Being a forex day trader can be very lucrative. The currency market is by far the most liquid and volatile market in the world and with this come various opportunities. In this article we will go over very important general day trading principles/rules and then we will see what a day trader has to recognize when specifically day trading the forex market.

The general job of a day trader is:

To control risk

One of the most important jobs as a day trader is to control your risk exposure. 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 loses. 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 traders 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.

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 do not 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!

To focus on the appropriate time frame

As a day trader your primary concern is to catch intraday swings. Your trades start and finish the same day. Your world is the day you are trading in. You do not care what will happen in the market tomorrow or the day after tomorrow. Your objective when trading is focusing on the appropriate time frame chart. My opinion is that day trading should be done on a 1, 5 or 10 minute bar chart. Remember, you are looking to capture several fast moves during the day and hence you must focus on the charts that best illustrate events as they happen in a short period of time.

However, the fact that you are day trading on a 1,5 or 10 minute bar chart does not mean you cannot use a larger time frame chart for the purpose of analysis. This however, is very subjective and depends very much on the traders strategies and methods of trading. As an example, many day traders would look at one hour bar charts in order to have a view of how the market has been behaving in the last week. Is it moving sideways (and so maybe I should only place trades between support and resistance areas)? Is it trending (and so maybe I should only be looking at placing trades in the direction of the higher time frame trend)? Are there any major support and/or resistance levels I should be aware of (areas where I should refrain from placing trades since it is uncertain how the market will react when reaching them)? Did the market brake out of a congestion area?

Again, it is very subjective. Some day traders believe that with proper larger time frame analysis they can select better their day trades. My personal opinion is that the more you analyze the more conflicts you will have and the more uncertainties will appear (especially if you are new to trading).