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Home > Finance > Currency Trading > Day Trading the Forex Market Profitably - Part 2
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Day Trading the Forex Market Profitably - Part 2
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To trade volatile and liquid markets
Since your job as a day trader is to capture intraday swings it is
crucial that the market you are trading has enough movement to allow
you to do this. It is also important that the market you are trading
has enough liquidity so that order fills do not suffer from excessive
slippage. You have to select a market that its volatility is permanent
and not a temporary occurrence. Since you are basing your trading
method on catching intraday price swings you have to know that you are
trading in the right place. As a day trader volatility is your ally and
you have to know that you can count on it every single day (or at least
90% of the days). Liquid markets will provide you with good order
fills. As a day trader this is very important since you are aiming at
smaller profit objectives and hence larger slippage will eat away more
of your profits. When trading several times a day this adds up and can
be the difference between success and failure.
As a forex day trader you have to apply all the above rules and
principles plus other criteria that are unique to the forex market.
Time of day trading
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.
Spread and liquidity
Forex brokers do not 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
traders 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.
Volatility
As a day trader volatility is you friend, a friend you cannot afford to
trade without. In its basic definition, volatility is simply the amount
of price change with relation to time. Volatile currency pairs have
various price swings (price changes) during a small period of time (one
day). These price swings are what a day trader lives on. In the forex
market volatility many times comes hand in hand with liquidity. The
most liquid pairs are the ones that are the most volatile. The big 4:
EUR/USD, GBP/USD, USD/JPY and USD/CHF are the most liquid pairs that
provide the best volatility and hence opportunity for the forex day
trader. Within these four pairs, the GBP/USD is the most volatile.
Although it is not the most liquid (the EUR/USD is), but it is the most
volatility. This pair, traded with the right broker (one that provides
a 3 pip spread) can present many profitable opportunities for the
astute day trader.
In conclusion, the forex day trader has to be prepared not only with
the basic day trading rules, skills and principles. His job is to
incorporate into his trading the characteristics and uniqueness of the
forex market. Remember, every currency pair might present different
opportunities and it is your job to always focus on the ones that best
fit the purpose and objectives of day trading. I hope to have
contributed to your forex trading education and I thank you for taking
the time to read this article. |
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