An overview of the potential earnings from Forex Day Trading, including the pros and cons and some favourite day trading strategies.
What is forex day trading?
Day trading means buying a financial asset and selling it within the same day. It is a popular short term trading strategy, which if done in the forex market is called forex day trading.
There are many different day trading strategies but the general idea is to open the trade close to the beginning of the trading day and close it before the market close. This style of trading is different to scalping, which involves very quick in and out trades often in the space of minutes.
If you don’t want to be glued to your screen scalping but also don’t have the patience to hold trades for several days, day trading could be the right option for you.
One incentive to day trade forex markets is that if the trade is closed before 5pm ET (10pm GMT) then the trader can avoid the overnight swap. The swap or rollover is either paid or received by the trader, depending if they are long or short the currency with the higher interest rate. Carry trades are held for multiple weeks with the principal goal of benefiting from this overnight swap.
How much do forex traders make a day?
This answer depending completely on each trader’s individual circumstances. Day trading works by putting money to work in the markets. Like anything, the more time, effort and money you put into forex day trading, the more you stand to gain or lose from it.
However, to give you an idea of the potential, let’s look at an example.
EUR/USD is the most actively traded forex pair. This figure varies over time but let’s say the average daily pip range for EUR/USD is about 50 pips.
NOTE a pip is the smallest increment price move in an exchange rate. Read more about it in our guide What is a pip in forex trading?
That means if you bought at the start of the day and sold at the end of the day you would make 50 pips. Or if EUR/USD is in a downtrend and you sell short at the start of the day and buy at the end of the day, you still make 50 pips.
For a standard lot of 100,000 euros, each pip on EUR/USD is worth $10. So, if you made 50 pips, you would make $500 on the trade.
For a mini lot of 10,000 euros, the pip value for EUR/USD is $1 so with a 50-pip profit you would make $50.
How much money to start day trading?
Now let’s consider how much money you would need in your trading account with your online forex broker for the above scenarios.
Assuming leverage of 30:1, you need to have a margin of $1 for every $30 invested. That means to take out a 100,000 EUR position, you will need the equivalent of 3,300 euros as a minimum margin requirement.
Day trading rules should consider the proper position sizing rule of risking less than 5% of your account on any one trade. Then if you are prepared to lose 50 pips across one day of trading, then to be prepared to lose $500 on a standard lot trade, you would want to have 10,000 euros in your account. (500 = 5% of 10,000).
Now let’s consider that there are lots of forex pairs. If you place 5 trades per day, win 3 trades for a profit of $1500 but lose 2 trades for a loss of $1000, then you would come away with $500 profit for the day.
Is forex good for day trading?
Forex is very well suited to day trading because trading is 24 hours per day so there is always a currency suited to your time zone.It is also more flexible with regard to how much money you need to get started trading than other markets like stocks or options trading. However, day trading stocks is now more accessible than ever thanks to fractional shares.
Forex day traders will typically select between one and five favoured forex pairs and trade those for the day. Tracking too many currency pairs is too difficult for short term trading, unless you have an algorithm to help you, like a forex robot or EA.
Many forex traders will stick to the major forex pairs like EUR/USD we already mentioned or GBP/USD (The British pound) or USD/JPY (The Japanese yen). Others will scan charts for technical analysis setups and then trade those forex markets that have the trading setup they are looking for.
Can you get rich by day trading forex? Yes, you can but a lot of things go into that result. Forex is not a get rich quick scheme.
Pros and cons of Day Trading Forex
Day trading forex is good if:
- You prefer your trades to be finished within a day
- You have the time to monitor the daily price swings
- You can make quick decisions
Day trading might not be so good if:
- You prefer to give your trade all the time it needs to finish
- You like short term or long-term trading styles better
- You have a job and not enough spare time
What do I need to start day trading?
This is perhaps what makes forex day trading appealing as a source of income, very little is need to get started other than some money to invest, a smartphone or laptop and internet connection. The most important thing you need is some forex trading education to learn technical analysis and fundamental analysis as well as good risk management to make sure you don’t loose too much when you are still new and learning the craft.
You will need to select a day trading broker, if you have not already done so, you canopen a FlowBank account to access the forex market.
Types of Forex Day Trading Strategies
The idea behind a trend trading strategy is to identify whether the forex market you are trading is going up, down or sideways. Once the trend direction is established, the trader will look for the best price entry point to trade in the same direction of the trend. That means if the trend is up, the forex trader will buy, whereas if the trend is down, the trader would sell short.
Finding tops and bottoms
This is where the trader has identified a trend but they think it is going to reverse and the place a countertrend trade. If the trend is up but they think the market has topped, they will sell short. If the trend is down but they think the currency pair has bottomed, they will buy.
The idea behind this strategy is that prices tend to move too quickly in one direction, and when they do- more often than not will revert back toward the average (or mean) price of the past few trading sessions.
A breakout happens when the price moves above a previous area of resistance or falls below a previous area of support. The breakout is supposed to indicate that a price trend has resumed and the breakout trader would trade with the momentum, in the direction of the breakout.
Forex news trading strategies pay less regard to the trend of the market and focus on the reaction of the price to a particular news event. In forex markets, news traders tend to focus on the weekly economic calendar to trade economic data releases like GDP or the consumer price index (CPI).
Forex Day trading is not for everyone but fortunately you can try it first, risk-free with a FlowBank demo trading account including 1,000,000 CHF to practise.