Forex Trading: Day-Trading vs. End-of-DayFriday, November 20, 2009 | Bill Poulos |
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A Special Note from The Tycoon Report: As a free investor-education newsletter, we continually look for opportunities to round out your education with different strategies and approaches.
Today, we are pleased to bring back Profits Run Founder Bill Poulos, who is presenting the final installment of a four-part series on getting started with forex. You can read his previous articles -- why trading forex now beats the stock market, how to find the right forex trading method and cracking the trader's code by clicking on the links provided.
In today's conclusion, Bill shares his insights on day-trading vs. end-of-day trading, and using fundamental vs. technical analysis. We hope you have enjoyed and benefited from this series.
To learn even more about forex, be sure to visit the link at the end of this article.
In my last installment, I talked about the keys to becoming an independent trader and the mistakes that most traders make that prevent them from doing so.
In the final installment of this four-part series, I want to briefly address the final two elements to trading the markets successfully: whether you should day-trade forex or not; and, the correct style of trading for most traders out there (fundamental vs. technical).
Forex Trading: Day-Trading vs. End-of-Day
“Do I have to day-trade forex?” is one of the most-common questions asked about trading the forex markets.
Day-trading forex is very widespread, but most people cannot commit the time to day-trading because it requires that you watch the markets on a to-the-minute basis.
Another approach, however, is to trade the forex on an end-of-day basis (considered as 5 p.m. Eastern time, or consistent with the close of the New York markets).
Trading on an end-of-day basis will require significantly less time, impose less stress and provide profit potential no different than day-trading.
You will need to identify a good trading method that is specifically designed for end-of-day trading, as many of the rules governing day-trading will not necessarily be applicable to end-of-day trading methods, or they will differ in unique ways.
Traders, especially those who are new to forex, should recognize that if you cannot make money trading forex on an end-of-day basis, you will not fare any better in a day-trading environment.
(In fact, I believe you’d perform worse.)
This is due to the time pressures needed to make instant decisions on order entry, immediate placement of stop orders and profit targets -- all of which are extremely stressful and demanding.
If you consider any of the six major currency pairs and look at the longer-term charts of each pair, you will clearly be able to identify long-term trends that could have generated significant profit over time.
Day-traders need to make quick and usually smaller profits; end-of-day traders can have the patience to take longer to make potentially larger profits.
So, don't believe that the only way to trade forex is in a day-trading environment. You can do as well (or better) trading forex on an end-of-day basis.
Fundamental vs. Technical Analysis
Once you’ve determined whether you want to trade as a day-trader or as an end-of-day trader, the next important decision you’ll be faced is with is determining whether to trade based on fundamental analysis or technical analysis.
Today, forex traders have a wealth of information from which to evaluate and select potential trades. (Some would argue that it's too much information.) These markets are moved by two primary forces: fundamental forces (balance of trade data, money supply, interest rates, economic and financial reports, etc.) and technical forces.
While many traders advocate fundamental analysis-based trading, it should be argued that this style of trading is very difficult especially for people who have little time to trade (less than an hour a day), or who are new to trading forex.
Fundamental analysis traders tend to be "always on" -- or, day-trading because it requires PRECISE timing to move with the markets. If you can't get to your trading platform the minute a "surprise" report hits the newswire, you'll be too far behind the action to respond to it.
That's because the markets are always taking in new financial and economic information from around the globe -- and they are continuously reacting to it to the minute.
Trading on fundamental analysis means understanding that the underlying data is NOT important -- what is important is the market's reaction to that data.
Remember that most fundamental data is "projected" -- the actual release of fundamental news only acts to confirm or change those projections. Thus, the "timing" of fundamental analysis is of greater importance and leads to shorter-term profits or loss due to the swing in market reaction.
Trading on technical analysis, however, gives you maneuverability in the markets. Technical analysis is designed to reflect fundamental analysis in the current market price -- in other words, the market is doing the fundamental work for you. What you are doing is riding a trend based on the trend meeting certain criteria (known as conditions).
Technical analysis will allow you to identify, confirm and enter a trend with enough time in the trend to generate profit potential. Technical analysis will also identify, confirm and help you exit a trend that has run its course. In both cases, the action of the price in the forex markets will dictate what moves you will make.
Thus, using a good trading method based on technical analysis is a less-demanding way to trade forex with far-greater odds of success.
Using Technical Indicators to Trade Forex
Did you know there are currently more than 100 technical indicators that you can use when trading forex?
Most charting software programs and packages available will provide all of these indicators to you -- but the most confusing question is always: Which ones should I use?
There are no magic in technical indicators in and of themselves, as they each can tell you something about the market's behavior at any given point in time.
Nor is it true that any one indicator is better than another.
What is important to using technical indicators successfully is to select only a few that complement one another and use them in an uncommon manner along with powerful trading tactics.
Most trading methods share the technical indicators they utilize for identifying potential trades -- the key to being successful with these indicators is to understand their application and their impact on trade selection.
The tendency for many amateur traders, however, is to over-complicate this process. They want to use too many indicators or patterns, and they think that success is dependent upon something being highly complex.
Nothing could be further from the truth -- in fact, simple is better:
1. Using too many or the wrong indicators is counterproductive, as the information that those indicators provide is counterintuitive and just plain misleading.
2. Using a few simple indicators in a uniquely powerful way can provide the right information necessary to make good trading decisions.
3. With the right indicators and patterns, you will be far more likely to trade with discipline because you will be able to understand an objective set of rules that the right indicators and patterns can provide.
In short, you are best keeping it simple and applying a smaller set of indicators to identify the best possible trades -- and avoid making "complexity" a qualifier for determining whether a method will work or not.
You'll likely find that the simpler the method, the more successful you'll be with it.
Good Trading,
 Bill Poulos Founder Profits Run |
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