A large number of the forex newbies I spoke with shared that they prefer day trading or speculation when trading currencies.
why not? Multiple quick setups per day can increase the chance of winning more deals.
Trading for short periods also means that you will earn money and have time for other activities such as sports, hobbies and social life… right?
I hate to burst your bubble, but forex trading doesn’t work that way. Taking more trades does not necessarily translate into more profits.
As in archery, you don’t get points for drawing the most arrows. You get it when an arrow hits a target.
Trading short-term charts also means spending less time on pre-trade preparations.
However, short-term trades can be profitable. The key is to know your strengths and weaknesses in day trading and adjust your forecasts and strategies accordingly.
If you really think that day trading or scalping is for you, here are five things to keep in mind:
1. Capital
A lot of traders open a small account thinking that they can turn $25 into $100,000 by closing a lot of small but profitable trades. But just because you can open an account with $25 doesn’t mean you should.
Remember that leverage is a double-edged sword. The number one reason new traders fail is not that they are bad, but because they are undercapitalized and do not understand how leverage really works.
Read about leverage and margin and see if your current trading performance can sustain the costs involved in doing several trades a day.
2. Transaction costs
Trading is a business and transaction costs are the cost of doing business. This includes broker margins, commissions and taxes. The more trades you make, the higher your broker’s usual spread and commission will be.
This also means that in order to make profits, you will have to earn more points than your broker charges. Think about this before you backtest systems that only yield 2-3 pips per trade.
Talk to your broker about the spread/commission terms so that you are not shocked when you start calculating your net gains/losses.
3. Market drivers
What is important to swing and position traders may not be important to short term traders. Ditch your long-term trends and market themes for short-term volatility drivers.
Learn what makes the major players determine your chosen time frame and time of day.
4. Day trading/scalping strategies
Once you have identified the factors that move currencies in the shorter timeframes, it is your job to figure out which strategies will work best for you. Do you prefer trading breakouts from psychological levels?
What about trading momentum and daily reversals? What indicators give the most accurate signals? Practice taking short-term trades and build a system that fits your trading personality.
5. Trading Psychology
Trading the shorter time frames opens up a whole new can of worms in terms of trading psychology challenges. In fact, short-term traders are generally exposed to more stress and stress of trading than long-term traders.
The pressure of quickly pricing information, placing orders, and trading large positions increases the likelihood of trading errors. Ensure that your trading discipline and risk management strategies are strong before risking real money in day trades.
Most forex traders fail not because they lack money or forex education, but because they expect to make a lot of “easy” money without any preparation.
Lack of knowledge about how leverage works and an urgent need to make money is a dangerous combination that often leads to damaging accounts.
Remember that trading is a business and making profits consistently takes time, effort and patience. Once you admit it, you will have a better chance of surviving trading for another day.