What is day trading? What are the best trading strategies?

man entering forex world

So, you want to be a day trader in Forex. But you do not know how to start or where to start in Forex or the best day trading strategies. Here is a simple guide that will help you day trade in Forex.

But, before going into the core area, let’s first discuss the pros and cons of day trading.

What is day trading?

Day trading is a style of trading where a trader opens his order and closes it on the same day. You get small profits a day, and if you’re consistent, you can build wealth around it. It is like accumulating the tiny droplets each day and making it into an ocean. For those who don’t know the long-term game, it is their best shot. Mind you, it takes time, intense discipline, and agility, and there is a considerable risk too.

Why should you do day trading?

Day trading is ‘make or break’ on the same day. And so there are significant risks associated with it. Yet, day trading lures many. Why?

7 reasons to start day trading

You can learn quick

Investments and long-term trading have a longer horizon. So, you get to know the correctness of your choice after that said period only, say six months or even 2-3 years.

Like it or not, a trader gets defined by the mistake he/she makes. And how they learn from it.

Day trading simplifies it for you. You get to know the rights and wrongs on that day itself. So, you can cut to the chase in a jiffy.

Hence, it is like a crash course to learn.

Here is a list of rookie mistakes that can kill your trading account. Learn it and do not repeat it.

Low capital requirement

Generally, for intraday trading, brokers across the world offer high leverage since you’re closing the position on the same day. However, if you’re from the US, you have ‘pattern day rule,’ which requires you to maintain a minimum balance of $25,000 to day trade. In forex trading, you have no such restrictions; you can trade with capital as low as $50.

It’s an income, not returns

When you day trade, you make profits (or loss) daily. So, it becomes a second income for you. And if you’re good at it, you can make a massive cash flow like a business. Suppose if you’re bad, you can go bankrupt like a business too.

But, you have a business in hand, and you’re solely responsible for the happenings.

Are you a beginner? Looking to start trading from home? Here are the nuts and bolts to do it. Know more here.

What are the prerequisites for day trading?

Although the market doesn’t discriminate against anyone, you need certain things to be a successful trader. The list follows.

Ideal Capital for day trading

‘You can even start trading with a capital of $5 or $50’ is just a figure of speech. In the real world, you need good capital.

An ideal capital would be $500, assuming your lot size is 0.02-0.05.

Don’t punch above your weight early on in your career.

Go for a smaller lot size initially, and once you gain confidence, increment it. Further, if you’re confused with lot sizing for different currency pairs, here is a handy tool for you.

Tools and Indicators

In forex trading, you don’t need fancy software because Metatrader has got it all. It renders the chart and has the default indicators and analytical objects to make it easier.

However, if you’re a day trader, you need specific exclusive tools.

Direct newsfeed

The news releases usually dictate the sentiment for the day. And you shouldn’t be toggling between tabs to check out the news. Here is a free tool that can bring data directly to your Metatrader terminal.

Know the Session

Although the forex market is 24×5, the trades are not done by the same set of traders. Traders and institutions around the world trade on the market every day.

And so, the volatility and liquidity will be maximum at particular session timings. It differs from asset to asset as well.

Hence, you need to memorize the time zone of prominent exchanges or can simply download this free session feed indicator.

Indicators

You have the option to use generic indicators, which are used by traders across the world. Or you can have indicators that can give you an edge.

Pipbreaker — A simple to use indicator, which comprises strategy for 3 trading modes — scalping, short-term and long-term trading. It is the perfect indicator for a beginner. If you’re one, check it out here.

Velocity Finder — The next-gen indicator that makes 200+ algo calculations in milliseconds and lets you compare multiple timeframes.

The herd mentality can kill you when the market is choppy. A unique, exclusive indicator can always fetch you better results. Know more here.

Broker

When you trade more, you tend to pay more to your broker as well in the form of spread and commissions. Like any business, you need to try and cut down your costs. Hence find brokers who offer lower spreads.
Here is a reliable broker who offers lower spreads and exclusive additional tools, as well. Check it out.

2 Best Day Trading Strategies

There are many day trading strategies. Some are proprietary, which gives an edge to its creator (trader). While there are others which are rudimentary, yet valid till date. And the market rewards both in the same way. So, here are two trading strategies that could help your endeavor.

#1 Box breakout

Every asset goes through a contraction phase. It can be in the midst of a trend or result in a reversal. So, you shouldn’t anticipate the direction when the market is inside the box. Instead, take the cue when it breaks out.

You can draw a box to the range — high and low of the sideways movement. The breaking of which leads to significant action.

Box day trading strategy USDJPY

In the above chart, USDJPY was stuck in a range of 108.143 – 107.784 for two days. And once it broke, it yielded a significant down for the day. And the subsequent days also, the box provided substantial resistance to the counter.

The larger the box formation, the bigger the ensuing move. And it doesn’t happen on the same asset frequently. So, you need to multiple asset classes under your radar and hop in when a breakout happens.

Note#1: The formation of the box need not happen on the same day. It can happen on the previous day or any number of days. But the breakout usually renders significant intraday move and as a trader, you need to capitalize it. This notion applies to every technical day trading strategy. In fact, the time an asset takes to form a set up is directly proportional to the ensuing move.

Note#2: If a box forms and breaks on the same day, say in M5 or M1 charts, then do trade it, but expect a modest target.

#2 Sentiment trading

Well, this is a tricky one. But its highly effective on day trading, of late.

Whenever a bull run or bear run happens, a sentiment prevails in the market.

For instance, the trade war between the US and China over the past year (2018-19) has made investors wary of risks. Hence, investors braced risk assets like gold and silver. They have had over-stretched rallies during the period defying technicals and fundamentals.

gold sentiment trading

The sentiment usually prevails for a longer duration and gives you spectacular trade opportunities. Each day the market gives a dip (or a rise) for intraday accumulation, as in the above chart, and then makes a rally.

The tricky part is you shouldn’t overleverage the sentiment. Because after a 3 or 4 days, although the sentiment may prevail, the positional traders tend to book profits and so the pair may witness downtick for the day.

Hence, it takes time to master this strategy. If you’re new to the forex world, kindly avoid it. But if you know your way around the forex world, then it is highly lucrative. But it showers you in profits ‘on its day’. In the above chart, gold yielded 200+ pips profit for two consecutive days.

So, if you want to try it out, then paper trade for a while and check out your ability to decode the sentiment of the market and then take it to your live trade.

Note: Always buy on dips or sell on rally when you deploy this method. And never carry the same sentiment for more than 3 days.

Psychological warfare in day trading

The critical aspect of day trading is not the strategy. It is the psychological warfare you have to master.

You have to spontaneous in your decision making, yet wait for your entry point patiently.

You shouldn’t be greedy, yet you don’t want to close your position too early.

And you must create a set of routines and build a plan for every day and stick to it.

Further, the chart gazing will eat you up and create a heck of stress. So, you should spot the best time to trade in a day and play smart.

You are bound to have significant losses at times, and how you cope up determines your success. Never revenge trade when you face a series of losses as it only adds salt to the wound.

Do not trade daily. You can trade on days when there is decent volatility in the market. For instance, the box breakout isn’t a daily recurring phenomenon, but when it does, it spews a significant move. You have to build such strategies and trade only during these high impact instances.

And so you have to be on your knees on a good day, while on an off day, you need to pack your bag in a jiffy. Here is a guide on how to manage your emotions in forex trading.

Conclusion

Many seem to like the idea of making quick bucks and get lured into day trading. However, when you do become a day trader, you know it’s quite the opposite. The going gets difficult; however, if you stick to your day trading strategy and risk management principles and keep the emotions in check, you’re bound to have success.