Forex trading involves a whole range of trading strategies and styles. Day trading, as opposed to position trading, is a popular trading style among Forex traders. But does day trading Forex work, and is it profitable?
Forex is good for day trading due to its high liquidity and volatility that create lots of trading opportunities. It’s perfect for traders who don’t like the pressure of long-term investment and price fluctuations. It has a lower risk of exposure but can be more stressful as there is less time to think.
In the following sections, we’ll discuss how day trading works and elaborate on its pros and cons. We’ll also go through some essential tips to consider if you want to start day trading in Forex.
IMPORTANT SIDENOTE: I surveyed 1500+ traders to understand how social trading impacted their trading outcomes. The results shocked my belief system! Read my latest article: ‘Exploring Social Trading: Community, Profit, and Collaboration’ for my in-depth findings through the data collected from this survey!
Table of Contents
What Is Forex Day Trading?
Day trading is a short-term Forex trading style where a trader buys and sells a currency pair during one day to make a profit from small daily price movements.
Day traders don’t like having an open position overnight. They make a prediction early in the morning, open a position, and then finish the day by closing it with either a profit or a loss.
Due to the high liquidity of Forex, billions of dollars are traded every day among banks, international companies, and retail traders. Therefore, currency price fluctuations are very likely, making a good opportunity for day traders to profit.
Since day trading differs from traditional trading, you need to develop different strategies, plans, and trading styles to profit. Traditional trading styles involve buying low, waiting for the right opportunity, and selling high. However, in day trading, the currency’s price action is more important than its long-term changes since it can determine a trader’s loss or profit in one day.
Advantages of Day Trading Forex
Day trading has advantages and disadvantages, depending on your personality and trading style. So, before deciding to get into the process, any trader needs to weigh down these pros and cons. Listed below are some of the most considerable advantages of day trading the Forex market.
Lower Risk Exposure
Risk exposure refers to the amount of money a trader could lose due to the risks in a particular asset class. The lower the market exposure, the better the investment.
In day trading, since traders take positions for short periods (one trading day), they can focus on the short-term market and price fluctuations. Therefore, there’s no overnight market exposure.
Emotional Reactions to the News
News can affect traders’ decisions, and sometimes, they tend to overreact. These emotional responses are behind large price movements after the announcement of GBP news and monetary policies. Day traders can take advantage of these reactions and make higher profits using the edge that day trading gives them.
Brief Drawdown Periods
From time to time, Forex traders see themselves losing trades one after another. The longer the trading period, the more difficult it’ll be for the trader to come out of the trading slump. In day trading, though, you can take advantage of the short-term investment and cut the losing string short.
Seeing Immediate Results
Day traders don’t need to wait long to see their decision outcomes. This way, they don’t need to worry about gaps, whether in their favor or against them.
So, if you can’t stomach long waits for overnight trading and want to know if you lost or won a trade pretty quickly, day trading is for you.
It’s a great advantage over longer-term trading, where you need to have a large account to tolerate long periods of negative price movements. It also takes a lot of patience and discipline, not to give up when things go wrong. Especially when markets move fast and fluctuate often, the overnight risk can be nerve-racking for longer-term traders.
More Trading Involvement
Day trading requires constant observation. So, it’s perfect for those who enjoy trading because it makes them involved most of the day. They need to treat it like a 9-5 job to be on top of the market developments in a day.
Easier Decision Making
In this trading, you need to decide whether to enter or exit a trade quickly. Since the markets are moving very fast, you don’t have enough time to maul over your options, and you should quickly jump on every opportunity that presents itself. So, it facilitates your decision-making processes.
Disadvantages of Day Trading Forex
Listed below are some of the most considerable disadvantages of day trading the Forex market.
Higher Costs
Since day traders enter and exit the market constantly during the day, they perform more transactions than long-term traders. For each transaction, they have to pay spreads and possible broker commissions, leading to lower profitability at the end of the day.
Higher Probability of Order Slippage
As a result of market fluctuations, the prices can change between the time a trade is ordered and completed. This variation leads to slippage, the difference between a trade’s expected price and the actual price at which it’s executed.
Stop-loss orders are another factor affected by slippage.
As a strategy to minimize potential losses, stop-loss orders tell the broker to buy or sell a currency when it gets to a particular price. The traders’ higher activity throughout the day makes them more likely to receive stop-loss orders.
When slippage occurs, there will be confusion over the trade’s actual price and expected price. Since volatility is higher in day trading, slippage can prevent brokers from executing stop-loss orders as planned.
More Trading Activity
As mentioned earlier, day trading involves more transactions, which requires more time on the trader’s part. It can be advantageous for those who enjoy trading, but if a person has another full-time job, this can be difficult for them.
Plus, they need to focus on their trading since it has more pressure and effort to closely watch market developments.
No Time To Think
While limited time can be an advantage because it doesn’t let you overthink, it can lead to impulsive decision-making. So, if a person can’t work well under pressure and might give in to the fear of missing out, day trading isn’t a suitable option for them.
Plus, people who need to spend a long time analyzing the market and possible options shouldn’t enter day trading. They may see the market is moving. So, they start buying (usually at the high) for fear of losing the market.
Overtrading or Revenge Trading
When you open the day with losing trades, you might decide to offset them by making more trades. But Forex isn’t gambling. Along with impulsive trading, this problem can wipe out your capital and force you out of the market.
Tips for Beginner Day Traders
If you think intraday trading matches your personality, capital, and trading style, consider these tips before you enter the market:
- Start with a demo account. At first, you may be so excited to start trading that you bypass the process of learning how to analyze accounts and manage your trades. But having a demo account is a necessity to start. It makes you familiar with the basics of day trading, the capital markets, and the trading software.
- Choose a reliable brokerage. Day trading involves lots of trades on a single day, incurring fees and spreads that add up over time. So, finding a broker that charges reasonably is crucial because it can affect your overall profits. Plus, your broker should be trustworthy and transparent since you’re giving it thousands of dollars. Also, make sure it has good customer service to help you in case any problems arise.
- Invest wisely. Never invest the money you can’t afford to lose, especially because of the high risk-exposure levels. As a beginner day trader, you should know what you’re precisely up against and what risks you may face down the road.
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Conclusion
Forex day trading can be a profitable option for you if you can’t wait for long-term investments to yield profit. But you should also have a high tolerance for daily pressures and make decisions quickly. It involves more transactions, which can increase the daily costs.
On the other hand, you’ll be more involved in the trading process, perfect for trading fans. Plus, you’ll see immediate results and are less likely to face long periods of drawdown and loss.
BEFORE YOU GO: Don’t forget to check out my latest article – ‘Exploring Social Trading: Community, Profit, and Collaboration’. I surveyed 1500+ traders to identify the impact social trading can have on your trading performance, and shared all my findings in this article. No matter where you are in your trading journey today, I am confident that you will find this article helpful!
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