What is Forex Day Trading?
One of the most popular ways of participating in the financial markets of the world is through a discipline known as day trading. Day trading is the active buying and selling of financial instruments within short-term, intraday time frames.
In contrast to more traditional forms of capital investment, day trading aims to achieve profitability through frequently entering and exiting a market. Instead of buying or selling a security and waiting weeks or months for capital appreciation, day traders take many small gains and losses every day in the quest for a positive bottom line.
The main goal of day trading is simple: achieve long-term profitability through executing as many winning trades as possible. To put it another way: the primary objective of a day trader is to ensure that profit outweighs loss and victories are always greater than defeats.
Elements Of Day Trading
There are three major facets of short-term trading that must be thoroughly addressed within the context of a comprehensive trading plan before an individual starts the process:
- Trade selection: Depending on each trader's adopted methodology or system, concrete guidelines governing the identification of a trading opportunity may be necessary. Ideally, trade selection is driven by a statistically verifiable "edge," or positive expectation. Predefined criteria pertaining to trade setups enable the trader to enter the market consistently and with confidence.
- Trade management: Upon entrance to the market, management of the newly opened position becomes a task crucial to the trader. The employment of protective stop-loss orders, in addition to profit targets, are basic methods of preserving capital while maximising the potential for gain. Trailing stops and proactively scaling in and out of positions are more complex examples of market exit strategies.
- Money management: A comprehensive money management strategy is an absolute necessity when trading on an intraday basis. The proper use of leverage is a key part of determining the correct position size and aligning risk vs. reward. Through administering sound money management principles, a trader can avoid the many problems related to a dwindling account balance.
Intermediate-term trading, swing trading and long-term capital investment implement the use of a time horizon measured in days, weeks, months and years. Active day trading is concerned with time denominations of hours, minutes and seconds.
There is rarely ample time to craft quality trading decisions on the fly. Without first performing the necessary due diligence regarding the three key areas of day trading, an individual new to the market is likely to fall victim to many avoidable dangers.
Day Trading The Forex Market
Perhaps the most appealing venue for an aspiring day trader is the forex market. The forex market is an over-the-counter (OTC) market specialising in the trade of global currencies. The average daily traded volume measures anywhere from US$3.5 trillion to US$5.5 trillion. In comparison, the average daily traded volume for the New York Stock Exchange (NYSE) typically trades between a value of US$30 billion and US$100 billion.
Short-term currency trading on the forex market affords participants several distinct advantages:
- Variety: In addition to pairs based upon the eight global "major" currencies, many smaller, regional currency pairings are also available for trade.
- Liquidity: The daily volume of trade is enormous. Large volumes ensure that a trader can interact with the market efficiently.
- Leverage: Forex currency pairings are traded heavily on margin. In forex, leverage is used to either buy or sell large quantities of currency.
- Opportunity: The forex market is open for trading 24 hours a day, five days a week. Extensive trading sessions produce a greater number of trading opportunities, no matter the currency pair or approach.
The forex market is often viewed as a day trader's dream. Frequent opportunity coupled with the availability of financial leverage are attractive characteristics to anyone interested in pursuing a career as a professional day trader.
However, common pitfalls such as overtrading and the improper use of leverage can lead to substantial capital loss. Although the development of a comprehensive trading plan can help mitigate these issues, short-term trading remains a formidable challenge not suitable for everyone.
Any opinions, news, research, analyses, prices, other information, or links to third-party sites are provided as general market commentary and do not constitute investment advice. FXCM will not accept liability for any loss or damage including, without limitation, to any loss of profit which may arise directly or indirectly from use of or reliance on such information.
Senior Market Specialist
Russell Shor (MSTA, CFTe, MFTA) is a Senior Market Specialist at FXCM. He joined the firm in October 2017 and has an Honours Degree in Economics from the University of South Africa and holds the coveted Certified Financial Technician and Master of Financial Technical Analysis qualifications from the International Federation…