What is forex day trading? In this post I want to clarify some definitions relating to trading strategies and timeframes in response to this question. Especially among new traders, there seems to be a bit of confusion regarding differences between scalping and day trading, swing and position trading.
As the topic of this post is “what is forex day trading, we will start with the definitions and then dig a bit deeper into day trading specifically. What are the pros and cons? How do you determine if it’s the right style for you? How to get started day trading?
What is forex day trading?
Same as scalping, day trading is a short term trading style. The difference, as I like to describe it, is that a day trader is entering a trade with the aim to hold it for the duration of a trading session or a full day. You might have a strong directional bias for the NY session for example and you position yourself at the start of the session. Nearing NY close, you’ll be looking to get out of the trade, unless your take profit was already achieved.
Generally, day traders don’t hold trades open overnight. If you do, label of this trade would change to that of a swing trade.
Other trading styles
Intention of a scalping trade on the other hand is to profit from very short term price movements. Generally seconds or minutes, capturing just a few pips. It requires constant focus and attention and is therefore more time intensive. Also, a scalper generally has a much higher turnover compared to a daytrader. Making up for small take profits with increased trade size and volume of trades. A day trader might be happy with one properly analyzed trade per day, a scalper is often in and out of +10 trades per day or session.
Swing and position trading are longer term trading styles. A swing trader is usually aiming to hold a trade for a few days or weeks. A position trader looks at his trade as an investment for the long term, often being in the trade for months and years even. There is a predominance of technical analysts among scalpers, day and swing traders. Position traders usually rely more on fundamentals, often profiting not only from price appreciation or depreciation but from positive swap (carry trades), profiting from differences in interest rates across the respective currencies.
Pros and Cons of Forex day trading
Is forex day trading for you?
Ask yourself the following questions. If you tend to answer “yes” to most of them, then day trading is probably a right fit.
- Do you like beginning and ending a trade within the same day?
- Do you have time to analyze the markets at the start of the day?
- Are you able to monitor the markets during London open (2-4 AM time EST) and/or New York open (7-9 AM EST)?
- Do you like to know exactly how much you have made (or lost) at the end of each day?
- Are you comfortable with not every day producing actionable setups?
- Do you feel scalping is too fast and swing trading too slow?
Types of forex day trading
There are several distinctive strategies you can apply if you decide that day trading is your style. Generally, these can be classified in the following categories:
You’re looking to position yourself in the direction of the primary trend. The setup is usually some form of a continuation pattern and the trigger is a break of structure or pullback to a significant level.
You’re looking for some form of mean reversion/reversal trade. You’re anticipating a reversal of prior trend by monitoring for reversal patterns, exhaustion, momentum shifts and a change of character of the preceding price action.
No clear trend with price action being contained in a range/sideways price movement. You’re looking to profit from short term moves within the range until a breakout happens.
Supply & Demand trading
You’re analyzing pockets of liquidity and imbalances in the order flow. Usually the setup forms after a strong drop or rally and you look to enter after a retest of the level where the impulsive move originated.
Top down/bottom up trading (multi-timeframe analysis)
This form of forex day trading involves analyzing structure and price action on multiple timeframes and looking for confluences to enter a trade. It’s essentially a combination of trend and counter trend trading as.
How to get started with forex day trading
Whatever style of trading you choose, you need a trading account with a reputable broker, execution platform (MT4, MT5, CTrader, etc), funds allocated towards trading and a strategy to trade.
I won’t go too much into detail on trading psychology and risk management, just keep in mind that overtrading and irresponsible risk management is what kills the dreams of many aspiring traders.
And although the aforementioned is more important than anything else, you still can’t get started without a clear and defined day trading strategy. If you’re new to trading, make sure to check out my review of the #1 rated resource for forex trading education and strategies.
You have your strategy, now what?
Now, presume that you have your trading account set up and funded, you have defined your risk management rules and you have a strategy to trade. Below are my recommendations to turn this strategy into a consistent money maker for the long term:
- Write down your trading plan and read it daily until it’s ingrained in your mind. Ideally also have it printed out at your trading desk.
- Backtest the strategy, either manually by scrolling back on charts, replay mode on TradingView or use a tool like Forex Tester.
- Start trading on your live account with a smaller lot size and don’t increase position size until you have recorded 3 months of consistent trading results.
- Journal your trades and do a post-trade assessment at the end of the day or the week.
- Stick to your rules and processes and profit long term.
I hope this post helped shed some light on what is forex day trading. If you read this article in full, I trust you have a good understanding of different trading styles and you are clear on whether or not forex day trading is for you. If you still have some questions, feel free to drop me a comment below and I will be glad to answer.