November 7, 2014

Why Is Day Trading So Hard?

I am sure that I have discussed this many times before on this blog, but after being asked this exact question by one of my readers, I promised him that I would write a new article that addresses this issue.

A lot of people are drawn to forex trading because they see this as a means of earning a lot of money, and after an initial learning period, they start to trade off the short-term charts using one or two trading strategies that they may have picked up along the way.

However the vast majority of these traders will quickly discover how hard it is to make consistent profits trading the 1-minute or 5-minute charts. So why is this?

Well for a start, if you study these short-term charts for any length of time, you will soon notice that you get a lot of seemingly random price movements for large parts of the day. This is referred to as noise, and it is this noise that is ultimately the undoing of many a short-term trader because they are constantly being stopped out all the time.

Another reason why day trading is so hard is simply because the price doesn't always move far enough in one direction to generate a decent sized profit.

Whilst you can expect the price to move as much as 100-300 points in any given direction over the course of a few days when trading off the daily chart, for example, the price moves on an intraday basis are obviously a lot smaller.

Even if you use a set of technical indicators that are all lined up and strongly indicate a move to the upside or downside, this breakout may be all over after about 15-20 points (or less), and may therefore stop short of your price target.

If you trade one of the least volatile pairs, such as the EUR/GBP pair, for instance, there are some days when even a 10-15 point move is asking a lot.

So when you factor in the spreads, which can be anywhere between 1 and 4 points, depending on which pair you trade and which broker you use, it can be difficult just to break-even in some cases, let alone make a profit.

Finally, I am writing this article just hours before the latest non-farm payrolls report, which is the one economic data release that moves the forex markets more than any other, and this is another point I want to make.

There are economic data releases scheduled pretty much every day (although Monday is often a quiet day in this respect), and these latest figures will have a direct impact on the currency pairs that they are most relevant to.

For instance, the UK GDP report will have an impact on any GBP-based currency pair, whilst any data releases coming out of the United States will directly affect the USD pairs.

So even if all of your indicators are in agreement with each other, and you take a position that subsequently moves into profit, this could quickly turn into a losing position if there is an important economic data release scheduled later that day.

Some news announcements are more important than others, so you really need to keep an eye on the calendar each day and plan your trades around these releases if you are trading the short-term charts.

On the whole, though, you are better off extending your time frames and focusing on the longer term charts, such as the 4-hour and daily charts, for example, because the trends here are a lot clearer and you can a lot less noise and the trends last a lot longer, which equates to greater profits.

If you do wish to continue trying to make money from day trading, you should at least look at the longer term charts before entering a position on the shorter term ones in order to see the bigger picture and to trade in the same directions as the long term trend.

Otherwise you might want to think about using a service such as Zulutrade because you will find some seasoned day traders on this site, all of which you can subscribe to for free and have their signals traded automatically in your own trading account.

The point is that it is definitely possible to make money from forex day trading, but it is a skill that few traders are able to master because you have so many factors working against you.

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2 Comments on Why Is Day Trading So Hard? »

November 9, 2014

aman @ 3:05 pm:

Its not possible to trade with perfect timing and need consciousness and that can only be possible with time and experience.

November 13, 2014

MartinPillar @ 10:31 am:

Sure James I agree, 1-min. charts trading is a negative sum game. Leverage and wide bid offer spreads make it impossible to make money in long term whatever your strategy is.