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Saturday, October 26, 2013

Day Trading Strategies for Beginners



A forex day trader is one who buys and sells currencies multiple times during any single trading day period without leaving any overnight positions.

This means the day trader will usually trade during a single time zone. An exception is when two time zones overlap, such as what happens when the US market opens in the morning and it is still afternoon in Europe.

Day trading is not as easy as it may seem and forex beginners have to be especially careful to acquire the right skills and tools before venturing into day trading.

Market Timing

A day trader needs to be well conversant with technical and fundamental analysis to be successful.

This should be combined with money and risk management strategies to ensure long term profitability. Click here to read more on risk management.

A viable risk/reward ratio is necessary for one to enjoy long term profitability as a day trader. When using a market timing strategy, a trader needs to have high levels of discipline in order to capture the right trades at the right moment.

The day trader should be adept at following price charts and accurately reading price movements, price volumes, and price trends.

It is necessary for the trader to know all about different candlestick patterns to determine the most ideal trade entry and exit points.

As a day trader, one should know when the markets are most liquid and dynamic with the highest volumes traded.

One should also know which types of economic data have the potential to change currency prices and which time frames are most favorable for their chosen currency pairs.

Trading Price Swings

Many currencies experience erratic price movements at certain times, especially when there is a release of important economic information.

A day trader seeks to predict such movements before they happen so that he can make trades just before the price swings occur.

Trading such short term price swings is ideal for day traders and small investors because they usually do not have to compete with large investors such as banks.

Margin Trading

Day trading involves the taking advantage of small pip movements to make a profit on short term trades.

However, to gain a substantial profit on just a few pips is very hard to achieve unless you are trading a very large amount of money.

That is why most day traders trade on margin. By borrowing at high leverage levels such as 300:1, 400:1, or even 500:1, a trader controls a much larger trade and stands to benefit so much more from small pip movements.

To trade on margin, the trader needs to open a margin account and deposit money into it. The deposit amount is usually an amount pre-agreed between the trader and the broker.

Typically, no interest is charged on this margin account unless the trader does not close the position by the delivery date and it gets rolled over.

Interest may then be charged depending on the trader’s position and the underlying currencies’ short term interest rates.

To illustrate margin trading, assume a forex investor has $1,000 in his margin account and needs to trade a standard lot worth $100,000.

The margin will be 1% and the leverage will be 100:1, which means the trader will have to borrow $99,000 from the broker to complete the trade.

The broker will use the trader’s $1,000 as security and if the trader undergoes losses that reach the $1,000 mark, the broker initiates a “margin call” which closes out the position unless the trader deposits some more funds into the margin account.

If the trade closes out profitably, the trader gets to keep the profits and repays the borrowed funds without interest.

Momentum Trading

Many beginners enter the forex market with the idea that to be profitable they have to predict future prices. Actually, this is not quite right. To be profitable, a trader has to ride on the market’s price momentum.

A common axiom in technical analysis is that price may often lie, but momentum will always tell the truth.

A Moving Average Convergence Divergence (MACD) histogram is especially handy in trading on momentum in forex trading.

Other useful indicators for measuring momentum include a stochastic oscillator, Commodity Channel Index (CCI), or a Relative Strength Index (RSI).

Scalping

One of the most profitable day trading strategies is scalping. A forex trader buys a currency and holds it for a very short period of time, gaining just a few pips, before s/he sells the currency.

Forex scalping time frames usually last between one minute and 5 minutes. This process is repeated over and over again throughout the trading day.

To be profitable, the trader has to learn how to look for trade signals and accurately interpret them to know when to buy and when to sell.

Additionally, since the pip gains are usually very small, the trader has to rely on very high leverage levels to make substantial profits.

There are forex robots used for forex scalping and offer the trader a fully automated system.

The trader has to teach the robot which signals to look out for and how to react to them.

Hedging

One way to minimize losses in forex trading and ensure a gradual increase in day trading profits is by hedging.

This involves the buying of one currency pair in one trade while at the same time selling the same currency pair in another trade then dropping the loser and going with the winner.

Instead of selling the same currency pair, one may also buy a currency pair that inversely correlates with the bought currency pair.

Summary

When formulating a day trading strategy that works, most traders will find that their system will be a combination of the above day trading strategies.

One should focus more on formulating a strategy that has practical and well thought out risk management strategies which employ favorable risk/reward ratios.

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