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If you are thinking about day trading Forex, what is the right way for you to get started?
Also, is it possible to make a consistent full-time income with Forex trading?
What are the Forex day trading strategies that actually work?
In this article, you will find answers to all the questions above.
Advantages of Day Trading Forex
There are many advantages of day trading Forex compared to day trading stocks or futures.
First of all, it’s easy and free to open a Forex trading account.
You can register and have your Forex trading account set up online in minutes without having to go down to any physical office.
Once you’ve created your Forex trading account, you just need to fund your account to start trading right away.
The best part about Forex trading is that there is no minimum deposit requirement.
What that means is that you can start trading Forex with as little as $10.
You can never do this with stock trading or futures trading which requires a lot more capital to get started.
For example, if you day trade US stocks, you might need at least $25,000 in your trading account. (yes, it’s legal requirement)
Secondly, Forex brokers offer one of the highest leverage in the financial industry.
Sometimes, it can be as high as 1000 times.
Just imagine that you can open a Forex trade position worth up to $10,000 with just $10 in your account.
If you have a profitable Forex trading system, you will make money much faster with higher leverage.
Having said that, you should be careful with leveraged Forex trading.
The higher the leverage, the higher the risk.
In other words, you can lose money much faster with higher leverage as well.
Lastly, FX market is open 24 hours, unlike stock market which has defined market hours.
That means you can trade Forex whenever you are free.
This is especially good news if you have a full-time job or other commitments.
Best Currency Pairs For Forex Day Trading
So, what currency pairs for best for day trading?
When it comes to choosing the best currency pairs, you should always choose those currency pairs that meet the following criteria:
- Tight spread (spread is simply the price difference where you buy or sell a currency pair. The smaller the spread, the less commission you have to pay to your FX broker)
- Good volatility (day trading is all about capturing the price movement of the currency pairs. Without meaningful price movement, there will be no good day trading opportunities)
- High trading volume (i.e. you can buy or sell very easily even if you have a good position)
Based on these criteria, these four major currency pairs EUR/USD, USD/JPY, GBP/USD, and USD/CHF are good candidates for day trading.
Apart from these four major currency pairs, commodity currency pairs USD/CAD, AUD/USD, and NZD/USD are also suitable for day trading.
Best Trading Hours For Forex Day Trading
Before we talk about the best trading hours for FX, you need to know that there are four main FX markets to watch for:
- New York
Japan is the first market to open at the beginning of every trading week, followed by Sydney, London, and New York.
Asia session normally is rather quiet, except for the first two hours of the Japan market open and the Sydney market open where you will see a bit more volatility.
For example, during the first two hours of Japan market open, the most heavily traded currency pairs are USD/JPY & GBP/JPY.
And during the first two hours of Sydney market open, the most heavily traded currency pairs are AUD/USD and AUD/JPY.
So, what are the best market hours for forex trading?
Generally, the best time to trade FX is the overlap between London and New York ( i.e. 8 a.m. to noon EST) which has the heaviest trading volume and most trading opportunities.
USD is the most traded currency of the world while London remains the world’s biggest currency trading hub, accounting for almost 40 percent of global volumes, with daily turnover more than triple that of its nearest rival, New York.
Apart from that, there is also something else that you must constantly monitor – the high impact economic news calendar.
Whenever there are high impact economic news releases, you will also see huge price movement.
For example, you should expect a lot of volatility and a much large spread when the central bank is about to announce its rate decision.
Some Forex traders love to trade news and have specifically designed trading strategies for that.
On the other hand, other Forex traders prefer not to trade during an important economic news release and have all their positions closed before that.
So, it really depends on what kind of Forex trader you are and what trading strategy you use.
At the end of the day, to get good results from your Forex day trading, you don’t necessarily have to stare at your charts the whole day or taking a lot of trades throughout the day.
It’s never ” the more you trade, the more money you make”.
In fact, you should always be very selective about your trades and only go for trades that have the highest probability to win.
So, it’s perfectly okay to just take one or two trades in the first two hours of the London market open or the New York Market open and then call it the day.
Day Trading Forex Strategies
Now, you know what currency pairs to trade and what is the best time to trade.
So, what are the best Forex day trading strategies that you can use?
First of all, what is really a Forex trading strategy?
A Forex trading strategy tells you when to enter and when to exit based on certain criteria being met.
For Forex day trading, you will most likely be using just technical analysis to determine your entry and exit and the time frame you use will probably be 15 minutes or under.
Below are some of the most popular Forex day trading strategies.
Breakout trading is basically about identifying an impending uptrend or downtrend in the currency pair.
After trading in a tight price range for a while, the currency pair might be ready to break out of the range and start trending up or down.
Another popular Forex day trading strategy is to trade the Pullback (i.e. retracement)
So, what is a pullback?
A pullback is a moderate drop from recent peaks that occur within a continuing uptrend in a currency pair’s price chart.
In other words, a pullback is a short-term move in the opposite direction of the longer-term trend.
This gives you an opportunity to ride the uptrend at a good price.
Reversal is another well-known forex day trading strategy.
So, what is a reversal and how do you trade reversals?
A reversal is a change in the price direction of a currency pair.
If the price of the currency pair has started to fall after it has been in an uptrend, that is called a reversal to the downside
Conversely, if the price of the currency pair has started to rise after it has been in a downtrend, that is called a reversal to the upside.
Support & Resistance
If you are day trading Forex, you must master the concept of support & resistance.
What is support & resistance?
Support is the price level where further price drop is expected to pause because of strong demand, while resistance is the price level where further price increase is expected to pause because of strong supply.
Generally, you can easily draw out support and resistance price levels using trendlines.
So, how do you trade support & resistance price levels in Forex?
Traders normally place buy orders near support price levels and sell orders near resistance price levels to enter a trade.
Below is an example showing you how to spot support price levels.
Below is an example showing you how you spot resistance price levels.
As you can see, GBP/USD has difficulty breaking the resistance price level and making new high because there is a lot of selling pressure at that price level.
Best Tips For Making Money From Day Trading Forex
Good Money Management
To make money from day trading Forex, a profitable trading strategy is not enough.
You must also have good money management.
No Forex traders will have a 100% win rate.
That means there will be winning trades as well as losing trades.
If you don’t manage your risk and capital well, you might lose a lot of money in your losing trade.
Sometimes, people wipe out their whole trading account because of one single losing trade because they take too big a position and use high leverage.
For example, let’s say you have $1000 in your trading account and you are using a leverage of 1:200.
If you buy 100,000 units of EURUSD, you will put up about half of your trading capital as margin to initiate this trade.
For every 1 pip that moves against you, you will have an unrealized loss of $10.
If EURUSD suddenly drops 40 pips, you will have an unrealized loss of $400.
That’s almost half of your account gone.
If EURUSD keeps falling, you will have a margin call and be asked to top up your trading account to avoid having your positions automatically closed out at the market rate.
This is what happens when you trade a big position size.
As a general rule, you should only risk 1 or 2% of your capital per trade if you want to be profitable in the long term.
Below is the risk-to-ruin table.
You can see that a 50% loss of capital will require you to make a 100% gain just to recover your loss and breakeven.
That’s why you should always manage your money wisely and avoid taking on too big a risk per trade.