way to enter and exit trades quickly. In forex trading, it’s not uncommon to see prices fluctuate quickly. Not only do you need to have your eye on the market, but you also need to be ready to act.

While hotkeys are a great way to quickly make a sale, stop orders are excellent when you know when you will exit a trade ahead of time. Stop orders go hand in hand with your trading plan. If you are comfortable with a set range of target prices, you will know exactly when to sell. 

For example, your margin of safety may be 15% below the price that you buy in at. With a broker, you can set a predetermined action to exit a trade when the market hits this price. Your broker will automatically initiate a sale when that floor is hit, and you can have your broker perform the same action when a trade hits a target price.

3. Find a Broker and Start Trading 🏎

After you’ve worked out your trading plan and have practiced trading, you will need to find a broker. You may have already found the one you are comfortable with by using their demo account. 

How to Choose a Forex Broker for Day Trading 💡

Finding the top forex platform—particularly for day trading forex— is one of the key components to trading forex successfully. A good broker helps you by having a solid user interface, excellent customer service, and the right tools to get you trading productively.

Safety 🦺

The most important part of choosing a broker is finding one that is safe and reliable. While some so-called brokers may be outright criminal schemes, other brokerages can be dangerous because of security flaws in their platforms. It’s one thing for your Allrecipes account to get hacked, but having your broker hacked is a recipe for a bad day. 

You should research each broker and be sure they are accredited appropriately. In the US, brokers are accredited by the Commodity Futures Trading Commission and the National Futures Association.

You should also research whether a broker has had any data breaches or complaints filed against them. Following the SECs suggestions for maintaining security online can help protect you from risk.

Cost 💸

Brokerages are either going to increase the bid-ask spread–meaning it will be more difficult to make a profit–or charge a commission to use their services. Understanding how your brokerage interacts with your earnings is key to generating a profit.

Both spreads and commissions are the two main ways that forex brokers can cut into your gains. Another way that traders can lose money is on slippage. Slippage occurs when a broker is unable to fulfil an order due to market volatility, and the right broker can help you avoid it.

Features 🛎

Trading platforms will offer a variety of features including access to news, investing tools, and investment types. Know how these different features are going to affect your trading.

Some brokers offer additional market information, such as more details on bid-ask spreads and market volatility by paying for a premium service. You should know what kind of pricing model your broker uses before opening an account.

The advent of financial apps is changing the way that people are trading. These apps are bringing in many new investors to forex and can offer their own range of features. You should take financial applications into consideration when deciding how you will be trading.

Financial Instruments 🗂

The financial instruments offered by a brokerage can vary wildly. For example, the popular forex broker IG offers 93 currency pairs, but some other companies might offer a much more uninspiring list of tradable products.

Other brokers offer different tradable assets. If you’re interested in CFDs and cryptocurrencies, a broker like eToro is one of the choices. The broker you decide to use can open the door for other kinds of trading and more exposure.

Customer Service 🤝

You may never end up needing this service from your brokerage, but it may be the one thing that keeps you safe in the market. As we learned last May when one investor was reimbursed for a $9 million oil transaction, your company must have excellent customer service—or else you’re on your own when something goes wrong.

Forex Day Trading Strategies 📈

Without a doubt, forex strategies are essential for making money in the forex market. As we’ve discussed, a forex trader needs strategies to keep a cool head to make the right decisions when markets are volatile.

The best way to stay calm is by having a variety of trading strategies to rely on. Markets can be complex, so having many different systems to work from can be essential. Not only do you need to know your strategies well, but you need to be adaptable, adjusting your methods to capitalize on opportunities.

Trend Trading

One of the easiest-to-understand indicators, and the one that most new traders use, is the trend indicator. If you notice that both the daily highs and the daily lows increase in price each day, then you will want to buy in when the market dips and sell after the high surpasses the previous day.

Reverse Trading

Reverse Trading or counter-trend trading is the inverse of trend trading. This is an indicator that helps investors take advantage of bear markets or corrections after an upwards trend.

Momentum Trading

Momentum trading is taking advantage of the recent history of an asset. By using the past performance and assuming that a trend will continue in one direction because of the momentum of the price, an investor can capitalize on price movements.

Popular Charts and Indicators for Day Trading

Many of the best forex trading strategies will revolve around charts and indicators. You will want to try a variety of strategies and see what works best for you. Trend trading and reverse trend trading are popular among new investors because they are easy to learn and straightforward.

You will need to know how to read forex market charts to successfully follow your trading plans. In the above chart you can see when an asset is trading down, when it is rising, and when it is trading sideways.

In day trading, the best charts are often going to be the ones you can understand quickly. If you are most comfortable with a simple line chart, then that will be better for your trading than a candlestick chart.

Familiarize yourself with the three main types of charts: the line chart, the bar chart, and the candlestick chart. Any of these may be available depending on your brokerage and trading environment.

Learn How to Trade Forex Successfully 🎓

To be a successful forex trader you will need to stick to your trading plan and minimize your losses. You will need to pick the right broker with a fee structure that you understand. 

To trade successfully you will need to have many successful days of trading, not just a few great trades. The best way to become a successful forex trader is by starting with a broker that offers excellent educational resources and has a solid trading platform. 

You will need to follow some of the steps we put forward earlier and come up with a good plan for trading. After you have your plan, try out a demo account to test your skills under real market conditions.

When you start seeing yourself turn a profit on demo accounts, then you may be ready to move on to the real forex market. Stick to your trading plans and try to have profitable trades that are more frequent and larger than your losing trades.

Set up stop-loss orders to cap your losing trades and have a target price in mind for each position you enter. Stay within your comfort level and don’t put more money on the line than you are comfortable losing.

Day Trading Forex vs. Stocks ⚖️

Day trading forex and stocks both rely on the same core techniques. Traders will be aware of market news, earnings reports, new bank policies and use the information to find price movements and create gains. Nonetheless, there are many key differences between the two types of trading.

With both stocks and forex trading, you will have to focus on the bid-ask spread to make money. Beyond the bid-ask spread, some brokerages may require that you pay a commission for your trades.

It is easier to trade forex throughout the day because it is open 6 days a week for 24 hours a day. On the other hand, the stock market is only open 5 days a week, which means less opportunities (and a ruined sleeping schedule for some). 

It can take more money to day trade stocks. Many brokers require you to have at least $25,000 to day trade—this is not an easy threshold to cross, but luckily, forex is much more accessible and you don’t need a large capital investment to trade to your heart’s content.

What are the Risks of Day Trading Forex? ⚠️

The forex market is appealing to a lot of new traders because it offers more flexibility than the stock market. More hours to trade can lead to more traders on the market.

The forex market can be riskier than the stock market. The forex market is only loosely regulated for the most part, while the stock market faces much stricter regulations.

Because the forex market is appealing and saturated with new investors, there are many bad actors in the space right now, so it’s essential that you know how to avoid scams. Beyond some of the scams that have occurred on the market, it can be difficult for investors to make money; nearly 70% of retail forex traders lose money on the market. 😱

Day Trading Forex During COVID-19

While the pandemic initially brought a lot of investors into the forex market, the scene is still constantly changing with the pandemic. While the virus brings a lot of fear and market instability, it also provides new opportunities for savvy investors. 

Bloomberg recently reported record numbers in trading activity meaning that traders are as busy as ever. Beyond the stock market, the forest market is looking to boom as renewed optimism of a COVID vaccine and a new US president drive market confidence.

Forex day trading is a huge opportunity for new traders and while the market is complicated, the right brokerage and information can get you ahead of the game. Doing the research will help you make sense of this volatile market and help you come out on top.

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