Forex Day Trading

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With a Forex day trading system, a trader can determine whether or not to buy or sell a currency pair at any time he/she desires. By analyzing and speculating the various signals, a trader will interpret them and decide to execute a buy or a sell. In order to gain the best results from a Forex day trading system, we have provided a step by step explanation for developing one that can produce the most consistent profits. Every trader must acquire and follow these steps so as to form the most profitable day trading system.

Developing a profitable day trading system involves

Choosing a timeframe and market

Timeframe: A trader has multiple choices when settling on a timeframe and market. Each and every market and specified timeframe is possible to use with a day trading system. It can be a hassle and can take a while to choose amongst the 50 different futures markets and 6 top timeframes (5 min, 15 min, daily etc). Every trader naturally aims to earn big winnings and profits however it is vital to consider that along with this there is the equal chance of risk. Small timeframes such as less than 60 minutes usually accompany an average profit per trade that is rather low. However with a smaller timeframe a trader acquires more trading prospects and a less chance of risk. A beginner trader with a small trading account generally uses a small timeframe so as to prevent any risk of overtrading his/her account. Evidently on the other hand, trading on a bigger timeframe will accompany larger profits with less trading prospects. Commonly, day trading systems are used with timeframes that are daily or weekly. These timeframes work just as well as any other but a trader must be aware that they do not create as much trading action and there is a higher risk of drawdown.

It is entirely down to each trader to decide which timeframe suits them best and how much risk they are willing to take.


A trader will desire a market that is greatly liquidated so as to enter and exit a trade easily. The most advisable futures market to pick would be the electronic markets such as the e-mini S&P, Treasury Bonds and so on. It is best advised for a trader to choose an electronic market as the commissions charged are considerably low. The difference between the commissions charged with an electronic and a non-electronic market can be as high as 75%. A trader using an electronic market should anticipate paying at least half the commissions paid using non-electronic markets.

Identifying your entry rules

Identifying your entry rules means selecting out of two entry setups. One is trend-following while the other is trend-fading. There are two strategies to choose from: swing trading and trend trading. A trader will also have to understand the various indicators in his/her charting software. He/she must understand what an indicator is measuring and why he/she is using it.

Decide on your entry rule setup

Trend following

The procedure of a trader buying once prices move up and selling when prices move down.

Trend fading

The procedure when a trader recognizes a price trading at an extreme such as an upper band of a channel and the trader sells. While the price moves back to its original state, the trader will try to seize the small move.

Effectively use Indicators

  • Indicators that identify trends- i.e. Moving Averages
  • Indicators that offer a trader a trade setup for a short term swing trade.
  • Identify your exit rules.

Traders must apply the two main exit rules when developing a profitable day trading system. In order to protect his/her capital, a trader must apply Stop Loss Rules and in order to apprehend his/her profits, a trader must apply Profit Taking Rules. Both these exit rules for developing a profitable day trading system are expressed in four different ways. Some that are very recommendable and some that are not.

A fixed amount

Markets are all very different, takes this example: Crude Oil fluctuates in value at around $3000 thousand dollars a day; in comparison to GBP/EUR which fluctuates an average of 300 dollars a day per contract. Using a fixed dollar amount will not work when switching to different markets like the two stated above. This strategy for stops and profit targets is not recommended because when a trading system is being developed, the difference between each market needs to be balanced, standardized and tested on each market.

% of the current instrument’s price

More recommendable than a fixed dollar amount as you can balance, standardize and test different markets.

% of the market’s volatility

More recommendable than a fixed dollar amount as you can balance, standardize and test different markets.

A time stop

This is the exiting of a trade after a certain time frame. It is recommended because a time stop can free a trader’s capital for other existing trades, when in any case his/her trade does not move in the expected direction.

Evaluating your day trading system

A trader may feel satisfied with the trading system that has finally been developed. However is it profitable as expected? In order to answer this question, the day trading system needs to be evaluated. There are eight factors that need to be assessed before moving forward with the system:

1.Net Profit
2.Average Profit per Trade
3.Profit Factor
4.The % of Winnings
5.Number of trades per month
6.Duration of the trade
7.Maximum Drawdown
8.Number of Consecutive losses

Here is an explanation for each factor:

1. Net Profit

Every trader wants to earn continuous major profits. However during the beginning stages of developing a trading system, it is common for profits to not generate as much and there are exceeding losses. Nevertheless there is no need for a trader to feel disappointed and frustrated that the system is not working well. This is quite common and there are ways in improving the situation and making the system more profitable. The trader can either reverse his/her entry signals or when there is a loss whilst going long at a specific price level, the trader should instead go short.

2. Average Profit per Trade

Day trading involves risks as well as rewards and every trader deserves a reward for the risks taken during trading. This is why the average profit per trade is important to analyze. A trader must ensure that the amount is worthy for the day’s trading. The average profit per trade must also be greater than the trader’s slippage and commissions.

3. Profit Factor

The profit factor represents a trader’s gross profit and gross loss. It shows a trader the amount of dollars probable to winning for every dollar the trader loses. Regular trading systems have a profit factor of 1.5 and maybe more. The higher the profit factor is signifies a stronger trading system however if a profit factor is at some point higher than 3.0, the trader must be warned that he/she has over-optimised the trading system.

4. The % of Winnings

There are trading systems that achieve a winning percentage of as low as 30%. It is up the trader whether or not he/she can handle 7 losses and 3 winnings within 10 trades. Most traders will go for trading systems that provide the highest winning percentage.

5. Number of Trades per Month

Regularly, trading systems generate 2-3 trades per month. However, there are traders who find that this amount is not enough. They yearn for daily action. A trader who is impatient and desires to see and execute more trades should choose a day trading system that has a higher trading frequency.

6. Duration of a trade

Most traders suffer from frustration and terrible nerves when executing a trade. In order to prevent this, a trader must expend a short amount of time in a trade. It is advisable to traders to avoid holding any positions overnight as this can create additional trading stress.

7. Maximum Drawdown

The maximum drawdown should be calculated so as to measure how risky a trader’s trading strategies are. The maximum drawdown will indicate how much capital could be lost in any vague, unpredicted point in time. It is important that a trader considers the maximum drawdown his/her system has created so far. In order to see whether the trader can handle this drawdown and trading system, he/she must double the maximum drawback that has been created up till now.

8. Number of Consecutive losses

Traders who use money management and also suffer through consecutive losses can have a devastating impact on their trading account. The amount of consecutive losses can determine the trader’s discipline and confidence to handle the trading system. A profitable trading system often experiences 10-12 losses consecutively therefore a trader must decide whether or not he/she can handle this amount of losses.

Improving the overall trading system

There are several ways in improving a day trading system. The best advice is to test your trading system with different circumstances, for example trying out various exit methods. Instead of a fixed stop the trader could alternate to a trailing stop. Some traders only observe the net profit whereas they could also observe the maximum drawdown and the profit factor for instance. Try trading using different strategies, if that fails, try evaluating the other factors of your trades.

There are rules that a trader can set in order to avoid the losses he/she has been experiencing previously. A trader may discover that every Friday he/she suffers excessive losses as compared to the rest of the week. In order to prevent this from happening again, the trader can option for a ‘filter’. By adding a filter, the trading system can automatically avoid entering trades on Fridays (referring to the above example). There may be other factors that generate losses or days that create more profit, by using more and more filters, the trader will be able to create rules for his/her trading system to avoid or focus on certain days, hours or months in a trade. However, the advantage of producing profits and avoiding losses will come to a halt once the trading system hits reality.

We hope that by using and implementing this step by step guide in developing a profitable day trading system, you will have learnt the best possible ways of gaining great profits and avoiding losses. It is down to each trader’s styles and preferences of trading when choosing what techniques the trading system will work by. Considering all, we are sure by sticking to this guide; your day trading system will generate increased profits.