5 Steps in a Forex Day Trading Plan

5 Steps in a Forex Day Trading Plan

1. Checking the chart

Checking the chart means looking at multiple time frames, from 1 minute to 1 month. Not every time frame needs to be looked at, but with practice the charts can be examined quickly to get a sense of movement around support and resistance, focusing down to the time frame of entry which may be short in day trading. Candlestick charts are particularly useful for this.

Mountain charts are useful for Indices and Equities to get a sense of changes in direction, peaks and valleys. Line charts can be helpful in very short term trades, for example Binary Options, to show local support and resistance.

2. Having a strategy

This can be many things, including using a technical indicator or set of technical indicators to help with entry and exits, or working out the flow of the chart through big figures and thus mapping possible patterns which may play out.

Checking the chart can help make sense of moves which actually happen. Without any strategy it is still possible to trade, but because day trading markets fluctuate in retracements even within a longer term direction, there needs to be something to make sense of this movement.

The market will do what it does but with a strategy one can then say that it is not doing what is expected, or is doing what is expected at least for now. So a strategy becomes a way to gauge the market thus getting away from an idea that the strategy will work or will not work.

3. Choosing an entry

Depending on how automated the strategy is, this is to a greater or lesser degree a matter of choice. In an automated strategy, for example copy trading, this may be taken care of. Choosing an entry is potentially a psychologically difficult choice no matter what because of the tendency for the market to move against the choice once it is executed (which is not that unexpected, given the fluctuations which happen on day trading time frames).

It's a matter of doing something which one gets to know will have the opposite effect to the desired outcome. But time can be the trader's friend and a strategy can work out after a while. One of the advantages of day trading is that it at least limits a trade in terms of what an acceptable time to wait is. However there are other limiting factors such as the depth of the move against the position taken.

4. Knowing when to exit

This depends on the many factors but one thing is knowing when a trade has gone wrong, for example when support or resistance or a big figure is cut through and the pair keeps on going rather than moving back. This can be automated to an extent in that the trade triggers a hard stop-loss.

For a trade going right, continued analysis of the chart can show patterns which can have an end. At this point the trade can be exited or continued if there is an expectation that it can continue going in the direction of the trade after a pause or a retracement.

Checking the chart on multiple time frames can help show why the pair may be retracing or pausing, for example it may have hit longer term support or resistance. Again it should not be assumed that support or resistance will be respected and can even accelerate a move. But it may tend to alter the way a pair moves, making it wave around the support or resistance.

5. How long to spend on the trade

This can to some extent depend on market open and close. These pre-defined times can increase the activity of an asset traded in the market before and during open and the slow its activity after close.

It is useful to try and work out which markets tends to move which pairs most in the example of Forex trading. However the repetition effect where moves in market are later repeated in another market can be something to think about as well.

Forex pairs lose direction and structure and this kind of change in the patterns being played out can also be a sign to end things. It can be helpful to hang things around clear market events thus having to some extent a market driven strategy in addition to whichever strategy is being chosen.

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