This strategy is suitable for those who want to start a career in forex trading. If you want to invest occasionally, day trading is not for you. The Day traders open and close positions during the day, not holding positions overnight. Day trading can turn out to be a profitable career if executed properly. However, it can also be challenging for beginners in trading, especially those who do not have well-planned strategies.
This chart shows the price bounce “Moving Average” throughout a single trading day. Ideally, you can sell when the price cannot pass the “Moving Average” line and bounce back to the downtrend.
In this case, as long you sell in the morning (Asian session), you will be able to sell lowest in the evening before bedtime. Day Trading strategy will have a favorable risk-reward ratio and abundant trading opportunities but required strong technical analysis.
What is Day Trading?
Day trading is a form of trading that involves actively buying and selling securities within a single trading day by trying to gain the advantage of short-term price changes. Day trading can occur in any marketplace but it is most common in the stock and foreign exchange (forex) markets. The majority of day traders are well educated and well funded; they use high amounts of leverage provided by forex brokers together with short-term trading strategies to take advantage of small price movements that occur in CFD instruments such as highly liquid stocks or currencies. They base their trading decision on actions that cause short-term market fluctuations, economic statistics, market psychology, corporate earnings, and interest rates
Important Factors to Consider in Day Trading
Before you decide whether or not to buy or sell an asset in CFD, you must consider
these three factors,
1. Leverage: Leverage is a mechanism traders use to increase their exposure to the market that permits them to pay less than the full amount of the investment. Using leverage allows a forex investor to enter big positions without having to pay the full purchase prices. Hence, leverage magnifies the profits from a favorable trade and also magnifies the loss from an unfavorable trade. It is therefore important to know how to manage your leverage to mitigate losses. Forex brokers provide leverage of up to 50 to 1 on major currency pairs. If a day trader is using 30 to 1 leverage, for instance, they tend to have more than enough leverage for trading. If the trader has $3,000 and leverage is 30 to 1, the trader can take positions worth up to $90,000. The risk is still based on the original $3,000; leverage keeps the risk restricted to a small fraction of the deposited capital.
2. Spreads: this is the difference between the ask (buy) and the bid (sell) price of a currency pair. It is the commission brokers charge per trading position. Currency pairs with wider spreads should be avoided during day trading since they incur more charges.
3. Liquidity and Volatility: liquidity is the ability to buy or sell a currency pair without causing a significant change in its exchange rate. On the other hand, volatility is how much the price of an asset will fluctuate on a given day. If the market moves in a favorable direction, more volatility will result in more potential profit while resulting in greater losses in an unfavorable market. Higher liquidity leads to lower volatility because the market tends to move in smaller increments thereby resulting in lower volatility.
An asset’s ability to be traded without significant fluctuations in the market increases when traders are actively trading at the same time at a higher total volume. Hence, the foreign exchange market is often regarded as the most liquid market due to the high volume of trading activity that occurs around the clock. However, due to certain economic factors, news, fiscal policy markets, and interest rate changes, markets can move drastically and suddenly thereby leading to low liquidity and high volatility. Metals such as Gold and Cryptocurrency pairs are typical examples of assets that undergo high volatility during day trading.
4. Trading volume: this is the total number of shares of an asset that are traded during a given period. At higher trading volume, there will be more interest in that asset. Hence, it is considered to be a technical indicator because it represents the overall activity of an asset and also indicates how much demand is for that asset.
5. Risk/Reward: Risk/reward represents the amount of capital that is being risked to attain a certain profit. If a trader risks 5 pips on a trade and takes a profit at 10 pips. The reward is twice the risk, which is a good risk/reward. If volatility is higher, for instance in XAUUSD or Cryptocurrency pairs, the trader will risk more pips and try to make a relatively larger profit, but the position size will be smaller than that used in the five pips stop loss trade.
Having more winning trades is also a goal of many forex day traders and a strategic factor for which many day traders strive. Higher winning trades signify more flexibility with your risk/reward.
Characteristics of a Day Trader
Below are some of the prerequisites necessary to be a successful day trader.
1. Knowledge and experience in the marketplace: traders without adequate knowledge of the market often lose. A good day trader would have a good understanding of the technical analysis and knowledge of charts.
2. Sufficient capital: A significant amount of capital is often necessary to effectively capitalize on intraday price movements.
3. Limit their Orders: a day trader often uses limit order to set a specific price for buying or selling. A buy limit order is placed when an asset is expected to lower in price and a buy order is automatically executed if the expected price fall materializes; hence a day trader will not have to pay too much. On the other hand, a trader places a sell limit order when they expect an asset to increase in price before falling and a sell order is automatically executed if the expected rise in price materializes; hence the trader will be selling at a higher price. A limit order is often used by day traders to manage risks by buying at a lower price and selling at a higher price.
4. Have a strategy: A day trader needs to develop a strategy that will give them an edge in the market.
Day Trading Strategies
Knowing when to enter and exit a position to make a profit is vital to becoming successful in day trading. Below is a list of day trading strategies a trader can master and adapt to become a successful trader.
1. Scalping: This strategy aims at making numerous small profits on small price changes throughout the day. The main goal of a forex scalper is to earn small amounts as many times as possible in a single day during the busiest times. Traders basically buy or sell a currency pair and hold and quickly grab a few pips between 5-10 pips by holding the positions for a period of a few seconds or minutes. They then repeat this process throughout the day to gain or make a more significant profit from each position by capitalizing on price fluctuations. With scalping, traders can grab up to hundred trades in the busiest hours of the day seeking small profits
2. Range trading: This strategy primarily employs support and resistance lines to determine trading decisions. It deals with the identification of overbought and oversold currency (i.e. areas of resistance and support respectively). Range traders tend to buy during oversold/support periods and sell during overbought/ resistance periods.
3. News-based trading: This strategy bases its decision on opportunities from the increased volatility around news events. Positive or negative news concerning a country or stock can lead to high volatility in the market, which can also magnify both profits and losses. Consequently, with this strategy, you will go short or sell when news is bad and go long or buy when it is good. An experienced trader will be able to anticipate economic and global announcements and therefore sell before bad news is announced.
4. High-frequency trading (HFT): This strategy uses sophisticated algorithms to determine small or short-term market inefficiencies.
5. Trend Trading: This is one of the easiest day trading strategies for forex beginners. It means trading with the trend. When looking for a trend, it’s necessary to recognize that markets do not tend to move in a straight line. Market prices move up and down. An uptrend is a market setting with higher highs and higher lows, while a downtrend is a market setting with lower lows and lower highs. Trends can be identified using several forms of technical analysis such as price actions, trendlines, and various technical indicators such as the Relative Strength Index (RSI). Trendlines show the direction of a trend while RSI indicates the strength of a trend at a given time
6. Counter-Trend Trading: This is the opposite of trend trading. It entails capitalizing on the frequency at which market trends tend to break down. It is trading in the direction of a long retracement (breakout or breakdown) while anticipating an overall trend reversal. In Counter-Trend Trading a trader attempts to catch the market in the period of reversal. To achieve this, you need to recognize the break in the trend. If the market however moves against you by resuming its actual trend, you must admit that your analysis is wrong and exit the trade.
Best Time for Day Trading
A day trader does not need to trade all day. You however need to develop more consistency by only trading at specified periods, for instance, 2 to 3 hours a day. Below are the hours you should focus on depending on the asset you want to trade.
1. Forex currency pairs: the market is open 24 hours per day during the week. The EUR/USD is the most popular currency pair for day trading. This pair records greater trading volumes between 6 am and 5 pm (1 am to noon EST) when the London markets are open. The hours of 12 pm to 3 pm (7 a.m. to 10 a.m. EST) produce the biggest price moves because both New York and London markets are open.
2. Stock: a stock trader enters the market between the hours of 2:30 pm to 4:30 pm (9:30a.m to 11:30 a.m. EST) because this is the most volatile time of the day and hence has the biggest price moves with the most profit potential.
Risks of Day Trading
1. Financial losses: many day traders suffer severe financial losses in the beginning stage. However many also eventually graduate to making profits. It is advised to only risk what you can afford to lose.
2. Stressful and expensive: Day trading is quite demanding and requires concentration in reading the news and watching price fluctuations to spot market trends. It also requires expenses on commissions, computers, and training
3. It depends on borrowed money: Day-trading uses the leverage of borrowed money to magnify profits. Hence if day traders are at a loss, they do not only lose their money but also end up in debt.