Day Trading Forex
Day trading forex is a matter of finding entry opportunities for trades, and then holding on until the best exit point arrives.
Sometimes this is not a difficult decision. Watching a currency pair, you see that it goes sharply lower.
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It hits the support floor, and it remains there, without moving higher, for more than one period. Meanwhile, the RSI indicator shows that the currency is oversold.
You now have a confluence of indications showing that the currency is oversold, and that it is likely to move higher. You would go long in the base currency, place a stop somewhat below your point of entry, and then watch it closely for movement higher.
Assuming you guessed right, and the currency moves higher, how long do you hold on? The answer is always the same: For as little time as possible! Minimise the risk!
Certainly, you want to get as much out of the trade as you possibly can. But conditions change like lightening on the forex market, so you have to look for signs of the best point of exit.
The most obvious sign would be a change in the RSI. When that indicator suddenly begins to show that the currency is overbought instead of oversold, you should immediately consider an exit.
But it may not yet be time. You may have other reasons to assume that the currency will continue its momentum, perhaps news from the political or economic world. Or you may have reason to think that the currency will move up to a pivot point.
The beginner at day trading should simply seek out specific opportunities of this kind, without trying to formulate any kind of long-term strategy.
So much comes from simple observation of and participation in regular trading. You need to get a sense of the regular movement of currencies, as opposed to when there are breakouts, sharp movements, etc.
As you gain experience, you will be able to expand the kind of reasoning you apply to day trading. Some currencies will behave in the same way nearly every day, as the large institutional investors who trade them perform the same operations.
You can take advantage of this kind of activity, but you should be careful to not be caught out on the day that, for one reason or another, conditions change and the currency behaves differently. Keep your stops in place.
To begin the day, the day trader should consult the economic calendar. It doesn’t matter whether you are a fundamental or a technical trader.
It is critical to know if a major event is likely to move the market, so that you can, at the very least, remove your funds from the market before the event. This is what many technical traders do.
Once that is established, if you are an experienced trader, you will apply a longer term strategy to the day’s trading. Range trading is a popular, longer term Forex trading strategy that is relatively easy for beginners to learn and implement.
This system relies on the fact that each currency has price fluctuations throughout the day and the week that remain relatively constant.
Many commonly trading currencies have relatively predictable price movements and by studying the charts for a few days, identifying the trading signals is straightforward.
For instance, if a currency generally fluctuates between US$1.20 and US$1.54 throughout the day, these would represent your trading signals. The support price is $1.20 – this is when you want to purchase this particular currency.
The resistance price is US$1.54. As the currency value approaches this number, you would, of course, seek to trade out of the position and cash in your profits.
As you can see, the key to this method is studying the average fluctuations of your target currency well enough to identify the support and resistance prices.
Although the profits generated using this range trading strategy are typically not as significant as traditional day trading or currency analysis, the consistent profits you can reap using this method make it one of the better options to consider as a novice Forex investor.
Obviously, it makes sense for you to link this strategy with the use of your preferred indicators, so that you can make better judgements about entries and exits.
In another example, you might apply a Fibonacci day trading strategy which uses the key Fibonacci numbers to show support and resistance levels and an RSI as confirmation of a sell or a buy signal.
Starting at the highest, or lowest point of a currency for the day before, enter the Fibonacci Retracement chart available on the platform. You can now see the retracement levels.
When the currency reaches one of these levels, you may be alerted to potential trend reversal, resistance area or support area. Retracements are based on the prior move. A bounce is expected to retrace a portion of the prior decline, while a correction is expected to retrace a portion of the prior advance.
Once a pullback starts, you may be able to identify specific Fibonacci retracement levels for monitoring. As the correction approaches these retracements, you should become more alert for a potential reversal.
The inverse applies to a bounce or corrective advance after a decline. Once a bounce begins, you can identify specific Fibonacci retracement levels for monitoring.
As the correction approaches these retracements, you should become more alert for a potential bearish reversal.
You should, however, always keep in mind that these retracement levels are not certain indications of change. Nothing is ever certain in forex trading. They are, however, very probable indications.
You can enhance the probability by using the Fibonacci retracement in combination with other indicators. There is then, in combination with your own experience, a very strong chance of managing risk.
This is how good forex trading is handled. There is no royal road to success. Just discipline, careful study, experience, and application.
Another day trading strategy involves the use of pullbacks.
Traders call a pullback the kind of movement that occurs whenever a market falls by a fair amount from a recent peak, but not so sharply as to indicate a reversal or market crash. Indeed, pullbacks tend to be quite small moves of about 5 per cent to 25 per cent.
This is why they usually offer a good chance to get aboard the prevailing trend. (If the move is greater than 25 per cent, the pullback begins to look more like a reversal and then a strategy based on support floor or resistance should be applied).
In fact, whenever a market is moving in a trend, with specific momentum, and the price pulls back, it is always tempting for a trader to jump in on the opportunity and try and join the trend, taking advantage of the price break.
However, the trader must always be wary that the pullback does not indeed turn into a major trend change.
Although market pullbacks can occur as a result of a variety of different factors, they often show themselves during periods of low market volume. This can sometimes mislead a trader, because the low volume suggests there is no real weight behind the move.
Also, a pullback can sometimes be deceptive since the market is moving for no fundamental reason. However, these are often excellent opportunities to join the recent trend, especially if you were unlucky enough to have missed it the first time round.
When there is low volume in the markets, liquidity dries up, which means the price can fall or rise more easily – as it takes less money to push the price to new levels. These are generally great opportunities for pullback traders as the trend is still intact but the market has simply come down to a better level for entry.
Some pullbacks will occur over very short periods so it is important to catch them swiftly and to act accordingly.
For example, if a trader is working with the 15-minute chart, it is not uncommon to see the price pull back 20-30% in a matter of seconds. This could offer a good opportunity for a quick pullback trade, but the trader should always fit the pullback into the larger context, checking the move on the one-hour and three-hour charts.
For example, a small pullback on the 15-minute chart could be the start of a much bigger pullback on an hourly chart. It may even be part of a longer term correction.
It therefore always makes sense to check different charts over different timeframes before entering a position. It also makes sense for a trader to remain in a trade within he timeframe that the trader is working.
If a trader is trading a pullback on a 15-minute chart, it would be unwise for the trader to hold your trade for any longer than an hour.
Similarly, should the trader be working a daily chart, holding a trade longer than 8-10 days would be imprudent. The rule is always the same: When a trade does not work within its likely time frame, it is best to take the small loss and to exit.
Holding on in hope is almost always a losing strategy.