An Introduction to Day Trading

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Day trading is a type of short term trading that typically closes out the trade before the market closes, the trade is intra day. This type of trading was made famous by the stock traders in the US, especially around the tech wreck in 2000.
Day trading is actually used by more FX traders though than any other market traders as many trades are closed out within a few hours.
The difference is that simply the market does not close so the FX day trader tends to trade a session that suits and opens and closes multiple trades within their working shift.

Typically, day traders choose their trades as certain market conditions they watch for occur.
Channels and trends are very popular and traders watch for a break of recognisable trend lines or often when a security or currency is stuck in a trading range and they trade the tops and bottoms predicting it will stay within that range.

Many day traders try to trade many trades in a session or shift, so they reduce the pressure on any one trade, if it loses it is one of many, this reduces the pressure when placing the trade so therefore the psychology of the trade is reduced.

Day trading stocks involves closing the trades out before the market closes that day, where trading on FX means the hours are almost irrelevant, except for key times around market openings in Europe, the UK, the US and news events, at these specific times the market can move unpredictably.

Day trading is suited for individuals who can dedicate the entire day analyzing, monitoring and executing the trades of a chosen currency pair. It can include swing trading, where traders wait for changes in prices as the prices swing from new higher and lower fractals, it may include scalping where traders just try to pick off small numbers of pips on each trade at support and resistance areas. Day traders typically want to realise their profit or loss on the series of trades, close all of the trades out before they are finished for the day and then they are done, all within the same trading day or trading session. They do not want to leave trades open as this may add risk to their trading or means they cannot completely switch off at the end of their trading day.

People with normal day jobs can day trade using mobile devices or the internet at work, and many, come home and trade the evening sessions in another part of the world.
In Australia the European markets open around 4pm to 6 pm depending on daylight trading, this means that it is perfect to come home trade for a few hours have some dinner, close your trades out and then relax after 10pm with a series of winning trades under your belt. It is nice when the trades are winners, although many times they may just as likely be losing trades.

Those ‘day traders' who are not comfortable with these a trading times, are often not suited to day trading, instead, they usually take up longer term trading positions, where trades may be open for a few days and up to a week, this is where investing and trading start to blur into each other.

If you are considering becoming a day trader, ask yourself if you can keep yourself informed of economic and political news which could help you arrive at sound trading decisions. It is also important to be able to have the time to frequently watch your time charts and monitor your chosen currency pairs.

There are different types of day trading. We will discuss each of them below.

The first is trend trading, which involves consulting longer time frames so as to determine a general trend in the market. Indicators are used to help determine this trend. Upon establishing the general trend, shorter time frame charts are consulted in order to determine opportunities based on the knowledge garnered from the longer time frame charts. The use of indicators in the shorter time frame charts will provide you with an idea when you should time your entry point. The Gold line trading system from Wealth FX is a type of trend trading system.

The next type of trading approaches is countertrend trading. The difference between trend trading and countertrend trading is that once the general trend is established with the longer time frame charts, the trader searches for trades that have trends in the opposite direction. One looks for the end of a trend and enters early on as this trend goes into reverse. This has the potential for regular profits although if a trend continues for a long time this system may have a series of consecutive losses as it is trying to pick the trend ends, both top and bottom.
A good example of this is a system using the Bollinger band and the overbought oversold condition.

Breakout trading is a third type of day trading system which involves looking at the ranges that a currency pair established at particular hours of the trading day and placing one's trades on both sides for the purpose of catching breakouts in either directions. This strategy is quite effective in pairs caught in a tight range, since it is only a matter of time for them to ‘breakout'. The trader sets himself up in a position to catch the wave when it finally breaks. In this strategy, the trader tries to determine a range with a support and resistance that are holding out strongly, and then sets up entry points both below and above the breakout points. Generally, one would be targeting the same pip amounts that are making up the trading range or channel.
Breakout systems are very popular and one of the best is the Impatient Trader breakout system trading on a one minute chart. Although the Impatient Trader trading system looks for a two to one reward for the risk taken on the trades.

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