End-of-Day Forex Trading: How to Find Signals and Potential Breakouts

When it comes to trading, timing is everything. While you may be able to anticipate market changes, you don't know when those changes are scheduled to occur and how to time your entry and exit points accordingly. Without this important information, you likely won’t reap the reward. The most reliable and profitable forex strategies consider how timing relates to the trader's chosen market, strategy, and trading style.

End-of-day trading is a deliberate forex strategy that allows traders to place trade orders after the New York Stock Exchange has closed for the day. This enables them to outline their strategy and create pending orders for the next day when no trading is taking place. 

The Benefits of End-of-Day Trading

After the market has closed, traders are free to review changes in price action that took place, analyze closing price candlesticks, and interpret any signals that manifested during the day with better clarity and context.

The two greatest benefits of end-of-day trading are the added context and flexibility this strategy offers. Without the pressure of responding to price movement in real time, you can conduct various technical analyses to identify trend strength and momentum, establish support and resistance levels, and confirm the validity of buy and sell signals before acting. 

Based on the insights you've gathered, you can lay out a more deliberate trading strategy and place orders with greater precision. By focusing on daily price action charts rather than intraday charts, it's also easier to identify overarching market trends that will affect long-term trading outcomes.

In addition to these strategic benefits, end-of-day trading doesn't require you to manually enter orders during trading hours. In other words, it makes it possible to keep your day job and still develop and execute a deliberate trading strategy. 

Outlining your orders before the beginning of the trading day also forces you to preemptively weigh risks and rewards. This allows you to place orders and profit targets that coincide with your ideal risk-to-reward ratio regardless of how the market moves. This removes some of the emotion from trading, allowing you to establish a consistent strategy and track the results of your decisions.

Types of Day Trading

Trend Trading

Trend trading, one of the most reliable and simple forex trading strategies, involves trading in the direction of the current price trend. 

In trend trading, traders must first identify the overall trend direction, duration, and strength. This information helps them understand the strength of the current trend and when the market may be primed for a reversal. With this strategy, the trader doesn’t need to know the exact direction or timing of the reversal; they just need to know when to exit their current position to lock in profits and limit losses.

Small price fluctuations that go against the prevailing trend direction happen, even when a market is trending. When investing in the direction of a strong trend, a trader should be prepared to withstand small losses, knowing that their profits will ultimately surpass them as long as the overarching trend is sustained. That’s why trend traders favor trending markets or those that swing between overbought and oversold thresholds with relative predictability. 

Countertrend Trading

The opposite of trend trading, countertrend trading aims to achieve small gains by trading against the overall market trend. This type of swing trading relies on the assumption that the overarching trend will experience reversals, with traders hoping to earn profit from these reversals. With countertrend trading, traders typically can hold positions anywhere from a few days to several weeks. 

Range Trading

Range trading is a type of forex trading strategy that identifies overbought and oversold currency. Range traders focus on buying during oversold or support periods and selling during overbought resistance periods. 

Range trading can be used by traders at any time, but it’s most effective when the forex market lacks direction, without a discernible long-term trend in sight. Range trading is at its weakest during a trending market, especially if market directional bias isn’t accounted for. 

Breakout Trading

Breakout trading strategies are helpful during a strong market trend—they encourage buying higher and selling lower. On a chart, breakouts can be spotted following a time period with tight peaks and valleys, indicating a volatile market. Predicting a breakout can increase your potential for earnings. 

Price resistance occurs when a supply is in excess. After the market “absorbs” this supply, the resistance is breached with a sharp movement up, a direct result of the shift in supply and demand. This is the breakout, normally occurring when resistance levels are breached. Breakouts typically occur in markets where upward price movement is expected. 

It’s ideal to employ this trading strategy when the market condition is either trending up or range-bound. Once the resistance line has been identified, you should monitor volume closely. When price action passes the resistance level with a strong force, a long position trade setup happens. Following a breakout, traders will likely see a small price retrace as the supply and demand levels attempt to rebalance.

News Trading

The forex market is often impacted by global economic occurrences. Understanding economic news events and how they influence currency pairs can help traders anticipate short-term (intraday or multiday) market movements or breakouts. These major events can include interest rate changes, economic reports on national unemployment rates, inflation rates, gross domestic product (GDP), nonfarm payroll, national trade balances, and consumer and business confidence surveys. 

With news trading, traders examine the relationship between these types of events or announcements and how they relate to current market conditions. Like any other global market, forex can also be dramatically impacted by unscheduled, singular events, such as natural disasters, war, or political changes. 

Forex Day Trading Strategies

Trend Trading

When it comes to trend trading, traders generally rely on simple moving averages and exponential moving averages, such as the moving average convergence/divergence and average directional index, to determine the direction and strength of the current trend.

With trend trading, traders don’t need to know what will happen next—they only need to understand what’s currently happening, making this strategy more reliable. However, it’s important to confirm the direction and strength of a new trend before entering into a position. 

When a price fails to reach anticipated support and resistance levels or when a long-term moving average crosses over a short-term moving average, it’s thought to signal a reversal. Rather than anticipate the direction of the reversal and enter a new position, trend traders use these signals to exit their current position. Once the new trend has manifested, the trader will once again trade in the direction of the current trend.

Price momentum will often change before a price change occurs, so momentum indicators, such as the stochastic oscillator and relative strength index, can also be used to spot exit points. These indicators help traders identify when a price is approaching overbought or oversold levels and provide insight into when a change will occur. 

Mean Reversion

The mean reversion strategy operates on the assumption that the price of any asset will eventually return to its mean or average price following a rapid increase or long-term price movement. 

When this occurs, traders attempt to gain profits as soon as the asset price returns to its regular level. Broad market timing allows traders to identify different time frames to enter the market, while entry and exit signals tell the trader when to enter and exit positions. 

Traders often prefer this technique because it offers a straightforward exit strategy and risk-adjusted returns. 

How End-of-Day Trading Strategies Work

End-of-day trading demands a thorough understanding of the market and the current trend. If you know how the market usually behaves and can identify a trend’s strength and momentum, you have a solid framework that can help assess buy or sell signals and identify ideal entry and exit points for the upcoming day.

Identifying the Trend and Determining Your Position

End-of-day trading is easiest in trending markets that oscillate between long uptrends and long downtrends and reverse after reaching established overbought and oversold levels. Using trend-following, trend-confirming, and overbought and oversold indicators, you can gauge if a strong trend is underway and place pending orders that coincide with the direction of the current trend. That would mean taking a bullish position in an uptrend and a bearish position in a downtrend.

If your technical analysis reveals that the price is reaching overbought and oversold conditions or that a divergence has occurred between price movement and market momentum, you may decide to place a limit entry order that goes against the current trend at the anticipated market pivot point. For example, if the price is in an uptrend and you're expecting a reversal, you would place a sell limit entry order above the current price at the anticipated pivot point.

In addition to trading with the current trend or anticipating reversals, it's possible to use a grid trading strategy to capitalize on trend breakouts. A grid trading strategy places buy and sell orders at set intervals above and below the current market price, eliminating the need to know what direction the breakout will take.

When using a grid trading strategy, it's exceptionally important to close out pending orders that weren't triggered and be diligent about placing stop-loss orders as well as profit targets, as illustrated in the following chart.

Placing Stop-Loss Orders

Stop-loss orders help mitigate risks by limiting losses in the event that the trend moves against your expectations. Stops can be fixed value or can change relative to price movement or what's known as trailing stops. After you've decided what position to take and placed corresponding stop-entry or limit-entry orders, the next part of any end-of-day trading strategy involves placing stop-loss orders for each position opened. 

For a bearish stop-entry order placed above the current market price, you should create a corresponding sell stop-loss order below the current market price, as shown in the graph.

For limit entry orders, a stop-loss order should be placed in the same direction as the buy or sell limit entry order to curb losses in the event that the trend continues rather than reverses, as shown in the next graph.

When determining how far away from a price to place stop-entry, limit-entry, and stop-loss orders, take support and resistance levels into account along with the location of buy and sell signals and the amount of risk you're willing to shoulder. The most successful strategies are realistic and use technical analysis to confirm ideal entry and exit points.

Keeping Tabs on Your Trades

Once you've placed all your pending orders for the following day, your orders will automatically be triggered the next day without the need for any manual action. That said, it's important to revisit your positions at the end of the next trading day to evaluate if they're still valid based on the most recent price movement. 

A trailing stop will shift position relative to price movement, but other entries and exits may need to be manually closed or adjusted to account for shifting risk and reward levels. For the best results, make sure your strategy has the appropriate checks and balances and frequently monitor results and reevaluate your positions in light of new insights.

How to Start Day Trading Forex

1. Practice, Practice, Practice 

Practice makes perfect. Don’t start investing your own money until you understand the forex market and when to use different strategies. Signing up for a free demo trading account gives inexperienced traders the opportunity to become acquainted with how a trading platform works, allowing them to develop their own strategy.

Even when practicing, it’s important to remember that each day will be different. Some result in little to no gains or some amount of loss, while others offer ample opportunity. Practice, hard work, patience, and the ability to learn and adapt can help traders develop their skill set. 

2. Set Goals

Once you’ve spent some time using a demo account, it’s time to start setting some long-term and short-term goals. 

As a new trader, avoid setting goals that are only focused on profit. While it’s tempting to want to hit certain earnings thresholds, focusing only on the result can lead to ill-advised trades that actually work against your goals.

Instead, focus on the process used to identify trading opportunities. While forex trading tends to feature traders working on long-term timelines rather than day trading and other short-term trades, there are still opportunities for goal setting that can be used to create a process-oriented, goal-driven trading strategy.

3. Follow the Data

While it may be tempting to simply follow your instincts, data gleaned from chart patterns and technical indicators is much more reliable. Always use strategy and analysis to build a data-driven case for making a trade, and avoid abandoning your trading strategy in the heat of a decision. 

4. Avoid Trading with Brokers That Don’t Offer Negative Balance Protection

Negative balance protection is a brokerage firm feature that protects traders from losing more money than the amount deposited into their trading account. It means that your account can never go into the red, even if your trading activity suffers losses that exceed the amount deposited.

5. Keep Learning

Learning from one’s mistakes is an important part of forex trading. New traders should continue looking for ways to improve their skill set and do better the next day. This can help identify any forex trading strategies that don’t work. 

Forex Day Trading Takeaways

• Practice using a demo account.
• Understand how the forex market works.
• Learn how to identify market trends and patterns. 
• Avoid working with brokers that don’t offer negative balance protection.
• Use charts and data to make well-educated trading decisions. 
• Set short-term and long-term goals that don’t only focus on profit. 
• Learn from your mistakes.