Forex day trading strategy
Forex day trading strategy is a short-term trading strategy that focuses on the buying and selling of currency pairs within the same trading day. Typically, traders will place a number of forex trades per day, and close them out at the end of the trading day, rather than holding overnight positions.Even so, with a decent win rate and risk/reward ratio, a dedicated forex day trader with a decent strategy can make between 5% and 15% per month, thanks to leverage. Remember, you don’t need much capital to get started; $500 to $1,000 is usually enough.Forex trading may make you rich if you are a hedge fund with deep pockets or an unusually skilled currency trader. … But for the average retail trader, rather than being an easy road to riches, forex trading can be a rocky highway to enormous losses and potential penury.Profitable day traders make up a small proportion of all traders – 1.6% in the average year. However, these day traders are very active – accounting for 12% of all day trading activity.
How to Day Trade the Forex Market In 2 Hours or Less a Day (EURUSD or GBPUSD)
Learn to how to day trade the EURUSD in two hours or less per day. See the best times of day to trade, what time frame to us, and how to enter and exit trades. Learn how to manage risk and plan out each trade. View the examples and then start practicing the method yourself.
The following guide assumes a basic understanding of how the forex market operates. If you are new to forex, check out Introduction to Forex, which provides some background on trading currencies.
Day Trading Forex – Basic Guidelines
Most of my day trades in the forex market are based on these simple concepts. For simplicity, assume I am talking about an uptrend unless otherwise noted. The same concepts apply to downtrends.
- Trade when London and/or the US markets are open. I opt to trade from 8:30 to 10:30 AM EST (15:30 to 17:30 on my charts below), but anytime while London is open is fine. I trade for about two hours per day, that is all.
- I use a one-minute chart.
- Only trade in the direction of the trend.
- Wait for a pullback. The pullback must stall out or show signs the price is starting to move back in the trending direction before reaching a major prior swing low.
- On the pullback, the price must consolidate (move sideways)–stop falling–for at least 2 bars+ (2 one-minute bars, or more). Buy a breakout above the high price of the consolidation. This requires patience. If the price stalls and then breaks out in the opposite direction of the overall trend then there is no trade. As long as the trend is intact, continue to look for pullbacks, consolidations, and then consolidation breakouts in the trending direction.
- Stop Losses and Targets are set at the start of each day and may be slightly adjusted during the day based on expanding or contracting volatility. Measure the trending price moves between pullbacks, and then subtract several pips from the smaller ones…that is your target on each trade. The stop loss is placed just outside the consolidation on the opposite side of the breakout. In order to take a trade, the expected profit must be at least 1.5 times the risk of the trade. Determine the stop loss and target based on these methods, then see if the reward is more than 1.5x risk. If all is good then proceed. If prior trending moves show that it will be hard for the price to reach a target that is at least 1.5x risk then avoid the trade.
- Exit all position at least two minutes before major news events. For the EURUSD and GBPSUD that includes major news related to the EUR, GBP, USD, and CHF. Don’t trade until after the news is released. Cancel all pending orders before news and when you are away from your computer. Create a day trading routine to avoid mistakes.
Knowing the strategy isn’t enough, and below there are multiple examples of this strategy in action. Price is constantly moving, so we need to be able to plan our trades before and as they are forming. Before a trade is taken we also need to know what we will do once we are in the trade, depending on what the market does next.
Trading Beyond the Hard Right Edge
If you want to really learn how to day trade the forex market (or any market), master “trading beyond the hard right edge.” Most people look at what has already happened on their chart, come up with one trade idea, and then pray it works out. Since we can’t see what happens next (beyond the hard right edge of our chart), inexperienced traders tend to think of scenarios they want to happen, or that they fear. Most people gravitate toward one or the other. They think about entering a trade and the price flying in their direction for an easy profit and high-fives from friends. This is fantasy. Or they enter a trade and imagine the price plummeting against them, stopping them out. This is fear. Either of these scenarios are possible, but so are a host of other possibilities, and which one is more prevalent in your mind will bias your trading.
We don’t want to be biased by one extreme view. Rather, we want to consider all possibilities: the price could drop, rally, or do nothing.
If you are very optimistic, you may miss clues that the market is turning against you. If you are very pessimistic you may avoid a good trade, or jump out of it too early. What is missing? Your strategy gets you into a trade, with an initial profit target and stops loss. Once you are in the trade though, it is a different world. All sorts of things could happen. What if the price moves in your favor slightly and then starts to move against you? What if the price moves to within 0.1 pips of your target and then reverses? What if the price does absolutely nothing after you get in…for 10 minutes? You were expecting something to happen, and now that it hasn’t what do you do?
As a day trader, you need to consider the various things that could happen, and what you will do in each circumstance. This may seem impossible, but it’s not. Actually, there are only a few things that could happen. The price can rise, fall, or move sideways, and it may do it quickly or slowly. The combination of the price moving higher-quickly tells us something different than higher-slowly. A quick downward movement followed by a slow upward movement tells us something different than slow-down and quick-up.
Have a plan for each combination that could arise. It is a fair bit to think about…but you have a lot of time while trading. Placing an order takes almost no time or effort. Hitting buttons is easy. The real effort is the thinking and analysis that occurs before the trade. Once the trade is placed, you should already know what you will do in any situation. Develop your thinking and analysis skills so you can do this on the fly.
How to Day Trade the Forex Market – Active Trade Management
Trading beyond the hard right edge is an advanced form of active trade management. It is a mind frame, where you look at what has happened and come up with scenarios for exactly what you will do (exit, adjust stop loss or target, or change nothing) in various scenarios after you enter a trade. As discussed above, there are only a few things that need to consider–direction, size of moves, and speed of moves.
Here are some examples of how I use these three factors to strategize everyday trade.
- If the trend is strong and the market isn’t giving any warnings signs, I will usually let the price do whatever it wants. My target is likely to get hit, so I leave my stop loss where it is and if I get stopped out. It was worth the risk because everything is moving well.
- If the trend is very strong, I also decide before the trade if I am allowed to adjust my target or not. If I am allowed to increase my gain, where am I going to move the target to? This will be based on the length of prior price swings (we play odds/tendencies, not what we hope will happen). If I adjust my target, and then price pulls back from it, do I get out or let it make another attempt at the new target? Decide what you will do before the trade is even placed.
- Usually, I don’t adjust targets. Maybe 1 in 10 trades is worth adjusting the target for. Remember, the target is based on the lengths of prior swings seen that day, so unless there is very good reason that this particular move is likely to be much bigger than the others (a unicorn) there isn’t usually sufficient reason to adjust a target. If a target is approached, and just barely missed, I usually close the trade immediately. Never let a trade that almost hit your target turn into a loss. This is why you need to plan ahead; if you don’t, it will be very hard to hit that “close” button when profit is evaporating and you are experiencing regret/anger/fear/hope.
- Say the trend is up, and we just a had a very deep pullback, retracing all or most of the prior up wave. The trend is still technically up, but the deep pullback could be the first wave lower of a downtrend (if the price proceeds to create a lower high after..called truncation). So thinking ahead, I say to myself “The trend is still up, so I want to get long using my usual entry method, but I also know that selling pressure is present. Therefore, I will buy to capture any remaining upside momentum, but if the price shows any weakness once I am in the trade I will exit immediately.”
- Various situations call for different exits. For example, if things look pretty good, but not ideal, I will allow the price to make three attempts to move in my direction. If it moves in my direction three times but doesn’t hit my target, I look to exit.
- I may also opt to give it only two chances to go in my favor if the setup is slightly less favorable (trend not as strong). Exit after two attempts if it doesn’t hit the target.
- If the trend is likely over but you are squeezing the last bit of juice out, or if the trade is at an inflection point which could go either way, only give it one attempt. If it moves in your direction and then falters, bail immediately. It is probably a false breakout.
- If you take a trade and it immediately moves against you, there isn’t usually much you can do about that. You get stopped out. When we take a trade we need to let it make at least one attempt (or more) in our direction before bailing on it. If you find this happens to you often, you need to work on entries because something is wrong.
To day trade the forex market successfully you need to read and adjust to market conditions. You decide which direction you are going to trade, and before the trade you decide how to manage that trade. Where you entered is no longer relevant; you can’t do anything about your entry price once in a trade. You adapt to what happens after you are in the trade. Like Napoleon on the battlefield, you have calculated everything beforehand.