Day trading forex: Everything you need to know

Close-up of market chart
A headshot of Patrick Foot, financial writer for and CityIndex
By :  ,  Former Senior Financial Writer

Day trading forex is a hugely popular approach to the markets – but how does it work? Find out here with our complete guide, including some forex day strategies, tips for day trading and how to open an account.

Start reading below, or skip straight to a section:

  1. What is forex day trading?
  2. Is forex day trading forex profitable?
  3. How to get started
  4. Tips for forex day trading
  5. FX day trading FAQs

What is forex day trading?

Forex day trading is an approach to the currency markets that revolves around just one rule: you never keep any positions open overnight. Instead, you ensure that every trade is closed by the end of the trading day.

Essentially, day traders look to profit from small intra-day price movements, ending each session on a profit instead of targeting longer-term positions that can deliver bigger returns.

This brings two notable benefits for forex day traders:

  • You won’t have to pay overnight financing, which covers the cost of maintaining your leveraged positions for more than a single day
  • You don’t have to worry about overnight price action negatively affecting your trades

However, day trading requires significant time, discipline and focus. Many day traders treat it like a full-time job, as you’ll need to keep a close eye on the markets whenever you’re actively trading. Luckily, there are lots of tools available to help you do just that: including guaranteed stops, our latest generation of trading app and instant alerts.

Scalping vs day trading forex

Scalping and day trading are both considered short-term styles of forex trading. The main difference between them is that scalpers keep their positions for even less time than day traders, hoping to grow their capital by making lots of tiny successful trades.

Whereas day traders typically open anywhere from one to five positions a day, scalpers could make dozens or even more trades in that time. Often, they’ll use automated systems to react to movement faster than humanly possible.

Learn more about trading styles in the City Index Academy.

Day trading: stocks or forex?

Forex is a hugely popular market for day trading as it offers some useful benefits that other asset classes can’t. When compared to stocks, for example, forex tends to bring higher volatility, liquidity, leverage and accessibility – four factors that are prized by day traders.

 Forex vs stocks day trading 
   Forex day trading  Stock day trading
 Volatility  Higher   Lower
 Liquidity  Higher  Lower
 Leverage  Higher  Lower
 Accessibility  Higher  Lower

You don’t have to stick exclusively to forex or stocks when you trade, though. Your City Index account gives you access to 1,000s of global markets, including forex, stocks, indices, commodities and more.

Lots of traders start out with a demo account, so they can see which asset classes suit them best before moving on to trading with real capital. A City Index demo comes with £10,000 (or $20,000) virtual funds and features live prices on our full range of markets.

Open your City Index demo here.

When’s the best time to day trade forex?

The best time to day trade forex is typically when the market is at its most liquid. Day traders tend to require a lot of liquidity, so they can enter and exit positions quickly and cheaply.

Currency markets are usually at peak liquidity between 13:00 and 17:00 GMT, as this is when the London and New York sessions overlap. However, volume will ebb and flow throughout each day, so you aren’t restricted solely to these times.

Learn more about the best times to trade forex.

Choosing a forex day trading strategy

Day trading dictates how long you can keep positions open for, but not how you find and execute opportunities. For that, you’ll need a strategy. There are lots of forex day trading strategies available; here’s an introduction to some of the most popular options.

You don’t have to use any of these strategies exclusively: you can combine them or use different ones to suit different market conditions.

Strategy 1: Trend trading

Trend trading involves looking at a long-term chart to determine a market’s overall price direction – its trend. Forex day traders will then move over to a shorter-term chart to find opportunities in that same direction.

The idea here is that there should be lots of smaller opportunities within the wider trend that are perfect for day traders. Trend traders often use indicators, both to identify the long-term trend and hunt for trades on the short-term chart.

Strategy 2: Breakout trading

Breakout traders, on the other hand, will look for outbreaks of new mini trends on their chosen markets.

To do this, they’ll try to find markets that are ‘rangebound’ – that is, stuck between strong support and resistance levels. Then they’ll watch to see when a market looks likely to break out of this range and trade the resulting movement.

Strategy 3: News trading

The two strategies we’ve covered so far are based on technical analysis, using indicators and candlestick patterns to predict movement. But there are lots of forex day traders who prefer to stick to fundamentals.

News traders do exactly what their name implies – make decisions on where a currency pair is headed next based on the latest headlines and economic data.

While this may seem like the simplest strategy at first sight, it requires a strong understanding of your chosen currencies. You’ll need to be able to predict how economic releases may affect the markets well ahead of time, so you can ‘buy the rumour and sell the news’.

Strategy 4: Countertrend trading

Countertrend trading is often considered a more advanced strategy. Like trend trading, it involves checking a long-term chart for a prevailing trend, before looking for opportunities on a shorter-term chart. But in this instance, you’ll look for moves against the wider direction of the market.

Every trend must end at some point. Countertrend traders look for trends that are about to reverse and try to profit from the resulting bull or bear move.

Is forex day trading forex profitable?

Forex day trading can be highly profitable. But as with any method of trading the markets, that potential for profit comes with a significant drawback: high levels of risk. Day trading is usually seen as riskier than other styles, such as swing trading and position trading.

The main reasons for this higher risk are the duration of time that you hold positions open and the number of trades you’re making each day. As trades are only held for hours or even minutes, the potential for short-term price action adversely affecting your positions is high. And you might be making lots of trades a day, meaning losses can stack up quickly.

Plus, forex in general is highly volatile and traded with leverage – which will increase your overall risk.

As ever, the answer to controlling that risk lies in having a comprehensive risk management strategy and sticking to it. Using stop losses and guaranteed stop losses, for example, enables you to dictate your maximum loss on each position. Many FX traders have strict rules over how much of their capital to commit to any single trade, too – say, only committing 1% or 2% of their balance at any time.

Learn more about forex risk management.

How to get started

To start day trading forex today, follow these 4 steps.

  1. Open your City Index account. It’s free and typically takes less than five minutes
  2. Add some funds so you can start trading instantly
  3. Choose the FX pairs you’d like to day trade. Popular markets include EUR/USD, GBP/USD and USD/JPY
  4. Find opportunities using our range of trading tools: including indicators, advanced charts and SMART Signals
  5. Open your first position

Not sure you’re ready for live markets yet? Test out our platform with a City Index demo, featuring virtual funds so you can try out trading on our full range of markets.

Tips for forex day trading

  1. Pay close attention to your risk management

    As we’ve covered, a comprehensive risk management plan is essential if you want to be successful. The best forex day traders will never enter a position without a stop loss and a take profit – placed at realistic levels that fit your risk-reward ratio.

    Day trading forex can seem exciting, but diving in headfirst is an easy way to wipe your account before you’ve learned the ropes. Instead, practise staying disciplined with a demo account before you upgrade to live trading.

  2. Start out with a couple of currencies

    Even if you aren’t planning on trading the news, it pays to know your chosen FX pairs inside-out when you’re day trading forex. After all, outside influences can derail even the best-planned technical strategy.

    Because of this, many day traders focus on one or two currency pairs at the outset. Once you’ve mastered those markets, you can consider expanding your portfolio.

  3. Allocate time to trade

One of the key benefits of day trading forex is that you can build your strategy around your schedule. FX is a 24-hour market, and while you’ll want to ensure you’re trading when markets are sufficiently liquid, you can dedicate as much or as little time to your account as you wish. The choice is yours.

You will, however, need to be able to pay full attention to the markets when you’re active. Due to the small price movements involved in day trading forex, a winning position can turn against you instantly, and relying solely on alerts and stops is rarely advised.

Also read our forex trading tips guide.

FX day trading FAQs

How much money do you need to day trade forex?

As long as you have sufficient funds to open an account, you don’t need massive amounts of capital start day trading forex. With City Index, you can get started with as little as £100.

As we’ve covered, though, many traders will try to only allocate a small amount of their balance on any single opportunity. With a £100 account, that would mean a maximum loss of £1 or £2, which doesn’t give you a lot of flexibility.

Open your City Index account here.

Is day trading forex illegal?

No, day trading forex is completely legal. It is no different to other methods of trading currencies, except that you ensure that all your positions are closed by the end of the day.

What are the best indicators for day trading forex?

The best indicators for day trading forex enable you to quickly assess a market’s price action and identify both trends and potential opportunities. You won’t necessarily have time to undertake comprehensive technical analysis when day trading.

Examples include:

  • Moving averages (both SMAs and EMAs). While these indicators are backward facing, they can help quickly see trends
  • Fibonacci retracements. Traders use Fibonacci retracements to quickly predict potential upcoming support and resistance levels
  • Bollinger Bands. This indicator can tell you a market’s current volatility at a glance – and gives both buy and sell signals
  • Relative strength index (RSI). As a momentum oscillator, RSI can be used to predict upcoming price action, as well as spotting trends

What are the forex day trading rules?

There is only one real rule to day trading forex: that you never keep any positions open overnight. However, there are a few other general guidelines that may help you succeed. These include learning all about the different types of order, choosing a reputable broker and choosing a suitable strategy.

Open an account today

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