Lesson 1
Successfull Day Trader
Day Trading Definition
Day trading by definition means that you end each day flat, meaning you go home without any open positions at the end of the trading session.
If you are to succeed at the day trading business, you have to run it like one. At the end of the trading day you take no position home overnight. By adhering to this discipline you avoid the overnight risks.
Day trading is limited by time and the average range of the currency, but you will be in better position to control your risk and the size of your losses. This is the key part of the "traders equation".
The average size of a day trader's profit will be smaller than that of a short-term position trader because of time and range. Day traders will be stopped out much quicker than position traders due to daily market noise such as programs and announcements from brokerage firms and the companies themselves.
The most important thing you must manage as a day trader is the size of your loss. Secondly you must manage a winning trade to maximize the profit on each trade. Your motto will become "make a point - lose a quarter". And you want to do this as many times as you can.
"Day Traders Equation"
Max % of profitable trades + Max profit per trade - Small losses x Multiple trades = 's SUCCESSFUL DAY TRADER
Maximum % of Profitable Trades
Day traders in an effort to keep losses small will get stopped out often and this makes it hard to maintain a high percentage of profitable trades. Our trading plan is to select the most promising opportunities; that is the currency which is most likely to move in the direction of the trend with maximum range.
In order to accomplish this you will select from the strongest currencies that have pulled back from their swing point highs or are coming out of consolidation in the direction of the trend (sells reversed).
Maximum Profit Per Trade
The currencies we look for must have room to run which means an average daily range of two points or more. When you enter the trade a good portion of the range should be available for profit.
Most traders have a tendency to take profits prematurely as they get nervous when a currency makes its normal pull back. You haven't traded if you haven't experienced taking a quick point profit and then watched the stock run another 1-1/2 points. You probably sat there frozen, unable to pull the trigger again as the stock made new highs. Managing your trade to higher profit levels after normal pullbacks is harder than it seems.
Small Losses
This is the part of the equation where you have the most control. If you can manage your losses, the profits will have a higher likelihood of happening even with average currency selection. It takes discipline and the proper mental attitude to determine your stop levels and execute the stop as planned.
The next most important thing to keeping your losses small is you don't have to wait until your stop loss point is hit before you exit a trade. When you enter a trade the market must prove to you the trade is correct by turning profitable within a short period of time. If the currency or the market dynamics change after your entry and appear negative, just get out of your position. Don't wait for the market to collect your $300 by taking out your stop.
Lesson 2
Choosing A Time Frame
Become Obsessed with One Area of Focus.
Discipline yourself to focus.
If you are going to be a forex trader for a living, then it makes sense - with respect to your currency trading, to focus on a currency pair, a system for trading that pair, and a time frame for watching that pair. If you focus on one currency pair to start, you can become as much of an expert as possible in that one area.
Becoming obsessed with one area of focus means that you set aside time every day to test 50 historical trades. And that you only watch one currency pair to start. And that you only watch one time frame. And you become an expert in that system, on that one currency pair, in that one time frame. If you look at 1,000 trades with those parameters, you are going to become an expert.
If you become an expert, you are going to trade profitably.
Different Trends on Different Time Frames
The EUR/USD can be trending upwards on the daily chart, but on the 5 minute, it can be trending downward.
Think about it for a moment - if you have a long term, daily, dominant move upwards on the EUR/USD, it's possible that in the shorter term we could see a movement in the opposite direction. So remember, if you want to be a trend trader, you can choose to follow the trend on a variety of different time frames.
If you have a full time job, you might look at trends on the daily and weekly charts. These trends take much longer to start and finish - but they are worth a lot of pips - even more than 1,000 pips.
If you are able to trade during the day, you might look at the very short term charts. I have been testing a new trend following system that works even on the 1 minute charts.
The point is that each time frame can have its own trend.
Trend Trading Requires Courage & Money Smarts
If you want to become a trend-trader, you are going for the big moves. You are NOT going to be trying to get 10 pips on each trade.
You're going to want to get 50 to 500, and maybe even many more pips, when you are trend trading.
To do this you are going to have to commit yourself to a patient process of waiting for a trend to develop, and then to stay in your trades.