Day trading refers to the speculation on buying and selling a financial instrument within a single trading day and it is actually a very popular short-term trading strategy. The goal is to benefit from small movements in the price of stocks or currencies. Unlike scalping, forex day trading involves placing a single trade and closing it by the end of the day. It occurs in any marketplace although it is most commonly used in the foreign exchange and stock markets.
About day traders
With forex day trading, traders pick a side when the day starts and either make a profit or take a loss when the day ends. They are not into holding their trades overnight. In fact, they place intraday trades based on shorter-term charts, like 15-minute charts for example. Positions are managed in minutes or a few hours by using technical tools for exit and entry points. This way of trading requires traders to be focused and disciplined as the forex market is a fast-changing market.
Day traders are also well-informed on the markets and usually have a significant amount of funds as they make use of high amounts of leverage while using short-term trading strategies. This means that day traders are aware of events that lead to short-term moves in the market. This is also known as trading based on the news, which is a quite popular technique.
All in all, if you:
- Like opening and closing a position withing a day
- Have enough time to spend on analysing the market and monitoring your trades throughout the trading day
- Can’t wait to know whether you are making a profit or not until the next day
- Are not into longer-term trading
- If you don’t have any other day job
Then you might easily get into forex day trading.
Common characteristics found in a day trader
If you are a professional day trader, that is, you trade for a living and not as a hobby, then you must probably be well-established within the industry and have a deep knowledge of the market. As with any other type of trader, day traders share some common characteristics as outlined below:
Familiar with how the market works
If you don’t have a basic understanding of the factors that drive the financial markets, then you should probably not attempt to day trade as charts can often be deceiving. Skills like technical analysis or reading the charts are, therefore, very useful for a day trader. Conduct your research and be familiar with all the details around your trading products. Also, keep abreast of the latest market and economic news on which to base your trading decisions when the trading day starts.
Day traders use funds that are used for high-risk or high-reward investments. This is also known as risk capital, and it is only what they can afford to lose. Also, to effectively capitalise on intraday price movements, access to sufficient capital is required. In fact, it is very important, as day traders use high amounts of leverage and there might be big margin calls triggered without much of a notice because of volatility.
Solid trading strategy
A day trader usually uses various trading strategies to have an advantage within the market. Then, they optimise them up to the point that they reduce losses and get the desired results.. Such strategies are:
- Scalping, which targets various small profits based on small changes in the prices within the day.
- News-based trading, which seeks opportunities arising from the increased volatility of news events. This a more traditional strategy and traders using it usually don’t pay much attention to charts or technical analysis.
- HFT (High Frequency Trading), which makes use of unique algorithms so as to take advantage of small or temporary inefficiencies of the market.
- Range trading, also referred to as channel trading, which makes use of support and resistance levels in order to determine decisions regarding buying and selling.
How day trading works
Forex day trading is suitable for traders that have sufficient time to spend on analysing, executing and monitoring a trade within a trading day on the best online trading platform, the MT4. While scalping is quite fast and swing trading is rather slow, day trading is the ideal trading style if you are somewhere in the middle.
Traders have their expectations about interest rates, corporate earnings or economic statistics and when these expectations are exceeded or not met, then the market reacts in a sudden way, causing significant moves which day traders take advantage of.
More types of day trading
This strategy refers to looking at a longer time frame chart and determining a trade in general. After this, traders move to a smaller time frame so as to determine opportunities in the specific trend direction. Indicators can be used here to help traders with timing their entries.
This type of day trading is very similar to trend trading, only that when traders determine their overall trend, they seek opportunities in the opposite direction. The goal here is to quickly identify the end of a trend so as to be prepared when it reverses to open a position at the desired entry point. This strategy is quite riskier, as it involves going opposite of the trend, but can potentially bring successful results. It is also suitable for traders that are well-acquainted with recent price action and when to go against it.