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Forex Trading – Day Trading Strategies

The most important characteristic of day trading is that no overnight positions are established and any trades that are executed during the day are unwound by the end of trading. Positions are invariably closed by the end of the day regardless of whether they are profitable or unprofitable. Depending on the currency pair being traded, the target profit for every trade is between 20 and 40 pips and the preferred timeframe is normally between 15 minutes and 30 minutes. Unlike scalpers, day traders thrive on trading news and in fact, keep track of the daily news in order to help them to plan their strategy. They pay particular attention to whether the news announcements reveal Numbers that are better or worse than the estimates.  They rely on momentum for their trading and establish long or short positions based on the trend at that time.

 

day-trading-strategies

Day traders close all the positions before the market close

The primary advantages of day trading are as follows:

Protection against risk-traders can look for peace of mind because they never have open positions in the market. Open positions always mean that the trader is at risk because the situation can change overnight.  One form of risk on open positions is called gapping in which transactions cannot be executed because of extreme volatility in the market. This means that there is a chance that stop losses cannot be executed leaving the trader open to a loss but day trading completely eliminates this risk.

The importance of news-because news causes markets to move, day traders can profit from the upward and downward movements of currencies as a result.  Because positions have to be closed on a daily basis, they are unlikely to be affected from the “ paralysis by analysis” syndrome that often affects many traders.  Because action has to be swiftly taken.  Analysis becomes that much more straightforward and uncomplicated.

Simplicity of calculation-Life is much easier when you start afresh at the beginning of every trading day.  Open positions mean that your margin and equity are constantly changing because of your position and this can be confusing when you are planning your new trades.  Calculation of  factors such as lot sizes are that much simpler.

 

Potentially devastating day trading mistakes

 

day trading mistakes

Day trading – Day traders often miss other opportunities

There are certain common mistakes often made in trading strategies which could end up in losses or at least lower returns on your invested capital. For instance, there are many potential problems connected with averaging down. One of the major problems is that you are holding a losing position where the capital and time could be better spent on more promising positions. Moreover, a larger return on your remaining capital is necessary to restore it to its original level and the larger the loss, the higher this return will have to be. Averaging down may work on some positions but it is far more likely to result in losses and margin calls especially if additional capital is required to sustain the losing position. The market trend can often be longer lived than the contents of the trader’s pockets.

 

Most traders are aware of what news will move the market even though the direction may be unknown. Traders may be tempted to take positions in advance of the news but there is no advantage in doing this. Because the markets are moved by market sentiment, some price moves may well appear to be not logical or even inexplicable. Often, prices will move up and down as stop losses on both sides are triggered before settling down into a discernible trend. Equally, trading just after a news announcement may or may not work unless there is a trading plan built on analysis and logic. Moreover, volatile markets often result in a lack of liquidity which means that your stop loss settings may not be enough protection.

 

Taking excessive risks may not result in excessive returns and traders who risk large amounts of capital on a single trade may end up losing all of it. The common rule of thumb is to risk no more than 1% of your capital on any given trade and professionals will often risk much less. The purpose of this practice is to make sure that the trader is not financially crippled by one single bad trade or even a full day of unprofitable trading.

 

You will find that almost all the above mistakes are the result of expectations which are not realistic because the trader is acting on his or her own expectations rather than attempt to establish the expectations of the market and act on it.  Frankly, the market couldn’t care less about what you feel or think which is why the market behavior can sometimes seem irrational or strange. Because the market can behave differently at different times during the trading day, the trader must be prepared to use alternative strategies depending on which way the market moves.

 

Inside Day Bollinger Band

 

Every trader knows that you have to buy low and sell high or buy high and sell higher ( or the reverse for short trades) but this is much easier said than done. What is required for the proper strategy is a measure for what is high and what is low and this can be achieved with Bollinger Bands. Prices at the upper Bollinger Band are generally regarded as high and prices at the lower Bollinger Band are generally regarded as low. You should however be careful about using these as entry or exit points because trends can often be strong enough to override this principle. The buy signal will be generated only when the candle following the candle that touches the Bollinger Bands does not create a new high or a new low ( known as an inside day) and the best time frame for this strategy is a daily chart. This combination will ensure that there is a good chance that we have picked prices at the highest or the lowest as the case may be.