What is Day Trading?

Let’s be clear about what exactly day trading Forex means. It can be defined as sitting in front of a trading screen for a meaningful continuous period of time and making trades that should substantially be closed by the time the trader closes up the computer and is done for the session.

A day trader might be scalping, meaning going for fast trades with very small profit targets of under 10 pips or so, or they might even be swing trading, trying to catch a daily move for as much 200 or so pips. Both can be day trading, if these trades are opened and closed within a single session.

The Challenge of Day Trading

Day trading is very challenging, both technically and emotionally. There are so many things that have to go right in order to consistently make money that it becomes very easy to lose. Most traders who try to trade like this are not successful. That does not mean that you cannot be, it just means that you have to be skilled, organized, and emotionally stable in order to have a good chance of winning.

It is not recommended for new traders to begin trading in a day trading style. Day trading Forex is very popular because it is exciting, because there can be a lot of action, and because it is easy to see all the intraday price movement and think this can be converted into lots of profit. A skilled trader might be able to do this, but it is nowhere near as easy as it looks. New traders are better advised to begin with position and/or swing trading, which is a much easier way to extract money from the market, and to build up their trading skills in the meantime. Once they have built a competence, they can later move into day trading if they want to.

If you are going to day trade Forex, you are going to need to be organized and systematic as to how you go about it. Here I’ll lay out a guide explaining how you might approach it. You need to plan several things in advance before the trading starts.

A Day Trading Plan

First of all, decide which hours you are going to trade. You need to be somewhere calm and quiet where you will not be interrupted and where you will be comfortable. When day trading, being able to get in and out of trades quickly is essential, so you don’t want any external problems or distractions.

Before you begin to trade, you should check an economic calendar to see if there are going to be any high-impact data releases concerning currencies you are going to be trading. Keep in mind that when you are looking at stop losses that might be no more than 10 to 40 pips away, unexpected economic data can make a great trade a losing trade in a split second. Is there any point in being so closely exposed to a random stop loss to the point where trading becomes gambling? Probably not, so exit trades close to stop losses before the relevant news release.

It is probably a good idea to be prepared to trade any of the four major currency pairs: EUR/USD, GBP/USD, USD/JPY and USD/CHF. Before you start trading, you should look at a long-term chart and mark key trend lines and support and resistance levels that are anywhere near the current price. If there is one pair that has been more active and directional than the others lately, then this is the one to focus on, especially if there is high-impact news scheduled for one or ideally both sides of the pair.

Secondly, depending upon the time of day that you are trading, it is a good idea to put lines on the chart marking the highs and lows of previous sessions, especially the ones which really stand out as inflection points. Some traders also like to mark session opens, but I personally believe they are far less important.

A good day trading strategy will involve being flexible, and taking advantage of your continuous presence in front of the screen to quickly identify low-risk entry points with tight stop losses. Another part of a day trading strategy will involve being ready to get out of a trade quickly if it turns against you, without being too hasty in doing so.

An Example of a Day Trade

As an example, the chart below is taken from Tuesday last week. I was considering trading GBP/USD beginning with the London open. In the course of my preparations, I marked the high and low of the Asian (Tokyo) session with pink lines:

This was an unusually large Asian session range, and London was opening (shown by the green horizontal line) right in the middle of it. This is a sign that it is going to be hard to break out of the Asian range, so a profitable day trading strategy here was to look to fade (trade against) the pink lines. Looking at the pink lines, it can be seen that the lower pink line looks more solid than the higher one, as it has been respected three times over the Asian session. Another reason why that low looked interesting, is that it was only about 10 pips above key long-term support at 1.5750, which was also a key psychological number. For all these reasons, it was logical to look for a turn in price there to give a possible long trade.

Slightly more than an hour after the London open, the price reached the Asian session low, and turned around quickly, giving a nice long trade. Note that the turn candle in the 5 minute chart below was quite easy to identify as:

It bounced quickly and strongly off the low.

It was the first strongly bullish candle after the entire move down. and was due to snap back in the long direction.

I entered long when the price broke above that candle’s high. This trade gave a maximum of 38 pips for a risk of 7 pips, which is a good reward to risk ratio. It is the possibility of achieving trades with this kind of ratio that can make day trading worthwhile.

It was not touching either of the moving average lines, suggesting the price had become “over-extended”

Conclusion

As you can see though, I went through a process to get to that nice winning trade. I looked at the 4 major Forex pairs and the economic calendar, and decided to focus on GBP/USD that day. I looked at a session low and major support and went for a bounce based upon the candlestick formation and the moving averages. If instead the price had broken below that Asian session low, pulled back and then begun to move down strongly, I would have looked to go short. The pink lines are pivotal points, but you can trade against them or trade with a break out past them, depending upon what the price action is telling you.

Successful day trading is all about looking at the big picture and being flexible, and then spotting the places where for a risk of say 10 pips or less, there is an opportunity to win maybe 30 to 40 pips at least. Catching the turn at the low or high in the day early in a major session for a Forex pair can be a good way to go about achieving this, entering just in front of a low-risk small turn candle, with the stop loss just the other side of it.