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Day trading the forex market is a journey about feeling comfortable and enjoying the process with an undeterred amount of passion, ‘get better’ mindset, constant refinement of one’s mistakes, self-control and a plethora of elements, which I hope, this article can contribute for you to better understand what it takes to raise victorious in such a competitive arena.

The article is authored by Ivan Delgado, Market Insights Commentator at Global Prime. The purpose of this content is to provide an insightful look into topics of interest for traders. Feel free to follow Ivan on TwitterYoutube. Make sure you join our discord room if you’d like to interact with Ivan and other like-minded traders. Also, find out why Global Prime is the highest rated broker at Forex Peace Army.

What is Day Trading?

Day trading is the activity of trading a financial instrument, be it stocks, commodities, currencies or other assets, with the aim to buy and sell for a quick profit within the same day, also referred to as intraday trading. It is, therefore, a highly speculative form of participation in the market with a short-term time horizon, as the length of an active position goes from seconds to a few hours.

Before anyone considers to get involved in day trading, as any ordinary professional career such as studying to become a doctor, lawyer, engineer, you name it, there are many considerations one must account for. These factors go from the availability of time to engage in trading, willingness to sacrifice your free time, a clear definition of your objectives, ability to stomach much greater amounts of volatility, psychological fortitude, and other elements this article will uncover.

Forex, A Popular Venue To Day Trade

If you consider being cut out to day trade the markets, over the years, the forex arena has become a popular destination for those traders looking to speculate in the ebbs and flows of currency swings.

The advantages of day trading forex over stocks trading can be found on the cost associated to participate in trades, with the latter typically carrying higher commissions. Another positive of day trading forex can be found on its daily market schedule. In the stock market, trading is limited from the opening of the stock exchange, usually around 9 am depending on the country, up to 4 or 5 pm. On the contrary, the forex market runs 24 hours a day from the Sydney Open on Monday until late hours in New York on Friday. Besides, currencies from developed countries do enjoy deep pockets of liquidity. The forex market tends to be quite technically based, and while random events can come about at any time, most of the fundamental-led news can be anticipated by checking the economic calendar.

One must be well informed about certain characteristics when it comes to day trading forex. First and foremost, currencies attract different levels of liquidity, that is, the numbers of standing orders. As the BIS (Bank of International Settlements) demonstrates, as part of its Triennial Survey of foreign exchange and OTC derivatives trading, currencies the likes of the USD, EUR or JPY concentrate the most turnover (transactions). Due to its status as the global reserve currency, the USD stands out.


Volatility, The Bread And Butter Of Day Traders

Day traders depend heavily for one’s income to the extent to which a currency pair moves in either direction. This distinction is critical to be made, as the higher the liquidity of a currency pair, the more stable its price gyrations, with tends to result, although not a perfect science, in lower volatility. What this translates into, as an example, is that the price action in the most traded currency pair in the world as is the EUR/USD tends to exhibit a different rhythm and dynamics than let’s say GBP/NZD.

One can check a currency’s daily variation in the following tablecourtesy of the website, measured in Pip, in $ and %. This is a very handy tool to calculate the average of the volatility in a particular currency pair, just a couple of clicks away. When trading the forex market, therefore, one must also decide the list of pairs to trade. Constant experimentation at the early stages is critical to understand how each moves, its particular characteristics and intricacies.

Below is a list of the main currency pairs traded in forex, which include the majors (G10 vs USD), crosses (non-USD), and emerging market currency, from highest to lowest volatility. The formula accounts for 4 weeks of data to calculate the variation. We can clearly find how emerging currencies the likes of the ZAR or the CNH, alongside GBP crosses, are the ones experiencing the most volatility, followed by the Kiwi, which also tends to be a wild market against non-USD currencies.

Understanding The Liquidity Landscape

Remember, the more liquid a pair is, the more stable its volatility should be, even if the proliferation of algorithm activity, including high-frequency trading, over the last decade has led to some clear dangers of flash crashes. Fresh in currency traders’ mind is the flash crash in the Japanese Yen back in January 3rd, 2019 or the more distant dump of the British Pound on October 7th, 2016.

What these events had in common it’s that it happened during what’s been dubbed the witching hour, that is, in the window that goes between the New York close and the Tokyo open. Even if liquidity, as pointed out, tends to be plentiful in currency markets, it is at certain hours that it concentrates the most, while in others, such as the period that goes from 5 pm NY time until 7 pm NY time, it vanishes.

The bottom line is that not only do we need to understand the overall volatility the currency pair is exposed to but at what times this volatility is most pronounced. Trading the GBP/USD in the Asian session, due to the fact that none of the currencies trades in its time zone (European or American hours) will result in a dull affair, with little price movements if compared to a currency pair such as the AUD/JPY, as the two currencies do trade at the time when its financial centers are up and running.

Find below a comparison of volatility by hour of the day in GBP/USD vs AUD/JPY. It is clearly obvious how each currency has distinctive volatility dynamics depending on the hour of the day.

Therefore, as an aspiring profitable day trader, you must first figure out the preferred times of the day to trade, which will depend on a set of parameters such as what times one is available to trade? or what market conditions one’s strategy can best thrive on? Independent of the hours traded, it must be perceived with the seriousness and diligence as if it were a full-time job. We’ll elaborate more on this.

If trading when volatility is the highest, a trend-trading strategy that looks to enter into potential developing directional biases could be of interest, while if participating at times of low volatility, an approach to exploit range trading conditions could be considered.

The professional breed of day traders, generally speaking, tend to either develop a specific strategy that serves them as an entry trigger to trade multiple markets – discretion applies to set a limit -, or alternatively, another common venue is to simply trade one market by deploying a set of different strategies. In either case, what’s critical is to specialize on a market and know it inside out or in a particular strategy and exploit it in several markets. Then there are traders that fall somewhere in the middle by trading multiple markets through a bunch of different strategies. As a caveat, be aware that the more financial instruments and entry methodologies deployed, the harder is to keep up.

The Rise Of Algorithms In Day Trading

Which brings me to the next point. In order to make one’s day trading work-load less intense in nature, regardless of the number of markets traded or strategies in active use, the proliferation of algorithms (robots), also referred to as EAs (Experts Advisors), has definitely revolutionized the way traders interact with the markets nowadays. The aim of developing an algorithm serves two main functions. Either to partially delegate the decision making-process, based on a set of predefined conditions, to generate signals from which to take the next manual intervention still required, or fully replace the human interaction by the robot generating orders to buy and sell. Algorithm strategies can vary from the simplest to the most complex, depending on the number of variables you’d like the robot to calculate before coming to the conclusion of buy or sell or fire a signal. Algorithms, therefore, have the advantage to process a number of calculations that humans could never manually perform.

However, be aware that by and large, algorithms are not only a double-edged sword but a crowded field where traders are competing with professionals that deploy very sophisticated and expensive trading technology, data subscriptions and/or reliance on lighting-fast personal connection speeds.

On one hand, the appeal for novice traders obviously resides in the fact that one can simply take a step back and allow the automation of a strategy to do the human job hoping to turn it into a money-making machine. On the other hand, what the majority of traders that go through the never-ending vicious cycle of trying one trading algorithm after another don’t realize is that unless the robot is constantly refined to adapt to new market conditions, what seemed to be a profitable strategy based on the backtesting of past data does not guarantee future results to be replicated. 

These automated strategies are meant to perform really well in certain market conditions only to fail miserably once the market starts to behave differently. Even if you tweak them here and there, the risk still exists of what’s called as over-optimization, which eventually leads to the core strategy changed.

Deciding the type of trader you want to be, whether it is manual, algorithmic, or semi-automated, it all starts by getting to really know the type of trader you envision to become for the next decade/s. The key is to take ownership of your approach. Know thyself must always come first before you choose your strategy. Are you the type of trader who likes to just specialize on one single setup on multiple markets? Would you like to focus on just one market? Would you consider automation to take the emotions away from the decision-making process? Adopting a style that not only resonates with one’s personality but that you can clearly pinpoint what makes it have an edge, that’s when another major leap towards more consistency in one’s results is taken.

Through day trading, especially as you make your baby steps, one will probably experience through all types of indicators and styles of trading. What I refer above as taking ownership means to apply the discretion necessary by combining different technical measures that allow creating a statistical edge. Being the owner of your destiny starts by making your own decisions, hence, why you must take ownership of how you are going to be trading the markets with purpose and authenticity.

Falling In Love With The Process

Few will argue that the idea of working from home for a certain number of hours per day with the aim to make a living out of it is such an appealing scenario. However, here is a reality check you must know to not get too carried away. Up to 90-95% of day traders that attempt to take on this challenging job eventually lose money, due to falling victims of their lack of discipline to hold winners and cutting losers for instance, poor risk management, psychological hacks the market tricks us with, falling victim of internal emotional battles, lack of focus, no perseverance, strategy hopping, or to put it more bluntly, simply not treating day trading as a professional business.

When day trading, a whole army of newcomers tend to hold unrealistic expectations, thinking that the ability to accumulate quick returns is reachable. There will always exist some exceptions, due to gifted skills to read the markets or simply and much more common, experiencing beginner’s luck. This is a skill as complex as anything people get professional degrees, which is why I mentioned that unless you treat it like a professional business, your chances are close to null.

While one should be ambitious and envision dreams come true, you must be realistic. The more disconnect that exists between your current state in the learning curve and true mastery of a process, the more disparity exists in your expectations. You, however, can reconcile this clash of reality vs goals by removing any expectations but instead focus all the resources in enjoying the process.

For that, a book that I’d recommend that reinforces this department is “The Power of Habit” by Charles Duhigg. The more you respect your process while gradually detaching from monetary goals, the more you can concentrate on the task at hand without being influenced by external factors.

What eventually you realize is that building an account becomes a by-product of your consistent actions and routines. By dedicating all your energy to all the steps necessary to perform the process flawlessly, without trying to alter what’s uncontrollable and randomly-dictated, such as the distribution of trading outcomes, you are giving yourself the absolute best chance.

Please, don’t be the type of trader coming to your desk and looking to randomly check the charts to spot any potential setups with no routine at all. If that’s your case, good luck with succeeding. A professional trader’ process must become mechanical. There is a strong correlation between seeking excitement and poor results vs setting up a routine with a very repetitive process and achieving a much better performance. Consistency and repetition is the key here.

The process when day trading, if manual intervention is still necessary, should go something like this. First up, before anything else, always read your simplified 1-page long trading plan (rules of engagement, risk management, other nuances), disconnect your phone and other potential distractions, analyze each and every chart traded to understand the type of conditions, check the news, even get to the point of engaging in an internal dialogue. This preparation sets day trader up to tackle the market at an optimal state to maintain a fully focused process.

Backtesting As A Confidence Booster

Now, a process can never get starter unless you define the rules of engagement. In other words, have you decided what system to use to enter the market? Most importantly, has it been diligently backtested through all types of market conditions before even considering to trade a demo account?

Remember, if your aim is to build confidence in a specific strategy that will act as your trigger mechanism to enter the market, you should definitely go through a rigorous process of backtesting it to determine if it has proven to be profitable over a large enough sample of trades.

If you are serious about trading, this process should take weeks or months of repetition, where you include in-sample results, out of sample, and forward-testing. The longer the in-sample, the more robust your statistical edge can be, which leads to increased conviction upon its expectancy.

Slow And Steady Wins The Race

Once this phase is completed, start with a demo account to gain experience and hopefully starts accumulating positive results. After a few months of a proven profitable track-record, take the next step by adding a small capital to a live account to keep building up your confidence and familiarity with the system. If you keep seeing positive results on a monthly basis, take it to the next level by adding an amount of extra capital within your limits and wash, rinse and repeat. That’s the responsible way to go about trading any market, through a slow but steady progression.

In terms of capital to allocate, it is always prudent to err on the side of caution by committing money, as harsh as it may sound, that you are willing to lose and even most importantly, the loss of it should never alter in any way, shape or form your standards of living or put at risk your finances. This sum can vary greatly based on the personal circumstances of each individual and its obligations.

The large majority of day traders tend to risk an amount of capital in the vicinity of 1% to 2% of their total account per every single trade. As an example, if you trade a $10,000 trading account and your pre-determined risk is 1% of your capital on each trade, your maximum loss per trade is $100. As counterintuitive as it may sound, putting on a trade for the sum you are willing to risk should be a completely uneventful event where your emotions are fully detached from the monetary value. If you are sweating it out over every dollar your account varies, you are probably risking too much.

Now, any effort you may have made up to this point may go to waste if you don’t get the following right. You must absolutely do your due diligence to choose the right brokerage firm to safeguard your interests as a trader. You really want the broker to come as close as possible to an entity that will place total emphasis on the satisfaction of their clients, with their interest to see you succeeding at heart, combined with access to deep pools of liquidity and supported by top-notch technologies. Equally important, one that offers extremely competitive price spreads.

If you’ve done your job and the right brokerage box gets also ticked, we should not ignore journaling trades. Not tapping into the insights of documenting your trades means that you limit yourself by not able to filter out the wheat from the chaff and be able to tell the areas that you are performing well versus what are the toxic trading mistakes that you must gradually remove. The repetition of common mistakes is a very costly business that you must address, which is only going to be possible if you work with the tools that allow you to quantify how much of an impact your mistakes are having in your bottom line. 

A trading journal, at the end of the day, should be seen as a filtering mechanism that provides the necessary insights on what’s working and what isn’t as part of your strategy. There are many great trading journal tools out there, but personally, I love

Ready To Start Your Day Trading Journey?

As a finishing note, never forget that day trading must be taken as seriously as any full-time job if one is to have a shot at succeeding by pulling profits out of the market in a consistent basis. Also remember, day trading is a journey with no end, it’s all about feeling comfortable and enjoying the process with an undeterred amount of passion and ‘get better’ mindset. Day trading is also about the constant refinement of mistakes, self-control and a plethora of elements, which I hope, this article contributed for you to better understand what it takes to raise victorious in such a competitive arena.

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