Day trading guide for beginners

Day trading strategies are also referred to as intraday trading. It means opening and closing position within one day. Timeframes from M30 to H4 are used in these strategies to analyze the forex market, although the most common timeframe is H1. Other intervals can be used too, but there is one rule: a trade must be opened and closed within one day to avoid swap costs.

The article covers the following subjects:

In this review, you will learn how does day trading work and figure out with day trading basics:

  • The peculiarities of intraday trading.
  • Advantages and disadvantages of intraday trading.
  • Intraday strategies based on classic and combined indicators.

What is day trading?

Intraday forex trading is a type of trading in which a position is kept open for no more than 24 hours without keeping it overnight. This means no swap costs. Any timeframe can be used for analysis, but the most popular time intervals are H1 and H4. Unlike scalping, trades are kept open for several hours – this allows you to assess the situation without emotion and haste and not overdo it at the same time. You don’t need a large deposit if you can avoid spikes in local volatility. 

Day strategies are the favorite type of trading for novice traders. Brokers have no problems with day trading, which cannot be said about scalping. Price noise is partially smoothed out (there are no local chaotic two-way movements), wave patterns are discernible. And most importantly, you don’t need to make hasty decisions, but at the same time, you don’t have to wait long for the result.

Intraday trading is speculative, so the financial instruments are mostly currency pairs. Stock and commodity CFDs are more suitable for long-term strategies where a trade is kept in the market for 3-5 days. On the other hand, cryptocurrencies are an ideal tool for intraday trading: scalping with them is not profitable due to large margin, while long-term trade carries unjustified risks. And the volatility of 3-5-10% per day bodes quite well for forward-thinking traders.

There are several unspoken rules for day trading. The first one concerns opening and closing trades around the weekend. Day traders skip the first two hours of the European trading session on Monday. After the weekend, the forex market may open with a price gap: traders are just starting their analysis and outlining their weekly plans. The first hours of Monday are the least predictable time, but after that the financial market enters its usual operation. The same concerns Friday. Before the weekend, in the last hours, trades are being closed massively in order to avoid swaps and fundamental risks.

The second rule is to take into account the volatility of the instrument in a particular session. With the H4 timeframe, an open trade is likely to overlap with the second session, where the trading volumes can be completely different. During the Asian session one should pay attention to JPY, during the European session – to European currencies.

How does day trading work?

Let’s look at an example of a forecast in day trading for beginners for the EUR/USD currency pair:

1. Analyzing the D1 timeframe:

In the daily timeframe, the price stopped at the resistance level “2”. Further movement to levels “3” and “4” is possible. But the price reached level “4” for the last time in the fall of 2020, while level “3” was tested by the price on March 31, 2021. The most probable scenario seems to be further movement to level “3” and a reversal towards level “1”. However, a rebound upward from level “2” is also quite probable.

2. Let’s go to the H1 timeframe (day trading stage):

Here you can see that on August 6, Friday, the price went down sharply, reaching the support level, and went up with several small candles before the weekend. Markets are usually calm before weekends and holidays. 

In the daily timeframe, we can see approximate levels, but there is no exact answer to where the price will go. In the hourly interval, we can see that after touching the resistance level, the price aims for upward movement. After the opening of the session on Monday, we wait for 2-4 candles. They will identify the underlying movement. We open a trade in the direction of the trend with a stop order just below the current resistance level. We set take profit at a mark just below level “1” from the first screenshot, which corresponds to the price from the second screenshot, to which the arrow points. Or we close the position at the end of the day. Potential profit is 50-60 points, which corresponds to the average daily volatility of this pair. 

Conclusion. This is one example of market analysis that shows the general idea: analyze the higher timeframe, draw the levels, build the patterns and understand the fundamental reasons for the existing trend or pattern. Then go to a lower timeframe, wait for 1-2-3 candles and confirm the hypothesis made on the higher timeframe. Then open a daytrade in the direction of the trend and the general movement of the related markets.

Who is day trading for?

Intraday trading strategies are suitable for the following categories of traders:

  • Beginners. Day trading does not require instant decision making. A signal that appears on a signal candlestick can be verified on other timeframes, in related or directly correlated markets, and patterns can be found. In the H1 interval, you have at 10 minutes for a complete analysis.
  • Traders who cannot spend 8-10 or more hours at their computer. In the H1 interval, it is enough to follow an open position for 5-10 minutes per hour.
  • Traders who work in different markets with a large number of assets at the same time. Since it’s enough to follow one trade in H1 for 5-10 minutes per hour, you can open another 5-10 trades and follow them one by one.
  • Traders who work with different types of strategies to diversify their risks. For example, they combine short-term scalping, swing trading and day trading in different charts.
  • Fundamental traders. The price reacts to the news from the economic calendar within 1-4 hours. Daily strategies are often based on fundamental analysis.

Which suits you best: position or daytrading, scalping or swing trading? You can only answer this question when you’ve tried your hand at each of these types of strategies on a demo account.

How do I start day trading?

Lets figure out how to do intraday trading. You should start trading intraday with these steps:

  1. Learn the trading conditions of the broker. You should know the level and type of spread, maximum leverage, and minimum contract size of the asset. This will help you calculate future expenses and net profit, as well as the leveraged position volume taking into account the stop order length and the amount of the deposit in order to build a risk management system. You can find information on how to calculate the trade volume using the initial data in the article “What is a lot on the forex market?“
  2. Learn the characteristics of trading assets: maximum volatility periods, nature of the price movement, fundamental factors affecting a particular trading instrument, etc.
  3. Preparation. Installing the platform, opening an account and linking it to the platform, depositing funds.

Start intraday strategy training by opening a demo account. Test different markets to see the correlation between them.

Hardware and Software Requirements

Equipment for day trading on the forex market:

  1. Computer. The more RAM, higher the frequency and higher the processor class, the better. Professionals work with multiple monitors; a beginner will need only one to start.

  2. Mobile device on which the trading platform can be installed. Mobile versions of the platforms have reduced functions and are almost unsuitable for market analysis. But with their help, you can track quotes, open and close trades. You can set up an alert to open a trade under certain conditions on a desktop platform and, upon getting it, open the position on a mobile platform. It’s quite convenient when you’re in commute or away from your laptop. Mobile trading apps also make it easier to monitor markets and open trades.

  3. Internet connection. The higher the data transfer rate, the faster the order execution speed. Internet stability is a must. Unlike trailing stop orders, trades are opened on the broker’s server. If your Internet connection fails, your positions will still remain open.

  4. VPS server. A VPS server is a service that lets you rent a physical server with virtual space. You need it when you day trade 24 hours a day – in case of Internet connection or power failures, or when you’re traveling and trading from different access points. It’s useful if you use a trailing stop in your trading strategy.

Forex day trading software:

  1. The main program is the trading platform: MT4, MT5, cTrader, or other. Installation files for computers and mobile devices can be downloaded from the broker’s website.

  2. Additional programs:

  • Technical analysis indicators – custom programs to be installed on the platform in addition to the basic indicators. They can be either simple or combined (based on several simple instruments).

  • Trading advisors – programs written for a certain platform code based on a manual trading system. They are installed on the platform and used for automating the search for signals, opening and closing trades, placing pending orders, which is done completely or partially without the participation of the trader.

  • Scripts – auxiliary programs for trading platforms that simplify trading and provide additional information. For example, the current spread or trading sessions scripts.

  • Testers. Stand-alone or platform-embedded software that allows you to test the effectiveness of the trading system on the history of quotes. Examples of testers: FxBlue, Forex Simulator. You can also use the built-in MT4 tester.

Useful analysis portals and tools:

  • Autochartist is a plugin for Metatrader. It automatically analyzes the patterns in the charts and suggests the most likely scenario.

  • Trading Central is a service for automatic technical market analysis from the developer company of the same name.

  • TradingView is a web service and social network for traders. It has its own platform with technical tools and streaming quotes of several thousand assets. It is also a platform for communication and discussion of strategies, indicators, advisors, and investment ideas.

  • Finviz is an analytical portal for the US stock market. It has everything you need for stock analysis: market sentiment by company and segment, stock screeners, analysis, news, etc. Includes over 7,500 stocks and derivatives data. It is formed on the basis of information from investment companies and statistical agencies.

  • Investing is an analytical portal where you can find several thousand streaming price charts. There are dozens of auxiliary tools here: volatility calculators, Pivot points, heat map, stock screeners. It publishes analytical reviews of individual sectors of the economy and analysts’ opinions, as well as news by region.

  • MyFxBook is an independent analytical platform for traders and investors. It has analytical tools for statistical and graphical analysis of strategies, as well as the function for linking a trading account to a platform with an investor password, which is proof of the trader’s identity for an investor.

If you know other useful programs and applications, share them in the comments!

A Trading Platform

This is a matter of individual preference. On the one hand, it will be easier for a beginner to deal with a platform that has a minimum functionality without complex tools like trailing stop or Buy Stop Limit orders. These platforms are similar in interface and capabilities to the browser platforms of binary options brokers. On the other hand, it is better to start getting used to complex platforms right away – this way you will quickly learn how to work with them. 

As an example, I suggest that you try out two platforms suitable for novice traders:

  1. MT4. A platform for professional forex trading, which is also recommended for beginners. It has many overlapping functions. There is social trading via the MQL5 portal, the option to set up alerts, download the history of quotes. At first glance it may look complicated.

  2. LiteFinance platform. Browser platform designed specifically for novice traders. It only offers manual opening of positions with a few clicks. It’s integrated into your personal account, where you can find training materials, contact tech support, etc.

The advantages of the LiteFinance platform:

  • You can connect your trading account to your copy trading account. In the Trader’s Cabinet, you can analyze the rating of LiteFinance traders.

  • It has built-in Market Sentiment indicator for each asset in different time intervals.

  • It has an expanded number of indicators in comparison with MT4 – more than 60. New indicators are added regularly.

  • The platform is user friendly.

You will find a detailed overview of the platform and its functionality in one of the sections of this review.

Advantages of the MT4 platform:

  • Day trading with the help of trading advisors.

  • You can add custom indicators, scripts, and advisors.

  • You can test manual and automated trading strategies.

You can download the MT4 platform here.

It will be easier for beginners to start with the LiteFinance platform. MT4 is considered a more professional and complex tool, while the LiteFinance terminal is extremely simple. Only the most necessary set of technical and graphical tools, one-click trading, convenient chart scaling and much more. You can open a demo account in the platform in the “Beginners / Open a Demo Account” menu.

Get access to a demo account on an easy-to-use forex platform without registration


Go to Demo Account

Broker for day trading

Criteria for choosing a broker for day trading:

  • Minimum deposit and leverage. The deposit-leverage ratio should be comfortable and allow opening trades with a minimum volume while observing the risk management rules. For example, the minimum deposit at LiteFinance is 50 USD. With a leverage of 1:500, the trader can trade with 25 thousand USD. The minimum lot for the EUR/USD is 0.01, the rate is 1.18665. The minimum trade volume is: 1.18665 * 100,000 * 0.01 = 1186.65. Conclusion: 50 USD is enough to open a trade with the minimum lot. If you want to increase the volume of the trade, calculate the limit based on the length of the expected stop order and the rule “Risk per trade must be not more than 2% of the amount of the deposit without leverage.”

  • Spread level and type. The smaller the spread, the lower the costs incurred by the trader. The fixed spread is mostly larger than the floating spread, but it does not widen during fundamental volatility. The smallest spread is found on ECN accounts, but a fixed commission for each lot can be charged.

  • Withdrawal conditions. No restrictions on the number of orders and minimum withdrawal amount, no broker’s commission.

  • Licenses. The most reputable licenses are FCA (UK) and CySEC (Cyprus), operating in accordance with the European MiFID directive. ASIC (Australia) and BaFin are also relatively strict regulators. Several licenses indicate that the broker is constantly monitored by the regulators of several jurisdictions. But this parameter should not be decisive when choosing a broker: there were cases when both FCA and CySEC made mistakes. In addition, for a private trader with a small deposit it is not easy to file a complaint. Read more about the procedure for filing a complaint with a regulator here.

  • Reviews. Provided that they contain specific information.

Other important factors are the transparency of the offer and no restrictions on the use of certain types of strategies and advisors. Additional services, for example, automatic copying of trades, are also an advantage. 

Most importantly, the broker must comply with the terms of the User Agreement. The trader’s convenience is also important. If you like the interface and the range of tools and are satisfied with the communication with the support service – this is your broker!

How to learn day trading

The secret to any success is continuous learning, which includes theory and practice. I will provide a general algorithm for those who are just taking their first steps.

First, you need to understand the basic concepts that are used in trading:

  1. What is a point and what is the difference between four- and five-digit quotes? What is the point value and how to express it in monetary terms?

  2. What are the types of orders, how do they differ and how to place them?

  3. How to identify and confirm indicator signals?

  4. Fundamental analysis. What news factors affect a particular asset, where to look for fundamental information?

  5. What is technical analysis in trading? What are the tools of technical and graphical analysis? What are the types of intraday strategies?

  6. What is a risk management system? How to calculate the lot size and minimum risk?

Next stage:

  • Learn to open trades with at least a small profit. Study theory, apply new knowledge in practice. Try to understand the topic in depth. Take your time, but try to have a small result every day: new market knowledge, trading theory, and small profits.

  • Make an action plan for the short and long term. Keep a trader’s journal.

  • Learn how to test the trading system. Your need to not only develop a trading system with high efficiency, but also to understand its statistical parameters.

If you have learned to test a trading strategy and your intraday trading system gives a profit comparable to alternative earnings – consider yourself a day trader at the average level. 

Use a demo account to practice trading skills.

Technical analysis basics for day trading

Technical analysis options for day trading:

1. Analysis of daily charts. The daily chart interval should answer the following questions:

  • What is the state of the market: is there a clear trend or is the price in the consolidation zone? If there is a trend, how long ago did it start?

  • What are the strong support and resistance levels?

If there is a visible trend in the daily chart, go to a lower timeframe and open a position in its direction. Keep in mind that the deposit must be sufficient to withstand a local drawdown within a day.

2. Analysis of levels. Support and resistance levels can be key levels for setting targets. At these levels, the direction of price movement often changes or consolidation occurs.

3. Assessment of current volatility and trend strength. The analysis allows you to see how well timed the entry into the market is.

Consider the fundamental factors that can radically change the established trend.

How Much Money You Need

When choosing a starting amount, it makes sense to build on the target and remember the risk management rules.

Options for targets and calculation of the approximate initial deposit:

1. Verify how well the broker fulfills their obligations. How quickly the money is credited, what is the actual spread, are there slippages, are there any problems with the withdrawal? A demo account will not do for these purposes.

A minimum deposit is sufficient, allowing you to open a position in some asset with the maximum leverage. The minimum deposit at LiteFinance is 50 USD, the maximum leverage is 1:500. This means with a deposit of 50 USD, a trader can trade with 25 thousand USD. This is enough to open a trade with the minimum lot for any asset with this leverage.

  • Important! Leverage 1:500 is only available for certain assets, in particular, for currency pairs. You can find available leverages for other assets in the contract specifications. Read more about this in the review What is Leverage.

2. Goal: learning how to open profitable trades in compliance with the risk management rules or learn how to work with the platform’s functions on a live account. The amount of profit does not matter for now as much as the fact you’re earning any profit at all. At this point you can even accept some loss: any outcome is a useful practical lesson that also teaches emotional stability.

For this purpose, any amount is suitable, with which you can open trades with a minimum volume subject to the risk management rules.

Example. You have a deposit of 50 USD with a leverage of 1:500. You are about to open a trade in the EUR/USD pair. A full standard lot is equal to 100,000 base units. The price of a point with a minimum volume of 0.01 lot is equal to 100,000 (full lot) * 0.01 (minimum volume) * 0.0001 (1 point) = 10 cents for 4-digit quotes. 

We calculate the trade volume based on the rule “2% risk per trade”. The volatility calculator shows that the average price movement per day is 60-80 points. Trading theory states that the take profit order should be 2-3 times larger than the stop order. If you intend to take most of the daily volatility, with a take profit of 45 points, the stop order should be equal to 15 points. 

The risk for a 1 lot trade is 15 * 10 = 150 USD. You can afford to risk 2% of 50 USD, or 1 USD. Within the limits of risk management, you are allowed to open a position with a volume of 0.0067 lots.

Conclusion. 50 USD is not enough to open a position in EUR / USD with the minimum allowable lot of 0.01 with a stop order of 15 points and following the rules of risk management. Possible options:

  • Break the rules of risk management and increase the percentage of risk per trade.

  • Decrease the stop-loss length, which is even greater risk with volatility of 60-80 points per day.

  • Look for instruments with less volatility, which will reduce the stop length.

  • Increase the deposit amount to at least 100 USD.

The calculation is similar for other assets. Look for leverage, minimum trade volume and quotes in the specification.

3. Goal: making money on trading. Here you need to start with the alternative earnings amount and calculate the starting deposit according to the following parameters: the alternative earnings amount, the amount of time you are willing to spend per day / week, the profitability of the trading system, the level of risk and trading conditions for the asset – spread, average daily volatility, maximum leverage.

For example, you think an average office job could bring you 1,000 USD per month. 1,000/22 = 45.45 USD per day. The amount is approximate – taxes, vacation pay and other factors are not taken into account. You need to earn about 50 USD per day, otherwise there is no point in switching. 

From the previous example, you can see that opening a trade with the minimum lot within the limits of the risk management rules requires at least 100 USD. Take profit of 45 points with a lot of 0.01 is 4.5 USD. To earn the desired 50 USD, you need to open at least 11 trades with a yield of 45 pips without a single loss. In practice, this is not possible. 

Conclusion. For professional trading, which would give a profit commensurate with alternative means of earning, you need at least 500-1,000 USD. This amount will allow you to open trades with a volume of at least 0.07-0.1 lots in compliance with the rules of risk management. Before working with such an amount, you need to follow the previous 2 steps indicated in this section.

Best securities for day trading

The best assets for day trading are assets with high liquidity and medium volatility. Their daily movement in both directions should be sufficient to obtain the target profit, taking into account possible losses. Currency pairs and cryptocurrencies moving in a stable range are mostly used for daily strategies. Stock and commodity assets are less common.

  • ВТС/USD. Bitcoin is the flagship of the cryptocurrency market and one of the best assets for day trading. It is the first to react to fundamental factors and is then followed by the market. It is less volatile than other altcoins, but more immune to scams and Pump&Dump strategies. Daily volatility is 2-5% with rare occasions of 5-10%.

  • EUR/USD. This pair accounts for the largest volume of trade turnover. With a moderate average volatility in comparison with other pairs, it has the greatest liquidity. This means that it has some of the tightest spreads, instant execution of orders without slippage, and provides the opportunity to earn 50-80 points per day.

  • Any blue-chip stock whose quotes are highly dependent on fundamental factors. These may be different companies at different times. For example, popular intraday strategies are dividend gap trading or opening trades when financial statements are released.

  • Oil. One of the intraday strategies is to trade with a short trend at the time of the release of the monthly NFP report. Read more about this strategy in the review “What is Non-Farm Payrolls on forex“.

The list of suitable assets for day trading on forex does not end there. If you have examples of other interesting assets, I invite you to discuss them in the comments.

Best currency pairs for day trading

The foreign exchange market is considered to be the most liquid in comparison with other markets. The main currencies for day trading are the majors: EUR, GBP, CHF, JPY, CAD, AUD, and NZD. Their combination with USD is the best trading asset with an optimal ratio of liquidity and volatility. The table below shows the relative distribution of each major currency by its turnover as a percentage:

Currency

Turnover, %

USD

85

EUR

39

JPY

19

GBP

13

AUD

8

CHF

6

CAD

5

Other currencies

25

Conclusion:

  • USD trading in combination with other currencies accounts for about 85% of all currencies trading. The most popular pairs are the EUR/USD, USD/JPY, GBP/USD, USD/CHF, AUD/USD, USD/CAD, and NZD/USD.

  • The trading volume of cross rates is 2 times lower than that of the majors. The most popular currency for trading cross rates is the EUR. The most popular cross rates are the EUR/GBP, EUR/CHF, EUR/JPY, GBP/JPY, and AUD/CAD.

Please note: each currency pair is convenient for intraday strategies in its own time. For example, the EUR/USD trading is most active during the European and American sessions, the USD/JPY trading – during the Asian session. The higher the trading activity, the greater the liquidity of the asset.

Day trading strategies

Below we will look at several basic strategies that reveal:

  • Rules for building a trading system based on a single indicator.

  • Combination of indicators with elements of Price Action graphic analysis, resistance and support levels.

  • Trend day trading using different timeframes.

Trading strategy

Brief description

Bullish Flag pattern

Pattern trading. In the uptrend, the price forms a narrow channel close to horizontal. We open a position at the breakdown of the upper border of the channel with the continuation of the upward movement.

Channel strategy based on the KC indicator

Channel breakout trading. We open the trade in the direction of the main movement, provided that more than 50% of the signal candlestick body closes outside the Keltner channel.

Alligator trading strategy

We open a trend position when the divergence of the Alligator’s three moving averages begins. Additional condition: the divergence was preceded by a flat, and at the moment of divergence all moving averages are pointed in the same direction.

Fibonacci retracement level trading

Trading with psychological levels based on the day swing trading principle.

EMA trading

We trade using 2 EMA indicators with different types of price. It combines a channel strategy with the inertial price movement principle.

Important:

  • The strategies below are not a direct trading guide – they are the basis that you need to refine taking your goals and risk strategy into account.

  • Each currency pair needs its own settings for the main and additional indicators. They are selected separately in accordance with the market situation – this is called optimizing the trading system. The set of optimal settings is determined by running the strategy on historical quotes in the MT4 tester.

Below, in each strategy, you will find links to detailed reviews of the tool used in them – this will help you build a comprehensive trading system.

Bullish Flag pattern

A bullish flag is a pattern that forms on an uptrend and consists of two elements: a flagpole and a flag. The pattern is formed as a descending channel, rectangle or triangle against the direction of the previous movement. The flagpole is an uptrend, while the flag is a consolidation zone characterized by a decrease in trading volumes and trend strength. Open the position at the moment of the breakdown of the upper border of the channel and the resumption of the upward movement.

Rules for opening a position:

  • Timeframe – М30-Н1. On higher timeframes, the trading strategy will become medium-term. On lower timeframes, the pattern is not clearly formed.

  • Asset – cryptocurrencies, major currency pairs. You can try other markets, but the strategy works worse for them.

  • Channel construction – at least 3 higher and lower points. Channel lines should be parallel or converging.

  • Take profit is equal to at least 0.5 of the length of the flagpole. Set stop loss just below the lower channel line.

Example:

An uptrend is forming in the chart – flagpole “1”. Then the price temporarily moves to the horizontal channel “2”: the trend can go down or continue the upward movement. As soon as the price goes up, at the point where the channel is broken out (to which the arrow points), we open a position in the direction of the “3” trend. We close the position by take profit or when a reversal pattern appears. In this case, it is a pin bar 2 candles after the trade was opened. Profit without the spread is about 1,100 USD in 3-4 hours. 

Read more about the patterns in the review “TOP forex Patterns: Learning to Interpret and Apply“.

Trading strategy based on the KC channel indicator

Keltner Channel is a channel indicator with a unique feature: it does not follow the market. If the price moves out of the channel, the indicator does not expand immediately after it. The trading system is built on this.

Rules for opening positions:

  • Asset – major currency pairs.

  • Timeframe – H1.

  • Opening a trade: the candlestick breaks the channel border and closes outside of it. More than 50% of the candlestick’s body must be outside the channel. On the next candlestick, open a trade towards the breakout.

  • Closing a trade: a reversal candle appears.

  • Place stop loss in the middle of the channel or on its opposite side.

Example:

  • “1” and “2” are false signals. Trades would be closed by stop loss.

  • “3” is a perfect working signal. The trade is closed at the very top of the trend with the appearance of candles with a small body and horizontal movement.

  • “4” – we do not open a trade: barely 50% of the candle is outside the channel.

  • “5” is a false signal.

  • “6” is an accurate signal that completely covers the loss on the previous signals.

  • “7” is a false signal.

  • “8” is an accurate signal.

To reduce the number of false signals, I recommend adding an oscillator.

If you want to know more about using this trading strategy and the indicator in trading systems, read the review “Keltner Channel Indicator: A Complete Guide“.

Fibonacci level trading

Fibo levels are based on the Golden Section psychology, which most traders subconsciously obey. However, this instrument has another side: the key Fibo levels are so popular that most traders believe in their effectiveness and therefore place pending orders and stop orders near them.

Trading rules:

  • You can trade any asset. The psychology of the indicator works on any instrument.

  • Timeframe – М30-Н1. On a smaller timeframe, the distance between the key levels in points is too small to obtain the target profit level. On a larger interval, the strategy turns into a medium-term strategy.

  • Opening a trade: look for a stable long trend in the chart, apply Fibonacci retracement levels. Open a trade at the end of the correction in the direction of the main trend during the rebound from the first or second key levels. In case of breakdown of the 0.5 level, the correction becomes the opposite trend – open a trade in the corresponding direction.

  • Closing a trade: at the beginning of a correction or at the end of a trend. You can use a trailing stop.

Example:

In the CAD/CHF cross rate chart, there are several clear strong trend movements. Apply Fibonacci retracement levels to the last uptrend. The chart shows that the price fluctuated around the 0.236 level for some time, then went to the 0.382 level. Further strategy is as follows:

  • If the price breaks down the level 0.382 but does not reach 0.5 and reverses, upon re-crossing the level of 0.382 from the bottom up, open a long position with the first target level 0.236 and the second target level 1.

  • If the price breaks the 0.5 level and goes down, open a short position following the market with the target levels of 0.786 and 0.

Use additional tools to confirm entry points. 

For more information about the rules for constructing Fibo retracement levels and opening trades, see the review “What are Fibonacci levels?

Trading with the Alligator

This is a trend indicator, which consists of a set of three moving averages with different periods and shift parameters. The moment of convergence of all three moving averages at one point or the intertwining of lines is a sign of consolidation and a signal: a trend can start at any moment.

Trading conditions:

  • Asset – major currency pairs.

  • Timeframe – М30-Н1.

  • Indicator settings – basic settings.

  • Opening a trade: all moving averages start diverging from one point. All moving averages are pointed strictly in one direction.

  • Closing a trade: by a reversal pattern, by trailing stop, at the moment when the long-range moving average changes direction or when the moving averages starts converging.

  • Stop loss: slightly above/below the local extreme or in accordance with the personal risk management strategy.

  • Do not open a trade if there is no triple intersection or if the divergence began more than 6 candles after the start of the trend – this is a lagging signal. Also, do not open a trade if less than 6 candles are left before the swap is charged, otherwise include the swap in expenses.

Additional indicators – according to individual preferences. This strategy is an example that you can fine-tune according to your own trading policy. Most often, the trend Alligator is supplemented with confirming oscillators and Price Action elements.

Example:

There is a horizontal movement in the market, the indicator confirms it – the moving averages are woven into one line. The trading session has just begun and a large red candle appears in the chart. You have two options here:

Close the trade at your discretion. Horizontal sections are formed in zones “3” and “4” – the trade can be closed in any of them. Alternatively, you can close 50% of the trade in zone “3” and insure the remaining 50% with a trailing stop. 

Read more about how to build trading systems with the Alligator indicator in the review “Bill Williams’ Alligator Indicator“.

Intraday moving average strategy

This strategy is based on two exponential moving averages with the same period but different types of prices. The indicators form a narrow channel, its range is the median price value. If the price has gone beyond its limits and reversed, open a trade in the direction of the reversal and follow the market.

Trading conditions:

  • Asset – any currency pair.

  • Timeframe – H4. The strategy allows you to take short market fluctuations with a length of 2-4 candles, so smaller timeframes are impractical in terms of profitability, spread and time spent.

  • Indicators: EMA (5) with application price High and EMA (5) with application price Low.

Opening a trade:

  • The price went beyond the channel, the candlestick closed outside of it. It is desirable that at least 50% of the candlestick’s body is outside the channel. If the next candlestick continues to move, do not open a trade.

  • The price reversed. The signal candlestick touches the channel border from the outside or closes inside the channel.

On the next candlestick, place a market order in the direction of the movement. Place stop loss at a distance of 2-3 points from the local extremum – from the price reversal level. Close the trade in 2-3 candles if the price starts to reverse after exiting the channel on the other side of the entry. 

Important! Open a trade only when the signal candlestick closed inside the channel. If the signal candlestick broke through the channel completely and closed on the other side of it, it means a strong movement and a missed opportunity. If the signal candlestick closes inside the channel, but its shadow goes beyond its limits, do not open a trade. Ideally, the shadow towards trade opening should be minimal.

Example:

  • 1 – A clear signal. A large green candlestick broke through the channel border and closed outside of it. The next doji candlestick is a signal reversal pattern. It is followed by two small upward candlesticks and the downside signal closes within the channel as indicated by the arrow. Open a trade on the next candle. Set the stop loss just above the shadow of the green candlestick – its length will be about 12-15 points for 4-digit quotes. Close the trade at the next reversal. The profit per trade is about 22-25 points.

  • 2 – A clear signal. The conditions are met: the downward candlestick almost completely closed below the channel, followed by the third upward doji candlestick that closes inside the channel. Open a trade on the candlestick indicated by the arrow.

  • 3 – No signal. The red candle that returns to the channel completely breaks through the channel.

  • 4 – False signal. The conditions are met, but the trend has not gone up. It is better to close the trade manually at the moment of the downward breakdown of the channel border.

  • 5 – A clear signal. The red candlestick closes below the channel, the next green one closes above the channel. The signal lasted for one candle. The trade could be closed without loss or with a small profit.

Strategy tips:

  • Signals are relatively rare. Therefore, it makes sense to search for signals simultaneously on several currency pairs.

  • It is better to look for signals at the beginning of the trading day. 4 candles on H4 make up 24 hours. If you plan to keep a trade in the market longer, remember to consider the swap.

  • Keep an eye on open trades at all times. It is easy to find a signal, it is difficult to close a trade in time. The example above shows that the movement can be as long as one candlestick.

The strategy is complex due to the ambiguous interpretation of signals. The above example is not a comprehensive guide to action – it only shows the principle of finding entry points. Each pair needs its own EMA period. Ask clarifying questions in the comments. And if you have mastered all of the above strategies and are ready to move on to more complex and efficient trading systems, click here.

Day trading risks

Day trading risks:

1. Influence of a fundamental factor. Any trend can suddenly end due to news releases that can drastically change the minds of traders.

What to do:

  • Use an economic calendar. Try to close trades 30-60 minutes before the publication of the most important news and do not open trades in the first 30-60 minutes after their release.

  • Use a stop loss and be flexible. You can adjust the stop loss manually or use a trailing stop  that automatically follows the price.

2. You’ve made an error while calculating the stop length and trade volume. Possible consequences: early closing of a profitable trade due to a small correction. Closing of all trades, including profitable ones, by stop-out.

What to do:

  • Develop the rules of risk per trade and the total risk for all open positions. Create an Excel spreadsheet where you can quickly calculate the stop length based on trade volume and price of a point. Additionally, you can use the trader’s calculator.

3. Late entry. Error in determining the entry point. Consequence: lost profit or loss due to price reversal.

What to do:

  • Use a combination of lagging and leading indicators. In most strategies, leading oscillators confirm the signal. Monitor patterns and daily charts.

  • Don’t follow crowd psychology. You don’t need to jump in the last car of a departing train. This is especially true for cryptocurrencies: every next small growth is perceived as a strong movement to new historical highs.

4. Technical risks. In intraday trading, a trailing stop is often used. It is set when the first target level is reached and 50% of the position is closed. The trailing stop is set on the trader’s computer, so if the connection with the broker’s server is lost, it disappears and the trade remains unprotected.

What to do:

5. Psychological risks. The desire to increase the volume of the trade along the trend in spite of the risk management system. The desire to keep a trade overnight. Missing an entry or exit due to distractions.

What to do:

  • Build resilience. Strictly follow the risk management rules.

  • Use alerts – sound and written reminders of an event. For example, when the price reaches a certain level or a pending order is triggered.

Gain practical experience. This will help you figure out which risks can be neglected and which should be accounted for in the trading system.

Day Trading Rules and tips for beginners

A few useful rules that can help you optimize your risk in day trading.

Determining entry and exit points

The trading system should provide clear rules for opening and closing positions. Namely you need to determine:

1. Tool combinations. Use trend, leading indicators, graphical analysis tools, fundamental factors. Your trading system should answer the following questions:

  • Which indicator or instrument is the main one? Which one is additional or confirming?

  • Which signal is the main one and which can be neglected?

  • What gap (in candlesticks) is allowed between signals of several indicators for timely entry?

2. Market exit rules:

  • By the ratio between stop loss and take profit. One of the theories recommends setting take profit 2-3 times larger than the stop order.

  • By patterns. The trade is closed when a reversal pattern is formed or a consolidation zone appears.

  • By target profit level determined individually.

  • Upon reaching key support and resistance levels.

Testing the trading system on price history helps to establish the rules for entering and exiting the market.

Determining the optimal trading period

Try to follow these rules:

  • Do not be in a hurry to open trades in the first 30 minutes after the market opening. Look at the market sentiment that sets the trend.

  • Try to close trades 30-60 minutes before the market closes. The last minutes of trading are characterized by a decrease in trading volumes. At such moments, liquidity falls and flats and slippage often occur.

  • Choose the best time period in terms of liquidity and volatility for each instrument.

Try not to open trades during news releases.

Using protective orders

Always use stop orders and do not move them contrary to the rules of risk management if the price has gone in the opposite direction and looks like it is about to return in the right direction again. Learn to accept a loss, do not try to sit it out.

Emotion control

Try to control your emotions. The key to success in trading is composure, calculation, self-discipline, and the ability to learn from mistakes. If you feel euphoria, anger, fear, uncertainty about your actions, you should pause. Understand the reasons for your feelings, do something else for a while. The advantage of day trading is that there is no need for instant decision making. You have time to analyze, assess the situation and pull yourself together. Tilt and FOMO syndrome are the trader’s enemies.

Practice

Take your time when switching to a live account. As practice shows, in order to understand the peculiarities of trading at a confident basic level, a trader needs to open at least 500 trades and spend 3 to 6 months on training. After the demo account, it is best to practice on cent accounts – you can open a large number of trades with a deposit of 10 USD.

Day Trading For A Living

Is it possible to make money on day trading?

It is. As with any other group of strategies. Day trading on forex is one of the types of trading systems, which differs in its approach to the entry and exit rules. However your success here does not depend on the chosen strategy, but rather on your:

  • Ability to correctly find accurate signals.

  • Ability to reasonably assess risks and exit the market on time.

  • Ability to analyze your mistakes and draw correct conclusions.

  • Psychological stability and the ability to manage your emotions.

The deposit amount is not the cornerstone – I have already shown above that you can open trades even with 50 USD. The more important factor is whether you are willing to improve your knowledge, skills and achieve new results every day.

Pros & Cons of day trading

Pros of intraday strategies:

  • No swap charges. In the H1-H4 intervals, the trade is closed in 1-2-3 candles (sometimes at the close of the current one). There is no swap fee.

  • Moderate emotional stress. Unlike scalping, the signal candlestick here is at least 30 minutes. This is quite enough time to look at the main trends and apply fundamental analysis.

  • Optimal profit potential. In long-term strategies you need to wait for more than a day, while in scalping there is a high risk of loss. In terms of the balance between potential reward and risk, intraday strategies are ideal.

Cons of intraday strategies:

  • Spread. The more trades, the larger the spread. While in long-term strategies it is almost negligible, in intraday trades it is noticeable. Many traders forget about the spread when planing tщ make “20 points a day”.

  • Risks. Some level of risk is unavoidable. While long-term strategies are less affected by speculation, day trading suffers most. Speculators prefer quick profits.

  • Time. In comparison with long-term strategies, with day trading you need to stay at the computer for a longer time to track the movement of quotes.

 Comparative table for day trading and other types of strategies:

 

Day trading

Scalping

Swing trading

Medium and long term strategies

Asset type

Any assets with high volatility and liquidity: major currency pairs, Brent, Au, cryptocurrencies, stock assets

Assets with high volatility and tight spreads. Currency pairs, blue chips

Assets with a strong long trend and local pullbacks with relatively high volatility. Stock indices, cryptocurrencies

Assets with a strong long-term trend. Stock instruments, less often – cryptocurrencies, exotic currency pairs

Duration of the position on the market

1 to 8 hours and longer

A few minutes, less often – up to 30 minutes

A few minutes to several hours

Several days to several weeks

Timeframes

М30-Н4

М1-М15

М5-М30

Н4-MN

Tools

Trend indicators, oscillators, Price Action, levels, fundamental analysis

Fundamental analysis, levels, indicators with a short period

Trend indicators, Fibonacci levels, patterns, oscillators

Trend indicators, levels, Price Action

Average profitability per trade, in points

10-20

5-10

10-20

50-100 and more

Please note that medium and long-term strategies will hold additional costs – swap (overnight fee). In other types of strategies, you can do without swap.

Conclusion: Is day trading right for you?

Only you can answer this question when you try to open the first trades, get the first positive result and feel the taste of victory. Don’t be afraid to take risks – try your hand at a demo account and discover the exciting world of investing. Only after practicing on a demo account will you be able to understand how day trading works for your character and how comfortable you are with trading in comparison with other types of employment.

If you have any questions, ask them in the comments and I will try to help you! Good luck!

The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteFinance. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.

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