Forex Day Trading Strategies

Overview

Day trading, also known as intraday trading, has many benefits. The most obvious one is that trading positions are not affected by news that could negatively affect their value. Another is the ability to protect positions through tight stop-loss orders. Stop-loss orders are an instruction to close a trade when the market price is at a specific price level. Besides these reasons, day trading also provides learning opportunities for traders to develop their trading and analytical skills.

However, day trading also has its disadvantages. More frequent trading means higher commission costs, which can affect profit margins. Also, there may not be enough time for positions to see an increase in profit. This is why day traders use numerous strategies to help them make the most of their trades. Here are some of them.

1. Scalping

Scalping is a strategy day traders use to profit from minor changes in a currency pair’s price. It uses larger position sizes for smaller price gains in a short amount of time. The objective is to buy or sell a large number of a security at the bid or ask price and then sell them quickly at a few cents higher or lower for profit. Holding times are usually very short, and can range from seconds to minutes.

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Do note that scalping is a very fast-paced activity, which requires good timing and execution. Traders who use this strategy often focus on the smaller time frame interval charts like the one-minute and five-minute candlestick chart to anticipate and make their trading decisions.

2. Range-Bound Trading

Range-bound trading is the act of trading in price channels. Price channels are defined by identifying support (the price that a currency pair does not fall below) and resistance (the price that a currency pair does not go above) levels and relating them to horizontal trendlines.

The objective is to buy at the bottom of the channel (lower trendline) and sell at the top of the channel (upper trendline) for a profit. Traders often place stop-loss points just above the upper and lower trendlines to prevent any losses caused by high-volume breakouts or other anomalies that may affect a currency pair’s price.

3. High-Frequency Trading

High-frequency trading is a strategy that makes use of advanced, powerful computer programs to carry out trades. These programs have the ability to analyse markets, and carry out orders based on market conditions. The orders can be completed at high speeds, often in mere seconds. This creates a huge advantage for traders, especially given the time-sensitive nature of the Forex market.

It is worth noting that high-frequency trading has been met with criticism. The use of algorithms to make trading decisions removes the aspect of human decision and interaction when trading. This naturally creates an unfair advantage to traders who do not have access to these programs.

4. News-Based Trading

News-based trading is one of the most common strategies used by day traders. Essentially, traders make decisions based on key economic news announcements. This can range from economic reports to global events that can impact the prices of currencies, stocks, bonds and other securities. Traders watch for the overall attitudes of people before and after these announcements before making their trading decisions.

Do note that news-based traders also tend to hold positions for a very short period of time, as the impact of news and events on securities are often short-lived.

5. Trend-based Trading

As its name suggests, trend based trading is literally just following the movement of a stock or other security. It is a simple and common tool that many beginner day traders employ. What they do is buy when prices are rising, and sell when prices start to drop. This is based on the assumption that prices that have been rising or falling over a constant period of time will continue to do so.

Trend-based traders have to be skilled enough to identify trends as early as possible, and know when to sell before they start to reverse.

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6. Contrarian Investing

Contrarian investing is a style of investing where investors go against market trends. In short, they sell when others are buying, and buy when others are selling. This is based on the belief that buying and selling behavior is based on fear and greed, which makes markets over and under-priced from time to time.

Contrarian investors often have a good understanding of a currency’s intrinsic value. This is done by spending a good amount of time on research and analysis. They often look for buying opportunities in currencies that are selling below their intrinsic value. While it can be rewarding, contrarian investing can be risky and may take a long time to pay off.