Day Trading can offer a very exciting and lucrative way of trading the forex market for those who take the time to prepare appropriately for the endeavor. As the name implies, the basic idea behind day trading is that all transactions happen during the trader’s normal business hours. Also, all day-trading positions are typically closed out before the end of the business day.
Advantages and Disadvantages of Day Trading
Day trading has the primary advantage that at the end of the day, the trader goes home with no positions and no overnight market risk. Another advantage of day trading is that the trader tends to be alert and can more easily focus on and take advantage of intra-day market movements.
Nevertheless, people with heart conditions or those overly-sensitive to stress may want to trade other strategies that are not as intensive and short-term in nature. Also, since the big moves in foreign exchange generally happen when the market trends over weeks or even months, day trading strategies may not give you the same sort of returns as successful trend-following trading systems.
Developing a Day Trading Strategy
If you think you might like to try your hand at day trading, the first thing you will need to do is come up with a successful day trading system. You can start this process by reviewing literature and online resources for information that can help you develop an objective trade plan.
The main idea behind having an objective trading plan involves minimizing any emotional interference that might sabotage your forex trading. Also remember to keep your trading system relatively simple and easy to follow so that you can do so quickly and with confidence.
One especially important consideration with day trading strategies is the risk/reward ratio of the strategy employed. For example, a day trader might set a goal of 30 pips of profit per day with a risk level of 20 pips to begin with. As their trading success improves and the equity in their trading account rises, they can also increase the amounts traded.
Many commercial automated trading robots risk hundreds of pips to make just a few and so they seem to trade well for a while before eventually blowing up on a serious adverse move. You will want to make sure that your day trading system avoids this potential pitfall and uses a risk/reward ratio that is conducive to long-term success.
Testing Your Day Trading System
The next step is to test your trading plan. Many day traders opt to first test their day trading strategy over historical data to find a system that has suitable profitability and draw down characteristics that suit their trading goals.
Then, they will want to trade their system on live data to gain experience and confidence in putting the strategy into practice. This process can also suggest refinements to the day trading strategy that can make it more successful.
Using a Forex Broker for Day Trading
Once an aspiring forex day trader has developed a day trading strategy and practiced implementing it, they can usually open up a free forex demo account with a forex broker without risking any money initially.
Doing so can give a trader a good idea of whether the actual work and returns involved in day trading in the forex market might be suitable for them. You can then usually upgrade and fund your account when you feel confident in your ability to day trade profitably on a consistent basis.