To control risk

One of the most important jobs as a day trader is to control your risk exposure. Sure, controlling risk is a concept you must use in any type of trading, however in day trading you must look at this issue from a different angle. Since your job is to capture various price swings during the day naturally your profit objectives will be much smaller then of a swing trader (who places a single trade aiming for a much larger profit objective). So, when placing several trades during the day it can be easy to “drift” away from your pre-determined stop losses. A common (very common actually!) day traders thought is “if I extend my stop loss just a bit I hope the market will turn around”! Hope is one of the trader’s biggest enemies. These little extensions of stop losses add up and suddenly without noticing you are losing more dollars per trade than planed making your risk/reward ratio turn against you.

To be disciplined

This principle is key for any type of trading but particularly for day trading. If I had to name one single aspect of a day trader that can make him or her a winner or a loser it is discipline. You can have a so-so system but still make money if you are disciplined. However, you can have the best trading system in the world but if you are not disciplined I guarantee you will not be a successful trader. So, what is all this discipline everyone talks about when discussing trading? Very simple, it’s respecting and strictly following your trading plan, your trading system, your money management rules, and your commitment to the business. Being disciplined with regard to each and everyone of these components is essential for your success. It is so easy to deviate from your trading plan, the rules of your trading system or any of the above mentioned components, especially when day trading. Why? Two reasons. First, because the trader is trading very frequent and does not have time to cool down, think, and evaluate. Second, because reality is replaced by hope. Your trading system rules (reality) says: “get our of the trade” hope says “hang in there, maybe it will still be profitable”. Your money management rules (reality) say “risk only 2% of your account on this trade” hope says “since I lost on the last trade I will risk 4% on this next one so I can make up for the loser and also be profitable”. Your trading plan (reality) says “trade each day 4 hours, give yourself Wednesday or Thursday a vacation to rest” hope says “Since I am not doing very well now I don’t need this rest day, and I will also trade 7 hours per day to make up”. I know (not hope!) you now understand the point!

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The forex market is a 24 hour market. Never stops except on weekends. Within this 24 hour period different currencies behave in different manners. As a day trader it is very important to know the “personality” of the currency you are trading. For example, the GBP/USD is more volatile in early to mid European session then any other liquid pair. For a day trader trading in these hours it would be wise to take advantage of the price swings the GBP/USD pair offers instead of trading some other currency pair that constantly shows no movement. The USD/CAD pair is “silent” in the early to mid European session but starts to have more price movement toward the start of the US session. Every time Non Farm Payroll is released most if not all currency pairs have a very small price range up to release time. As a day trader it wouldn’t be wise to trade during these pre-announcement hours with trading strategies that are based on breakouts. It would probably be smarter to use strategies that are based on range support and resistance.

Spread and liquidity

Forex brokers don’t charge you a commission for every trade you make (at least most forex brokers). Instead, they make their profit on the bid/ask spread which is measured in pips. As a forex day trader you are aiming at capturing small price swings sometimes several time per day. Also, your profit objectives are obviously much smaller than the swing trader’s profit objectives. All this means one thing: every pip counts. You cannot afford to trade currency pairs with large spreads, if you do your profit will get eaten up to a point where you will not be trading with an adequate risk/reward ratio. Forex day trading must be done with liquid pairs. Most forex brokers will provide you with a very narrow spread for the most liquid currency pairs. As an example, many brokers are now offering a 2 pip spread for EUR/USD and USD/JPY and a 3 pip spread for USD/CHF and GBP/USD. These are the most liquid pairs and the ones a day trader should focus on.
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14 Rules of Successful Forex Trading

 By Avi Frister

 Being a successful Forex trader takes more then just having money, time and desire. The more you realize it, the better are your chances of making it big in this wonderful business. Throughout the years I learned many valuable lessons that today I apply to my Forex trading. Here are some of these lessons. I hope you don’t take them lightly, I guarantee you that these are true gems product of trial and error (something I hope to shorten for you!).

1.Your psychological state of mind is more important than your dollars. Yes, that is correct. For example, entering a trade when you know you should not enter it and ultimately losing money on it will cause you a financial loss which hurts but can be recovered in the next trade or two. However, it will also cause you a psychological loss in the form of future fear and insecurity. This, will take more than one or two trades to recover!

2.This one is simple but you would not believe how many traders do not follow it. In bear markets sell the markets that show most weakness. Don’t try to outsmart the market. If the market is telling you "I am weak" don’t argue and just follow! If the market tells you "I am strong", BUY and continue BUYING!

3.Don't ever try to pick absolute tops and bottoms. I know of traders that have an addiction with this. They always look to pick the absolute bottom or top and ride the market on the reversal. They succeed one or twice but eventually suffer a big hit. If you can't help it and you want to try and look for those huge turning points in the market at least use some sort of confirmation. Don't just guess "this is the top" or "this is the bottom".

4.Trading runs in cycles. There are good day and bad days, there are good weeks and bad weeks, there are good months and bad months. Don’t let a bad day, week, or month put you down. Learn not to measure results in the very short term. Many traders give up after having three or four bad days. Don’t! Know that its part of the business. Hang in there, manage your money well, be persistent and I promise you it will pay off!

5.Remember what type of trader you are and follow the rules of that specific method of trading. For example, if you are a day trader it would be wise to ignore the fundamental picture. It would also be wise to analyze and trade with the appropriate time frames. Also, select a broker that offers tight spreads, provides good order fills and guaranteed stop losses (all important for effective day trading). If you are a swing trader it is important you look at the much bigger picture. Sometimes fundamental market data can come in handy (although I personally prefer to look at the technical picture alone). Learn to be patient, both in terms of your profit target being reached and entering trades (for swing traders it can be weeks with no trade signals).

6.KEEP IT SIMPLE! Don't think that the more indicators and patterns you use the more profitable you will be. My trading strategies are simple BUT original. I learned through time that the true gems in the market originate from simplicity. This is an important concept, don’t dismiss it.

7.Never ever add to a losing position. I think this is one of the biggest "diseases" traders have. A stop loss is like a red light, it's not a suggestion. It tells you to get out of the market not to add more money to the trade. It simply makes me angry to see people adding money to a losing position. It has no justification except one. HOPE! They don’t say "gee, I was wrong and should have exited in my stop loss level", they say "I am correct about the direction of the market, it's just that my stop loss was placed to close to my entry. If I hang in there and add more money the trade will surely go my way and I will not only make for the loss but I will make much more since now I am adding to my position at a much better price!".

8.Be patient with your profit targets. I know it is very tempting to grab the profits in a winning position before the profit objective is reached. There is a fear the market will turn around and the trade will become a loser. Be disciplined. There is a reason your profit objective is where it is. You did your homework before entering the trade and the profit objective you decided on justifies the trade in terms of risk/reward. Frequently take profits before the profit objectives are reached will destroy your whole risk/reward ratio and will finally be the difference between success and failure.

9.95% of traders are not disciplined and that is why they do not succeed. They always know better than their system, they always know better then what the market is telling them. Be amongst the 5% disciplined traders and I guarantee you will be light years ahead of the crowd.

 10.Think, analyze, and create BEFORE the trade. During the trade only follow what you though, analyzed and created before the trade. Before you enter the trade you are cool and balanced, you are thinking logically. During the trade you are under fire since money is involved. You are under pressure. What makes you think that you can make better decisions under intense fire then when you are calm and balanced? You can't. That is why you planned the trade before hand. Follow your plan!

11.Don’t favor sides. Trading is about recognizing long and short opportunities. Many people have the problem of shorting. They have the problem of profiting when the market is going down. They are taught through life that you make money when markets go up. As a currency trader you don't care if the currency market is going up or down, if there is an opportunity to make money you take it, that’s your job.

12.Trade a method that fits your personality. If you are like me and like hearing the cash register ring often then use day trading strategies. If you don’t mind waiting for profits to accumulate over time then consider using swing trading strategies. This is very important. Trade with what best suits your character. Be true with yourself and recognize what are your needs. My need is the gratification that frequent profits provide, no matter how small. It keeps me going.

13.As forex traders we can never know what price is to "low" and what price is to "high". Don’t be afraid to join a trend. I know that psychologically this can be difficult sometimes. You are always afraid that you will be entering the trend at it's end. This rule is important but must not be followed blindly but rather smartly. Suppose you are day trading the EUR/USD. You know that the average daily range of the pair is 90 or 100 pips. If your system is telling you to go long at a point where the market has already moved 80 pips and place a profit objective of 50 pips, would that be a smart move? Obviously not.

14.Know the personality of the currency you are trading. Each currency pair has its own individual "personality". This can be in terms of volatility, spread, average daily range, liquidity, specific patterns etc. Use trading strategies that go hand in hand with the characteristics of the currency pair. That's it. Remember, 95% of traders don’t follow these rules. Be amongst the unique that do and use a good trading method/system. Your success will come faster than you think.


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