Day trading

Day trading is a popular way to speculate on financial markets. Here we look at what day trading is and which markets you can day trade on – plus two handy strategies.

• What is day trading?
• Which markets can you day trade?
• Finding day trades
• Day trading strategies
• How to start day trading forex
• Summary

What is day trading?

Day trading is an approach to the markets that involves opening and closing positions within a single day. How much you trade is up to you: you could stick to once per session or less, or open positions frequently as you spot new opportunities.

Because trades are kept open for such short periods, day traders look to profit from small price fluctuations in very liquid markets.

One major advantage of day trading is that it removes the risks and costs associated with keeping a trade open beyond the market close. Day traders don't have to worry about prices gapping overnight, and don't have to pay financing charges on their positions.

However, it requires a lot of time to devote to the markets – although many day traders use mobile apps, stops, take profits and more to avoid sitting at a screen for many hours each session. Day trading is fast paced, so it requires proficiency and skill to analyze the market and make rapid decisions. This can be very stressful and is certainly not suitable for everyone.

Which markets can you day trade?

Market liquidity is important to day traders because they need to be able to move in and out of positions quickly. Any delay to the trade could make a difference between a profit or loss. So, while you can day trade on any market, the most popular ones are usually FX pairs and indices.

One other key factor in choosing markets to trade is cost. As day traders look to take advantage of relatively small price moves, the costs to open each position can have a significant impact on its result.

Say that you're looking to earn a profit from a 10-pip move in a market. Having a 1.0 spread on EUR/USD means you can keep 9 pips as a return. Trading stocks, where you have to pay a commission charge, means your gain is far lower.

Finding day trades

Because of the time-intensive nature of day trading, most participants aren't able to pore over fundamental data when choosing which opportunities to pursue. Instead, they tend to rely heavily on technical analysis.

Ignoring economic data entirely can be treacherous, however. Major releases will often have a significant impact on market prices, so you'll need to be aware of what might be driving volatility in any given session.

Day trading strategies

Any strategy that enables you to capture short-term profits can be used when day trading. But here, we're going to focus on two popular options: trend trading and scalping.

Trend trading

As we covered in the previous lesson, this strategy can work over both the long and short term. When day trading, you're looking to take advantage of price action over a single day – either by capturing a small portion of a larger trend or by finding ‘mini' trends.

There are lots of different ways to identify trends. For example, you could look at price action to try and spot higher highs and lower lows, or you could use indicators such as trend lines, moving averages and more.

Mean reversion

Mean reversion, on the other hand, is based on the theory that markets have an average level they will return to after a significant price move. If you can identify a market that has had an extreme fluctuation from its mean, you can then trade its return to normality.

Most traders using this strategy will employ technical indicators, such as moving averages or Bollinger bands, to calculate a mean for their market. Then, they’ll monitor when it breaks up or down from this level and go long or short accordingly.

Scalping

Scalping is a very short-term strategy that involves taking lots of small profits each day. Scalpers will open and close multiple positions each session – with some trading every few minutes or even seconds as they hunt for opportunities.

When scalping, you're aiming to earn small profits from most of your trades, targeting a higher win-rate than day or position trading. Once a market has moved a little bit in your favour, you exit it to realize the profit. If a market moves even slightly against you, you immediately close the trade and take a small loss.

Scalping is one of the most intense forms of day trading. It requires more even more time, and a disciplined approach to avoid letting profits or losses run. After all, when margins are this thin, a single large loss could wipe out the gains from multiple successful positions.

Whichever strategy you decide to use, solid risk management is essential when day trading. Day traders often use market structure to set stop losses, for example by identifying support and resistance levels or using moving averages.

How to start day trading forex

To start day trading forex, you first need to understand that it is a challenging endeavour requiring meticulous preparation which is not suitable for all traders. To have a chance of profitability, you not only have to be aware of the combination of fundamental and technical drivers of currency markets, but you’ll also want to start with sufficient capital in order not to bust your account.

This may vary from person to person, but while a few hundred dollars may be sufficient to merely experiment with a live account, a large account size may give you a better opportunity.

You also need to ensure that you’re able to access your platform for the entirety of the time you plan to spend trading per day. An unexpected trip away from the computer or mobile, no matter how quick, could mean vital information on price action is missed.

Crucially, you need to understand the risks involved and ensure you employ a risk management strategy to try and mitigate them as much as possible. We’ll cover how to put a risk management strategy in place in the next course.

For now, you might want to experiment with day trading on a FOREX.com demo before trying the real thing. You can see whether day trading works for you without risking any real capital.

Day Trading Summary 

• Day trading is the opening and closing of a trade or multiple trades before the markets close
• Day traders often trade FX and indices as they have high liquidity and tight spreads
• A sound risk management strategy is essential to prevent wiping profits out
• While this style of trading avoids the potential for overnight movements or gapping, it is fast-paced, time-consuming and can be stressful
• Trading highly-liquid forex pairs at high-volume times can be important on short-term charts
• Multi-timeframe analysis can help give a ‘bigger picture’ on price action
• Technical indicators can assist with entries and exits, particularly with confluence
• Ensure you pay attention to the charts at all times!