From Robin Lofton,
Your Guide to Forex Trading.
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Day Trading in the Forex Market

Day trading in the Forex market is very similar to day trading in the stock or futures market. It involves buying and selling currencies during the market trading day. Open positions are rarely ever held into the next trading day. Typically, day traders only hold open positions for a few hours or even minutes.

Because of the high amount of liquidity and different spreads, currency prices are constantly changing. With pips rising and falling often, day traders are seeking to make a profit from this constant change. They don’t aim to earn large multiple pip profits in these short-term positions. Their goal is to earn only a few pips on each trade, then move on to the next trade. This type of trading continues throughout the session. Day traders in the currency market make their profit by entering large numbers of trades where they will earn only a few pips.

Extremely short-term trading by speculators who seek to capture just a few pips on each trade is called “scalping.” It is a fast-paced, short-term trading style. In fact, it is probably the fastest type of trading in the market. Day traders in the currency markets must be disciplined, focused, and slightly ruthless. They can never get attached to a particular trade, outcome, or being in the right. If the currency moves in their favor, they quickly take the profit and move on to the next trade. If the currency moves against them, they quickly take the loss and move on to the next trade. Notice that, in both cases, the day trader will accept the one or two pip price movement and then move on to the next trade.

Day Trading Guidelines

1. Trade only the most liquid currency pairs.
   

   They will have the tightest spread, which reduces the amount of profit that the day trader needs to earn. The most liquid currency pairs are EUR/USD, USD/JPY, and the EUR/GBP.

2. Trade only during the Power Hours.
   

   The Power Hours are the times of peak liquidity, volume, and volatility. During the Power Hours, the market makes its largest and quickest price movements. Day traders should focus their attention and efforts on trading during the Power Hours.

3. Focus on trading one currency pair at a time.
   

   Many traders make the common mistake of trading too many currencies. Day traders must especially avoid this mistake since open positions are only held for a very short period of time before moving on to the next trade. Day traders must also have a large amount of knowledge and experience with a currency to know its characteristics, personality, and price movement habits.

4. Remember the risk-reward ratio.
   

   Day traders seeking small profits still must know whether the trade is worth the risk for the possible reward. A particular consideration is the spread (the difference between the buy and sell price) of the currency pair. Some currency pairs have narrow (2 or 3 pips) spreads while others can be quite wide (8 to 10 pips).

   Choosing currency pairs with a narrow spread will help the trader to take profits more quickly and easily since the currency need not make a large price movement in order to secure a profit. But the trader must always factor the pip spread into the risk-reward ratio. An acceptable risk-reward ratio for day trading is 2 to 1. Never choose a 1 to 1 ratio.

5. Avoid trading when economic data is released.
   

   This can be difficult since economic reports are constantly being released. Since Forex is a global market, the trader needs to know what is happening in the US, Asia, and Europe. It can be quite restrictive to trade only on a data-free day.

   A better approach is to avoid trading when a MAJOR report is being released. This would include the nonfarm payrolls report , central bank or Fed meeting, consumer price index, producer price index (or other inflation data). Remember these reports will also be released in other countries with major currencies, particularly Canada, Japan, the United Kingdom, and the European Union. However, the US reports can cause strong price movements in most other countries.

Is Day Trading Right For You?

Does day trading sound like the style of trading that is consistent with your time, money, and personal commitments? If not, don’t be concerned. There are other styles of trading that can be just as profitable (or more so) while fitting in with these other important factors.

If day trading does seem to fit with your life and vision for trading, then be sure to follow the five guidelines listed above. And you will also need to find a good broker that can handle the trading volume and speed of day trading. Discipline is an important characteristic for a day trader. And remember that day traders can still control trader stress. Happy and fast trading!