Day trading and retail investing has surged since the onset of the COVID pandemic. Trading apps like Robinhood and social news platforms like Reddit have seen a large surge of business and visitors.

There are many markets day traders can participate in – stocks, options, future, bitcoin, funds, forex, and much more.

“Forex” (FX), which stands for foreign exchange, is the most heavily traded market in the world with $5.1 trillion traded per day. U.S. stocks in comparison trade $257 billion per day, 1/20th the size of the forex market.

Many investors opt to trade in the FX market since it is traded 24 hours a day, 5 days a week by investors and financial institutions worldwide. There is no physical exchange (like the New York Stock Exchange) for the FX market. It is traded over the counter (OTC), which means they traded through a dealer network.

What is FOREX trading?

Trading FX means you are buying one currency and selling another currency simultaneously. Think of vacationing in Europe and exchanging your dollars for euros.

As of 7 April 2021, the exchange rate was 0.84 euros per dollar (or 1.19 dollars per euro). If you went to an ATM machine in Europe and withdrew 100 euros from your bank account, you would see a withdrawal of about $119 when converted to dollars.

20 years ago the exchange rate was 1.14 euros per dollar (or 0.88 dollars per euro). Using the example above, if you withdrew 100 euros from an ATM machine then, you would see a withdrawal of about $88 when converted to dollars.

Why the difference? The exchange rate, how many dollars you get per euro, fluctuate constantly based on supply and demand. The goal in FX trading is to make money by taking advantage of these fluctuations by buying currencies you think will appreciate compared to the one you sold.

For example, you purchase 10,000 euros at the 0.88 dollars per euro exchange rate which costs you $8,800 USD. You later go back to the bank and exchange the 10,000 euros at the 1.14 dollar per euro exchange rate, and receive $11,400 USD. You made a profit of $2,600! ($11,400 – $8,800 = $2,600 profit).

Scalping vs Day Trading vs Swing Trading vs Core Trading

FX traders are looking to profit off the volatility of the different currencies within a certain time period. Scalp traders trade in a very short timeframe, anywhere from seconds to minutes in the market. The goal is to make multiple trades for small wins that add up.

Day traders also are intraday traders, but hold onto trades longer, usually hours. The goal is to make a few trades for a larger win of the expected daily price movement.

Swing traders trade over a few days or weeks. The goal is to ride an intermediate-term trend of an asset for gradual price increases or decreases (if you are shorting). Swing traders will hold until there is usually a technical sign of a reversal.

Core traders are long-term traders that buy and hold for the long-run. Most people not familiar with investing but have a 401(k) or investment account with an advisor have core investments that they hold for years.

Which is better?

Over the long run, the stock market has returned 12% annually while the average investor barely beat inflation. So it pays to be disciplined and stick to a plan. There is generally less risk involved when choosing long-term diversified assets to hold vs day trading just a few investment assets.

If you want to see if you can succeed and generate extra income by day trading FX, cryptocurrency, or other assets, it is important that you do your homework, understand the risks, and stick to your trading plan.

The FX market offers exciting opportunities and the potential to achieve financial freedom, but it won’t happen overnight. You will need to invest the time to educate yourself and learn about price action, volume, technical analysis, and how to identify high percentage setups.

Here are some strategies to help you become a more successful FX trader!

Educate Yourself

In the finance world the term “smart money” means those who are experienced, well informed, and have a better chance of success in making money in the market. By contract, the opposite would be “dumb money”, investors who blindly invest hoping they will make money.

The stock market is a zero-sum game. This means to every trade, there will be a winner and there will be a loser. The smart money understands human emotion, psychology, trends, and when to get in and when to get out.

Many amateur investors have lost considerable capital and suffered setbacks due to lack of experience and education. Wall Street will always have an advantage, but as a retail investor, you can follow their tracks and piggyback of their success.

Reading charts with futures, stocks, and forex are all very similar. Why? Because the graphs represent human behavior and psychology. Over the long-term fundamentals will drive the appreciation of the assets, but over the short-term investors can utilize technical analysis to find high-probability setups.

The three different types of forex market:

There are three different ways to trade on the forex market: spot, forward, and future.

  • Spot forex market: the physical exchange of a currency pair, which takes place at the exact point the trade is settled – ie ‘on the spot’ – or within a short period of time. Derivatives based on the spot forex market are offered over-the-counter by dealers.
  • Forward forex market: a contract is agreeing to buy or sell a set amount of a currency at a specified price, and to be settled at a set date in the future or within a range of future dates
  • Futures forex market: an exchange-traded contract to buy or sell a set amount of a given currency at a set price and date in the future.

FX trading involves understanding currency pairs. The first currency listed in a forex pair is called the base currency, and the second currency is called the quote currency.

The price of a forex pair is how much one unit of the base currency is worth in the quote currency. Using our earlier example, the base currency is the euro and the quote currency is the dollar.

It would be reflected as EUR/USD. EUR (base currency – currency you are buying when you trade the FX paid / USD (quote currency – currency you are selling when you trade the forex pair).

If the EUR/USD is trading at 1.19, then one euro is worth 1.19 dollars.

If the euro rises against the dollar, then a single euro will be worth more dollars and the pair’s price will increase. If it drops, the pair’s price will decrease. So, if you think that the base currency in a pair is likely to strengthen against the quote currency, you can buy the pair (going long). If you think it will weaken, you can sell the pair (going short).

This can get complicated. It is important to not rush into trading and take the time to study, educate yourself, look at back-testing certain strategies, and doing your due diligence. The majority of trading knowledge comes from live trading and experience, but you should learn everything about the FX markets, including the geopolitical and economic factors that affect the different currencies.

Create a Trading Plan and Stick to It

It’s important to use proper money management techniques and set-up a rules-based system that you will abide by. You can find many examples online. The key is to keep it simple and find rules that give you an edge when it comes to trading.

Use a practice account to test your plan. Some software systems will allow you to back-test your trading plan and see the success rate.

Your trading plan will have at a minimum profit goals, investment methodology, risk tolerance level, and evaluation criteria. After having a plan in place, stay committed to it. Many people lose money because they break their trading plan.

They will move their stop-losses, chase returns, or take too much risk. Your plan is to prevent your from doing this by keeping a systematic method for screening and evaluating investments, determining the right amount of risk and formulating your investment objectives.

As a rule, you must never risk more than you can afford. You need capital to continue investing, so protecting your account is just as important as the trades you decide to take.

Find a Reputable Trading Broker

The FX industry has much less oversight than other markets, so it is possible to end up doing business with a less-than-reputable forex broker. FX traders should only open an account with a firm that is a member of the National Futures Association (NFA) and is registered with the Commodity Futures Trading Commission (CFTC). 

Compare factors such as execution, pricing, and market reputation before you choose a broker. You can check FxPro Review to compare the different FX brokers. Research the broker’s account offerings, including leverage amounts, commissions and spreads, initial deposits, and account funding and withdrawal policies.

A helpful customer service representative should have the information and will be able to answer any questions you have promptly.

Be Self-Aware and Keep Your Emotions out of Trading

The best piece of advice for any trader is to keep emotions out of trading. It is easy to make wrong decisions when you are emotions cloud your judgment. This is why sticking to your trading plan is important. It will help you check your emotions in check.

Many investors chase returns, make revenge trades, try to get back what they lost, or just hate losing, and as a result, make bad decisions. Remember, you would rather wish that you were in a trade than wish you were out of it.

Consistency is the pillar of trading success, so you must stay disciplined for the long haul. Keep good records and use a trading journal to assess how well you did. This will help you be self-aware of your decisions and what you need to do improve.

Start small and build your account slowly. If you try to grow it too fast, you will take needless risk and have a greater chance of losing your money.