A good number of forex newbies I’ve talked to have shared that they’d prefer day trading or scalping when trading currencies.
And why not? Taking quick and multiple setups a day could increase the chance of winning more trades.
Trading for short periods also means that you’ll make money AND have time for other pursuits like sports, hobbies, and a SOCIAL LIFE… right?
Hate to burst your bubble, but forex trading doesn’t work that way. Taking more trades doesn’t necessarily translate to more profits.
As in archery, you don’t get points for drawing the most arrows. You get them whenever an arrow hits a target.
Trading short-term charts also doesn’t mean less time spent in pre-trading preparations.
Still, short-term trades CAN be profitable. The key is to learn the strengths and weaknesses of day trading and adjust your expectations and strategies accordingly.
If you really believe that day trading or scalping is for you, then here are five things you should consider:
A lot of traders open a small account thinking they can turn their $25 into $100,000 by closing a lot of tiny 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 why new traders fail is not because they suck, but because they are undercapitalized and don’t understand how leverage really works.
Read about leverage and margin and see if your current trading performance can sustain the costs involved in taking multiple trades in a day.
2. Transaction costs
Trading is a business and transaction costs are your cost of doing business. This includes broker spreads, commissions, and taxes. The more trades you make, the more your broker usually gets in spread and commission.
This also means that, in order to make profits, you’ll have to earn more pips than your broker charges. Think about that before you backtest systems that only yield 2-3 pips per trade.
Talk to your broker about their spread/commission terms so that you won’t be blindsided when you begin tallying your net gains/losses.
3. Market movers
Know what makes major players tick in your chosen time frame and time of the day.
4. Day trading/scalping strategies
Once you’ve identified the factors that move currencies in shorter time frames, it’s your job to find out which strategies will work best for you. Do you prefer trading breakouts from psychological levels?
5. Trading psychology
Trading shorter time frames opens a whole new can of worms in terms of trading psychology challenges. In fact, short-term traders are generally exposed to more trading stress and pressure than longer-term traders.
The pressure of quickly pricing in information, placing orders, and trading larger positions increases the possibility of making trading mistakes. Make sure your trading discipline and risk management strategies are solid before you risk real money on 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 with barely any preparation.
The lack of knowledge about how leverage works and the urgency to make money is a dangerous mix that often leads to blown accounts.
Remember that trading is a business and becoming consistently profitable takes time, effort, and patience. Once you acknowledge these, then you’ll have a better chance at surviving to trade for another day.