What is Day Trading?

Day trading is a term used to reference a short term trading strategy which is applied to both the stock markets as well as the forex or currency markets.

Day trading or intra-day trading is a term used to reference a short term trading strategy which can be applied to both the stock markets as well as the forex or currency markets.

With day trading, positions are opened and closed within a few hours, as compared to swing trading or stock market investing where positions are held over weeks, months or at times even years.

Day trading is one of the most popular ways to trade the forex markets given the volatility that comes with it, allowing traders to capture a decent number of pips on a given day. Most beginners to forex often start out with day trading as it is less complex and the open positions can be easily managed.

Day Trading Strategies

There are many day trading strategies, also known as scalping strategies. These day trading strategies can be based upon price action as well as indicator based day trading systems. Some of the most common day trading or scalping strategies can be categorized into the following types:

  • Day trading breakout strategies: This strategy involves buying or selling when price breaks a trading range’s high or low.
  • Day trading based on news events: This strategy involves buying or selling based on the outcome of an economic release. A better than expected release usually results in the respective currency trending stronger and vice versa.
  • Day trading on smaller chart time frames: This strategy can be price action, chart patterns or indicator based, but is limited to smaller time frames such as 15, 30 minutes or 1 hour charts.

Most day traders usually focus on the smaller time scale charts such as 15 minutes and up to 1 hour chart time scales.

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Planning your trades when day trading

When day trading, it is important to note that traders should pay special attention to their risk management, which includes preparing for the trading day. Although day trading is easier to manage than swing trading, the risks are one and the same.

With day trading, incorrect use of stop or limit orders could quickly see a trader’s equity erode over time. Therefore, discipline and patience are of utmost importance if you want to succeed with day trading.

Check list for day traders

  • Plan your day trading by first looking at the previous day and the current day’s economic calendar. High impact news releases such as GDP, inflation, unemployment or speeches by central bankers tend to cause volatility which could impact your bottom line profit and loss (PnL).
  • Start with a top down analysis. This means, take some time to analyze the higher time scale charts such as daily and weekly and build the market context accordingly. Analysis could include price action such as looking for important candlestick patterns as well as identifying the prevailing trend
  • Manage your risks. After you have narrowed down to an instrument or currency pair that you want to trade. Never risk too much on a single trade and at most risk not more than 1% of your trading equity
  • Don’t be too greedy when day trading as this would mean ignoring your trading rules and letting your emotions take over. Discipline and patience are two of the most important aspects that will determine your trading success. If you have reached your daily goal of banking a certain number of pips, stop trading for the day. Over trading can lead to taking unwanted risks and is one of the common issues that often plagues day traders

Minimize risks with stop losses when day trading

It is common to see price spikes during any given trading day or session. Despite using a tested and profitable trading strategy, day traders must accept the fact that losses on trades are inevitable. There is no fool-proof trading strategy that will guarantee you 100% success.

Therefore, the use of stop loss orders is important. While setting the stop loss orders on your day trading positions, ensure that you place them considering the spread on the currency pair and also at a key price level such as known support or resistance levels.

More importantly, place your stop losses at levels where you know that if price breaks above or below the stop loss level, your analysis is invalidated. It is always better to cut your losses when they are small.

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At the same time, ensure that you lock in the profits are regular intervals by moving your initial stop loss to break even and then trail your stops by locking in a few pips at regular intervals when the markets allow you to do so.

Most day traders tend to focus on making profits, when in reality focusing on minimizing your risks on your trades is the key to being successful.

Can you make a living with day trading?

Can you make a living with day trading? This is a commonly asked question. Yes, it is possible to make a living with day trading but do not expect this to happen overnight.

Traders need to build a lot of experience with the markets, build familiarity with their trading systems, charts and the instruments/symbols they are trading and most importantly, traders should learn how to manage their risks.

There are many successful day traders both in the forex as well as the stock markets but to achieve a level so as to make a steady income stream from day trading requires practice and constant learning.

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However, beginners can take solace from the fact that even the best day traders have at some point started off as beginners. With a keen focus on learning and constant practice, it is possible to make a living with day trading.