Transcription
Rockfort Academy FOREX 101Part IV: Build Your Forex Day Trading StrategyWritten byWilliam B.Rockfort Markets
CONTENTS1. What is a forex trading strategy?2. How to create a day trading strategy in 5 steps3. Five common forex trading mistakes and howto avoid themwww.rockfortmarkets.com
About the AuthorVishal Rathod has been investing and trading for over past 10 years. He is currentlyworking as Trading Manager and Head of Technical Research at Rockfort Markets. Hehas worked for leading Equity Research firms in New Zealand and has been doingequity analysis and Technical Analysis from past 5 years. He writes weekly marketinsights and other articles for Rockfort Markets that offers insights into where themarkets are leading and how to better navigate them. Vishal holds a Masters Degree inEconomics, and MBA in Finance from Pune University. He has also done Post GraduateDiploma in Business from Unitec Institute of Technology in Auckland, New Zealand.Vishal RathodTrading Manager, Rockort Markets
Hello and welcome to the fourth section on the forex trading course.In this guide, you will learn how to build your forex trading strategy. But first, a quickrecap of what we have learned so far.Recap of previous sections: Basics of the forex market: In this section youlearned what the forex markets are all about. You nowhave an idea of how to trade forex Fundamental and technical analysis: In thissection you learned the differences between forexfundamental and technical analysis. You also learnedwhy it is important to use both when day trading 4 Forex charts: From the different ways to analyze theforex markets, here, you learned what are forex charts.You may find many different types of forex charts.This is useful because in this part, we will apply theconcepts learned.If you haven’t read the previous guides to day tradingforex, then we highly recommend you read them first.The goal of day trading is to buy and sell currency pairs.You buy when the price is low and sell when the price ishigh!This sounds simple on paper, but difficult to implement.You need to have good risk management skills to succeedin the forex market.The goal of day trading is to buy and sellcurrency pairs. You buy when the price islow and sell when the price is highwww.rockfortmarkets.com
1Fundamental AnalysisWhat is aforex tradingstrategy?
Fundamental AnalysisStrategy explained.What does day trading mean?A forex trading strategy is a plan on how you want to trade themarkets. There are many day trading strategies, and they caninclude different forms of analysis.Day trading is another word for short-term trading. You can daytrade any markets, from forex to stocks. Day traders open andclose a trade during the trading session.Most common day trading strategies include using acombination of technical indicators or trading based on newsevents.When you day trade the forex markets, you are looking atshort-term time frame. This time frame can range from the15-minute chart or lower up to the 1-hour chart.All of them qualify as a day trading strategy because the endgoal is to find profitable trading opportunities.But make no mistake, when you day trade forex, you will alsolook at the 1-day or even the 1-week time frame.A forex trading strategy is classified into swing trading strategyor day trading strategy.Day trading is used in the futures and the forex markets.A swing trading strategy requires you to be adept at daytrading. As a beginner to forex, this guide will focus on thelatter.6As a day trader, you need a good margin account. This isbecause you will be trading on leverage. Therefore, havingsufficient trading capital is important.You also need to acknowledge the fact that day tradingrequires your time. You cannot set up a trade and walk awayand expect it to make money for you.www.rockfortmarkets.com
Fundamental AnalysisTypes of day trading strategies to use in the forexmarketTraders can use a system focusing on price movements, orindicators or a combination of both. At the end, there are twomain aspects.This trading style requires minimal time to set up. Manymechanical trading systems use the breakout method. Profitsand losses are quick with the breakout trading.Price and support and resistance whichyou will find in any strategy that you pick.There are different approaches you canapply for trading forex. But all tradingstrategies can be one of the followingtypes as below.Breakout tradingThis is a forex day trading strategy thatfocuses on rapid price action movement.There is a high risk of losing when usingthis strategy.7www.rockfortmarkets.com
Fundamental AnalysisTrend tradingThe trend trading style requires a bit moretime to evolve. You may have to wait for aday or two until the right trading conditionsappear in the market.When the signal is triggered, this daytrading strategy can give you good results.Patience is very important to be a successfulday trader using trend-following strategies.In this trading style, the trend is your friend!Because the day trading opportunities are so little, you will haveto monitor multiple instruments at the same time. This can gettiresome.There will be times when you will have to sit on your hands forprolonged periods of time. This is when you may end up takingunnecessary risk.8Patience is very important to bea successful day trader usingtrend-following strategieswww.rockfortmarkets.com
Fundamental AnalysisCounter trend tradingThis is the same as trend trading except that it takes acontrarian approach. A forex day trader will be taking oppositepositions to the trend. This happens because prices can zigzag their way.Therefore, counter-trend movements or retracements are quitecommon. These counter-trend day trading strategies can berisky, but highly rewarding.There is a high risk of losing with this trading style if you arenot careful. In forex day trading, you will never know whetherthe market is reversing or continuing its trend. It is quitepossible that you may give back the profits made with countertrend trading.In counter-trend trading, you will be relying on the momentumin the forex market.This is one of the most advanced day trading strategies fromthis list. Hence, traders should be careful when trading againstthe trend.In counter-trend trading,you will be relying on themomentum in the forex market.9www.rockfortmarkets.com
Fundamental AnalysisThe table below summarizes the pros and cons of the three-day trading strategies.Trading styleProsConsBreakoutDynamic and rapid price movements canRequires good money management skills over trading canbe fun to trade, but also stressful requirebe a huge risk-prone to fake market movementslittle time for analyzing the marketsTrend FollowingCountertrend tradingYou trade in the direction of the marketNot very frequent trading opportunities you may have toconsidered a safer way to trade requiresspend a bit more time to pick the right forex pairs to tradea good knowledge about trends acrossdoes not work when the markets are choppy or movingdifferent time framessidewaysYou trade the retracements in the trendsOverall risky as prices can reverse, defying logic needscan be rewarding as profits are alsogood money management skills to limit losses difficult toquickerRequire a good knowledge aboutdistinguish between a retracement and a reversaltrends and markets in general10www.rockfortmarkets.com
2Fundamental AnalysisHow to createa day tradingstrategy in5 steps
Fundamental AnalysisLet’s now get into the technicalities of creating your firsttrading strategy.While you can use a commonly available method, you willeventually tweak it to your liking.Because there are many day trading strategies, it is importantto recognize your trading style.Therefore, if you can understand your personality, you willbe better at picking a trading system that you are morecomfortable with.Some forex traders are patient, while others prefer quickresults. Hence, a forex method that works for one trader willnot work for the other.This is a common trap that many forex traders fall into to. Tohelp you avoid this, follow the five steps to creating a forex daytrading system.#1. Understand your character Are you an impatient person in general? Do you like to get things done quickly? Do you hate waiting?If you fall into such a category, then you should focus on daytrading strategies that can complement your personality. Aforex day trading system is highly personal.12#2. Do you have the time?The amount of time you can dedicate to forex trading willinfluence the strategy you want to use. Some require a lot oftime, while others not so much.If you have a day job, then carefully pick a day trading methodthat can fit in with your lifestyle. If you do not have the time totrade forex, you could look at spending time on the weekends.This is when the markets are closed. It will help you to identifypotential trade set ups you can use over the week. In somecases, a forex day trading system may require you to monitoryour trades throughout the day.Try to avoid such methods for obvious reasons.www.rockfortmarkets.com
Fundamental Analysis#3. Do you have sufficient capital to trade?#4. What is your risk tolerance?There are some forex day traders who target just a few pips.Traders react differently when they lose money.The way these forex traders make money is by trading biggerlots. This means you need to have a larger trading capital, andperhaps higher leverage too.Knowing how much loss you can take is important. If youget upset on too many losing trades, then you will have toconsider a different day trading style.It is pointless to use a day trading method targeting just 5 pips,by trading with a micro-lot.May forex day traders think of making money by trading withjust 100. This is not enough to get you very far. Even if you usehigh leverage, it won’t help because your risks also grow withthis.Retail investor accounts lose money very easily. To avoid this,you should first practice forex day trading on a demo account.You can then gradually move toward using a micro-tradingaccount or a cent-account.This way, you can gain familiarity with the type of strategy youwill be using to day trade.13www.rockfortmarkets.com
Fundamental AnalysisTrading psychology is an important aspect of the forex market.We cover this in detail in the next part of this trading guide.Risk tolerance is all about understanding that you can losemoney when trading. Therefore, it is recommended that youtrade with capital that you can afford to lose. Different forexday trading methods have different risk tolerances.While having a trading system is good, there are still areaswhere traders can fall into a trap. In this part of this guide, wewill look at some commonly made mistakes when tradingforex.Identifying this early on can help you keep your losses to aminimum.#5. Do you understand the indicators used?Day traders can randomly pick one of the many forex tradingstrategies available publicly.Each of these trading strategies uses different indicators. Thereare some trading systems using price movements too.Knowing what is in your trading system is important.This will help you to understand the strengths and weaknessesin your trading strategy. Also spend time to read about theindicators used in your forex day trading system.14www.rockfortmarkets.com
3Fundamental AnalysisFive commonforex tradingmistakes and howto avoid them
Fundamental AnalysisLearn how you can avoid these mistakes.Mistake #1: Not having a trading planIf you don’t have a trading plan, you are bound to lose.Using stop loss is good, but you also need to give your tradesome breathing space.Professional traders use a trading plan to help them staygrounded. You can read more about the importance of atrading plan in forex day trading.Find a balance within your risk management to ensure thatyour trades can move around a bit without impacting your PnLtoo much.A trading plan helps you to manage the risk of losing moneywhen trading. This is a good practice to maintain right fromthe start.The stop loss levels can also vary depending on the time ofthe day. During the U.S. session, you may see higher volatilitycompared to the Asian session. This can also increase withhigh-impact news events like an interest rate decision.Developing this habit also helps you to control your emotionsespecially when you hit a string of losing trades.Mistake #2: Using tight stop lossHave you noticed how often your trades get stopped out? Doyou notice that right after being stopped out, price moves inthe opposite direction?16What the trader is left with is a losing trade that could havebeen profitable.Avoid using tight stop loss, depending on the market context.This will help to ensure that your trades have a better chanceof turning a profit.Mistake #3: Using too much of technical analysisTraders already know that there are different approaches totechnical analysis. You do not have to use all of them. Veryoften, traders end up using too many indicators or chartpatterns.www.rockfortmarkets.com
Fundamental AnalysisWhat happens, in the end, is a cluttered trading system.Traders can barely see what price is doing when using suchstrategies. Another downside of analyzing the markets toomuch is that you will end up confused.Avoid analysis paralysis by sticking to just a few methods ofanalysis. This is more than sufficient especially if you can befamiliar with these types of analyses.But remember that no matter how thorough you are, there aretimes such as when trading news events. During such periods,market volatility picks up. All the hard work you put in can beinvalidated in a jiffy!you are not familiar with, you can start to lose money.To avoid this, day traders should take time to understand themarket they want to trade. If it is the EUR/USD for example,learn the fundamentals. Figure out what affects the currencypair, and the price moves it makes.Things like interest rate decisions can make this currency pairvolatile in the short term, but not so much in the long term.Mistake #5: Maintain a good risk/reward ratioon your tradesTraders should hence be careful especially with trades aroundhigh-impact news releases.Mistake #4: Not knowing what market you tradeEven though you are trading in the foreign exchange markets,not every currency pair is the same. Different forex pairs havedifferent attributes. Some are volatile than others.The three-line break chart is anotherprice only chart, where the time(x-axis) is not considered.Therefore, when you blindly apply a strategy to a market that17www.rockfortmarkets.com
Fundamental AnalysisSometimes you will come across trading opportunities thatlook nice. But they have a bad reward ratio. Traders whoignore this rule are at a higher risk of losing money.A good risk to reward ratio is important to help you makemoney in forex consistently. This is crucial because even with abad trading system, you can still make money.The trick with this method is to find a balance between yourtrading system, risk management, and the market itself.It will take years for you to master this, but with enoughpractice, you can get there eventually.18www.rockfortmarkets.com
Have any questions?We’re here to help.EMAILCALL USCHATReady to start trading?Join the fast growing Rockfort community with traders numbering over1000OPEN AN ACCOUNT23TRY FREE DEMOwww.rockfortmarkets.com
Disclaimer: The information provided is of a general nature and is not intended to be personalised financial advice. The information provided is not intended to bea substitute for professional advice. You may seek appropriate personalised financial advice from a qualified professional to suit your individual circumstances.Reproduction or redistribution of this information is not permitted.Trading in Rockfort Markets derivative products may not be suitable for everyone as derivative products are high risk. Please ensure that you understand therisks involved. A Product Disclosure Statement can be obtained here and should be considered before trading with us.Rockfort Markets we are committed to your privacy, see our privacy policy for details. If we have not met your expectations and you wish to make a complaint,Rockfort Markets should be your first point of contact. Please refer to our complaints process for details.Rockfort Markets is also a member of an independent dispute resolution scheme. If a satisfactory outcome cannot be achieved, you may refer your complaintto Financial Services Complaints Limited (“FSCL”), an approved dispute resolution scheme under the Financial Service Providers (Registration and DisputeResolution) Act 2008. Our participant details can be found at http://www.fscl.org.nz/ and our membership number is 6397. FSCL will not charge a fee to anycomplainant to investigate or resolve a complaint. Their contact details are: Financial Services Complaints Ltd, PO Box 5967, Wellington 6145 New Zealand.Telephone: 64 4 472 3725, Freephone: 0800 347 257, Email: complaints@fscl.org.nz, Website: http://www.fscl.org.nz/Rockfort Markets Ltd is a company registered in New Zealand (NZBN 9429042010807) located at Level 2, 22 Fanshawe Street, Auckland Central, Auckland 1010;PO Box 5382, Victoria Street West, Auckland. Rockfort Markets Ltd is a registered Financial Service Provider (FSP509766) and holds a Derivative Issuer Licenceissued by the Financial Markets Authority.
Some forex traders are patient, while others prefer quick results. Hence, a forex method that works for one trader will not work for the other. This is a common trap that many forex traders fall into to. To help you avoid this, follow the five steps to creating a forex day trading system. #1. Understand your character
