Deciding What and When to Buy When Day Trading.
Forex day trading is a huge market. Billions are traded in foreign exchange on a daily basis. Whether you are an experienced trader or an absolute beginner, finding a profitable forex day trading strategy or system is complex. So learn the fundamentals before choosing the best path for you. In the high leverage game of retail forex day trading, there are certain practices that can result in a complete loss of capital. There are five common mistakes that day traders can make in an attempt to ramp up returns, but that ultimately have the opposite effect.
Once the overall trend is established, you move to a smaller time frame chart and look for trading opportunities in the direction of that trend. Using indicators on the shorter time frame chart will give you an idea of when to time your entries. Once you determine the overall trend, you can then move to a smaller timeframe and look for entries in the same direction.
Countertrend day trading is similar to trend trading except that once you determine your overall trend, you look for trades in the opposite direction. The idea here is to find the end of a trend and get in early when the trend reverses. This is a little riskier but can have huge payoffs.
In this example, we see that there was a long and exhausted downtrend on the 4hr chart. Remember that going opposite of the trend is very risky, but if timed correctly, can have huge rewards! Breakout day trading is when you look at the range a pair has made during certain hours of the day and then placing trades on either side, hoping to catch a breakout in either direction.
This is particularly effective when a pair has been a tight range because it is usually an indication that the pair is about to make a big move.
Your goal here is to set yourself up so that when the move takes place you are ready to catch the wave! There are several problems with averaging down in forex markets. Thus, this time and money could be placed in a better position. Secondly, a larger return is needed on your remaining capital to retrieve any lost capital from the initial losing trade.
Losing large chunks of money on single trades or on single days of trading can cripple capital growth for long periods of time. Day traders are especially sensitive to these issues. The short timeframe for trades means opportunities are short-lived and quick exits are needed for bad trades.
Traders know the news events that will move the market, yet the direction is not known in advance. Therefore, a trader may even be fairly confident that a news announcement, for instance that the Federal Reserve will or will not raise interest rates , will impact markets. Even then, traders cannot predict how the market will react to this expected news. Other factors such additional statements, figures or forward looking indications provided by news announcements can also make market movements extremely illogical.
There is also the simple fact that as volatility surges and all sorts of orders hit the market, stops are triggered on both sides. This often results in whip-saw like action before a trend emerges if one emerges in the near term at all. For all these reasons, taking a position before a news announcement can seriously jeopardize a trader's chances of success.
Similarly, a news headline can hit the markets at any time causing aggressive movements. While it seems like easy money to be reactionary and grab some pips , if this is done in an untested way and without a solid trading plan, it can be just as devastating as trading before the news comes out.
Day traders should wait for volatility to subside and for a definitive trend to develop after news announcements. By doing so, there are fewer liquidity concerns, risk can be managed more effectively and a more stable price direction is visible.
The practice of taking on excessive risk does not equal excessive returns. Almost all traders who risk large amounts of capital on single trades will eventually lose in the long run. Day trading also deserves some extra attention in this area and a daily risk maximum should also be implemented. Alternatively, this number could be altered so it is more in line with the average daily gain i.
The purpose of this method is to make sure no single trade or single day of trading hurts has a significant impact on the account. Therefore, a trader knows that they will not lose more in a single trade or day than they can make back on another by adopting a risk maximum that is equivalent to the average daily gain over a 30 day period.
To understand the risks involved in forex, see " Forex Leverage: Much can be said of unrealistic expectations, which come from many sources, but often result in all of the above problems.
If the price gets very close to my target and then pulls away, I just close it out.
It is important for a trader to remain flexible and adjust their techniques to match changing market conditions. When it comes to averaging down, traders must not add to positions, but rather sell losers quickly with a pre-planned exit strategy.