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7 Tips For Developing a Profitable Day Trading Strategy

By : Markus Heitkoetter
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Day trading is very popular these days, and many traders enter the arena of day trading without a strategy, completely unprepared. For those traders it is only a matter of time until they lose all their money.

If you want to succeed in day trading, then you MUST have a solid day trading strategy.

Here are the seven steps how to create a profitable day trading strategy:

1. Define your Day Trading Goals Before you start developing a day trading strategy you MUST define your goals. It is essential that first you define WHAT you want to accomplish, and then describe HOW to achieve your goals. Defining your day trading goals is crucial, since all other steps depend on these goals. Make sure to specify your day trading goals the SMART-Way:

S- Specific

M - Measurable

A- Attractive

R - Realistic

T - Timeframe

2. Selecting a Market

Basically you can use the following three markets for day trading:

1.) Futures

2.) Forex and

3.) Stocks

Before developing your day trading strategy you have to decide which market you want to trade, since each market has specific advantages and disadvantages, and you want to make sure that your day trading strategy is suitable for the market you selected.

3. Selecting a Timeframe

Do you want to day trade on 60min, 30min, 10min or 5min? Not every day trading strategy is suited for each timeframe. If you are day trading on a rather small timeframe (less than 15 min), then you might experience a lot of noise in the markets. This noise is caused by computerized trading, scalpers and engineered moves. Timeframes smaller than 15 min are suitable for trend-fading strategies, while timeframes larger than 15min are better suited for trend-following strategies.

4. Selecting a day trading style

Essentially there are two categories for a day trading strategy: Your trading strategy is either a trend-following strategy or a trend-fading strategy.

Trend-following means that you are trading in the direction of the market: You are buying when prices are going up and you are selling when prices are going down.

When applying a trend-fading strategy, then you are trading against the direction of the market: You sell when you think the market reaches a peak or resistance, and you buy when you think the market reaches a bottom or support.

All day trading strategies and indicators can be categorized as either trend-following or trend-fading. Make sure that you understand what the indicator is measuring before using it in your day trading strategy.

5. Defining Entry Signals

Many traders say that this is the easy part. They claim that "a monkey can enter the market. Money is made (and lost) when exiting the market".

Most indicators that you will find on the internet or in books describe when exactly you should enter a market, e.g. the Relative Strength Index (RSI): You should BUY when the RSI is below 20 and sell when the RSI is above 80.

Make sure that you understand whether the trading indicator is trend-following or trend-fading. Then you can use the basic rules of the indicator for your day trading strategy.

6. Defining Exit Signals

There are two different exit signals that you should define in your day trading strategy:

- Profit Taking Exits and

- Stop Loss Exits

Profit Taking Exits get you out of the market if prices move in your favor, and stop loss exits let you close the trade if the market moves against you.

Never enter a trade without knowing when to exit: When to exit with a profit and when to exit with a loss.

7. Evaluating Your Day Trading Strategy

Test your strategy and evaluate the result. Does the day trading strategy you just defined help you achieving your goals or not?

If it does, your job is done. If not, you can either start improving the day trading strategy, or you go back to the drawing board and start with step 2 again.

Conclusion:

Developing a day trading strategy is a systematic step-by-step process. It is not difficult, but that doesn't mean that you will find a good day trading strategy quickly.

There's a four letter word to trading success: W-O-R-K.

Follow the outline above and start creating your day trading strategy. It takes some time and probably a lot of trial and error, but once you found a good day trading strategy, you are about to make a lot of money.

About the author:
Markus Heitkoetter is a veteran trader with more than 19 years of trading experience. For more free information on day trading please visit our website http://www.free-daytrading-info.com.


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