What Is a Currency Day Trading System?

A currency day trading system is a framework that day traders in the foreign exchange market use to determine whether to buy or sell a currency pair on a short-term or day trading basis. Typically, these systems consist of several graphical interfaces that produce charts, indicators, and other currency day trading signals that are based on technical analysis,

Currency day trading systems may make use of forex forecasting and charting software, and trades may be executed using an online FX trading platform.

Key Takeaways

  • A currency day trading system is a forex trading platform especially tailored to short-term and technical day traders.
  • These systems can be tailored to several general strategies, including being optimized for scalping, fading, momentum, or pivot trading.
  • Day trading systems may be manual, where traders produce and analyze their own signals, or automated whereby software and electronic trading platforms take the reigns.

Understanding Currency Day Trading Systems

A currency day trading system provides insight for traders use when looking to determine whether to buy or sell currencies. Each trade involves buying one currency while selling another currency, i.e., the currency pair.

Broadly, there are two main systems used. Manual currency trading systems involve traders tracking signals on their own; signals may include a particular chart pattern, a breakout of an important resistance level or a news event to materialize. Traders then interpret those signals prior to engaging buy or sell activity. 

In contrast, automated currency trading systems allow traders to program software to look for particular signals and how to react to them. These systems can either alert a trader to make a trade or place the trade automatically. Some of the more popular trading system methodologies include the following:

  • Scalping involves buying or selling immediately after the trade achieves profitability, taking small incremental profits. Trading is frequent, with many small trades placed in rapid succession in this type of system, typically accruing large volumes - and potentially racking up trading fees.
  • Fading involves shorting a currency pair immediately following upward moves in contradiction to the current trend. The target price is set when buyers reengage in the market. 
  • Daily Pivots seek profit through daily price volatility. Buying and selling occurs during low periods and trades are closed at high periods.
  • Momentum systems follow market developments or by identifying strong trends accompanied by high volumes. The target in this method is when volume starts to decline and bearish candles appear. 

Financial institutions trade in "yards", or US$1 billion increments, while many professional day traders trade in standard lots. These lot sizes allow them to control up to US$100,000 with a single trade while risking just US$500 with leverage. Day traders and retail investors may employ even smaller lot sizes, including mini- ($10,000 ), micro- ($1,000), and nano-sizes ($100).

Currency Day Trading Systems and Back-testing

Currency day trading systems, in theory, could be active and running 24 hours a day, six days a week. The near constant activity in the forex markets makes it a popular destination for many day traders around the world. As a result, it is important to know how the system will hold up in different market scenarios and to identify soft spots that the trader may want account for. 

Traders often back-test their systems with historical market data to determine whether the underlying algorithm produces the expected results in certain scenarios. Unusual market activity is particularly notable to traders, so many subject their trading systems to extreme scenarios to see how they would perform under market stress.