Are you looking for an active trading style but not at the point of holding positions for seconds or weeks? Day trading may be the answer for you since this approach hits the sweet spot between scalping and swing trading.
Like the term suggests, day trading in the currencies market is where traders buy and sell forex pairs to profit off the day’s fluctuations. This group never holds their positions overnight and typically no more than a few hours.
Day traders rely primarily on technical analysis on time-frames starting from the 1-minute to the hourly chart. The average day trader will execute at least two orders daily, exploiting highly active trading sessions producing the highest volume possible for maximum volatility.
Intraday trading is still quite an active way of speculating (yet not to the scalping level). Thereby, traders expose themselves to an array of fast-pacing markets.
This selection may become too overwhelming, meaning having some specialization is critical. Hence, this article will cover the best 4 currencies for day trading and what makes them ideal for this methodology.
How to pick the best currencies for day trading
When day-trading any currency pair, the two most important things to consider are spreads and volatility. Essentially, one needs instruments with low spreads and above-average volatility.
- Spreads: Short-term trading strategies require traders speculate in markets
with low spreads. Since the profit potential is relatively small, every pip does matter in the long run.
A higher than usual spread on one position won’t make much of a difference, but over the long run, it does. Fortunately, most currency markets have reasonable costs and are often advantageous for day trading purposes.
Specifically, the major or USD-based pairs should be a ‘day trader’s playground’ as one doesn’t usually pay above a pip spread. Some minor or cross pairs also have fair spreads and offer much-needed diversification away from the dollar.
The major pairs tend to be correlated, meaning you only need to pick no more than two. Generally, with day trading, you don’t need to focus on a plethora of markets; not more than ten is sufficient.
- Volatility: Volatility is about the extent of price fluctuations for a pair within a
particular period. Every trader thrives for the highest volatility as it’s the primary element responsible for maximum gains.
All currencies share relatively robust and stable volatility, though several cross/minor and GBP-based pairs offer the greatest. These are some of the markets with relatively low spreads which tend to move faster over a short period:
Best 4 currencies for day trading
As previously mentioned, one of the benefits of day trading is you can exclusively focus on a handful of pairs. So, below are the best 4 currencies.
Despite being technically less volatile, the euro is particularly favored by short-term speculators as it’s the most traded pair in forex. With high trading volume comes massive liquidity, allowing for the most fluid execution with barely any latency.
So, it’s an instrument day traders can get in and out with relative ease. This market represents the two most used currencies globally; euro and the US dollar.
This means EURUSD is where much of the action begins. Traders can view the relationship between this pair and other USD pairs and notice similarly-looking price movements, especially with USDCHF, with which it typically shares an inverse relationship.
EURUSD’s volatility is not too high but not too low, meaning this market is moderately stable with tiny erratic movements. Another positive aspect about the euro is it offers the lowest spreads across all forex markets.
So, overall, the euro ticks all the boxes for one of the best currencies for day trading.
Since USD is the quote currency, both EURUSD and GBPUSD tend to move alongside each other. So, day traders should never execute the same positions when trading this pair as they would likely be increasing their risk unnecessarily.
Yet, there is one underlying reason why GBPUSD is a better alternative to the euro – volatility. Fast-paced movements characterize ‘Cable’ as the British pound is also a heavily traded currency in the markets.
So, many day traders might focus exclusively on the pound instead of the euro when gaining exposure to a USD pair. Moreover, the spreads on ‘cable’ are low, and the trade execution is almost always flawless.
While AUDJPY is not as prominent as the previously mentioned pairs, it’s an Asian-Pacific market that should form part of any day trader’s portfolio. When collating a watchlist, you’ll want exposure to different markets.
So, AUDJPY provides unique, diversified opportunities away from the US dollar. The Australian and Japanese economies are closely entwined, and we see big moves on these pairs frequently due to their inherently tremendous volatility.
Also, the Australian economy exports some of the largest amounts of gold in the world, making AUD a currency often driven by the commodities market. Moreover, traders get reasonable spreads with this pair, usually not above 3 pips for most of the trading day.
The ‘euro kiwi’ combines the trading forces of the Eurozone and New Zealand economies. Hence, it’s a profitable market to day-trade as the dollar has little influence on it.
Like AUDJPY, the euro kiwi is partly driven by the gold market as New Zealand has some of the highest exports with this commodity.
Despite being a minor or cross pair, this instrument attracts significant liquidity and can produce deep, long-lasting moves far greater than the major pairs on many occasions.
The spreads can be a little high with EURNZD. To combat this solution, traders should consider brokers who offer a zero spread account to lower these costs.
Ultimately, day trading does provide numerous benefits: focusing on a few pairs, the luxury of trading during hand-picked trading sessions, and the abundance of opportunities.
The best currencies we’ve provided in this article enhance all these qualities. Yet, this is only half the story since day trading in forex is tough. So, the pairs you select can only get you so far.
From solid risk management, intense concentration to implementing the correct risk-to-reward and stop losses, there’s a lot to master when it comes to day trading.