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Strategy for Trading Strong Trends in the EURUSD (Or Any Market)
This strategy works best on strong trends, but can also be used to find entries during weaker trends as well although strong trends are always the preferred environment to trade in. Used in conjunction with paying very close to the price action and strength, this strategy gets very advantageous prices and allows for large profit potential. An additional benefit is that risk can also be kept quite small.
A trend is not just a relentless move in one direction; it moves in waves, but makes overall progress in one direction. A downtrend starts with a move down, a smaller pullback and then another move lower and so on. The main waves (in this case down) are called impulse or primary waves. As long as the impulse waves are stronger than the pullbacks the trend is likely reasonably healthy.
Strength is determined by distance and speed. Figure 1 shows a strong trend. Notice the impulse waves (in this case down) cover much greater distance than the pullbacks and also have greater velocity than the pullbacks. This shows that sellers are much more interested in selling than buyers are interested in buying.
Figure 1. EURUSD 1 Minute Chart
There is a lot of information on the chart. The left side shows the strong downtrend which we want to be a part of by going short (buying puts). As we move further right on chart the pullbacks get stronger and the moves lower get smaller. This is our indication the downtrend is likely over, or that at least conditions have changed enough that we don’t want to keep taking short positions using the following strategy.
This strategy simply capitalizes the waves structure of trends, as well as slowdowns on a pullback to enter in the direction of the trend. By waiting for a slowdown during a pullback risk can be kept small and the profit maximized.
Here are the basic rules assuming a downtrend, like shown in figure 1 and 2.
- Enter only in the direction of the dominant trend
- Apply Bollinger Bands or a similar indicator to your chart (I use enveloped for a 1 minute chart as described in Forex Day Trades – Oct 7, which covers a different variation of this strategy).
- Only take trades that are near the midband of the Bollinger Bands.
- Only enter when there is a pause of three bars or more.
- The closer entry is to the top of the three bars, the lower risk, but you can enter anywhere inside the 3+ bar slowdown (for an uptrend, ideally enter near the bottom of the slowdown if possible).
- Place a stop several pips beyond the highs the slowdown (for a uptrend, stop is a few pips below lows of slowdown).
- The slowdown of the pullback should have been preceded by a sharp move lower (see figure 2 for the basic idea–for trades 3 and 4 these are still considered to be preceded by a sharp move lower).
- Take profit at approximately 1.5 or 2 times your risk, OR, base your target on the distance of average price runs, as discussed in Make a Little Money Before a lot of Money.
- If there is evidence that the trend is weakening, you can still take the trade but if the price moves in your direction and then quickly fails, get out (the fourth trade in figure 2 is an example of this).
Figure 2 shows the same downtrend we saw before. Now Bollinger Bands have been applied, as well as small boxes which mark relevant slowdowns and trade opportunities.
You enter somewhere in the slowdown box–preferably near the top (for downtrend) since the risk will be less. Place a stop just above the highs of the box. This will depend slightly on volatility and the time frame you are trading on. For 1 minute chart I place a stop about 2 pips above the slowdown. For a 5 minute chart I put the stop about 3 to 5 pips outside the slowdown.
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Figure 2. EURUSD Trades on 1 Minute Chart
This strategy does require that you adapt to changing market conditions and realize when the trend is likely over. The first two short trades would have worked out very well. Regardless if you took a profit at 2X your risk (meaning if your risk was 3 pips you take a profit at 6 pips) or held for more as the price accelerated, these trades were strong trend trades.
The third trade is a loser. We get short and very shortly after are stopped out. Notice this slowdown is only 3 bars, so it is very possible this trade would not have been taken at all. The overall trend is still possibly down though. This may just be a bigger pullback after a strong move lower. So a fourth short trade is taken. It moves onside but then fails to move lower.
Since we already know, based on the third trade, that there is some buying strength, we don’t bother to wait for our stop to get hit and bail on the fourth trade with a small profit, breakeven or small loss. Depending on the entry point is still likely possible to extract a small profit on this trade. We are aware of the possibility that the downtrend is over because the pullback was much stronger and the moves lower have lost their strength.
Once again, the fourth trade is only 3 bar slowdown, therefore it is possible that you may not have been able to take this trade at all, especially if you were waiting with an order near the top of the slowdown.
Define personal rules for yourself about how you will enter on slowdowns so there is no question in your mind on how you will handle these types of situations.
How to Read the EURUSD discusses more on managing trades while they are underway.
In hindsight it looks easy to spot these trades, but in real-time it takes a lot of practice to determine when the market is strong and when trend may be changing. Also depending on where you enter, your risk can vary quite a bit. There is a fine balance between making sure you get a position if you want one, but not getting a worse price than you need to. For exits I usually have a target set at approximately 2X my risk. I will then adjust this slightly based on daily conditions and the whether the trend seems to be weakening or strengthening.
Day Trading the EURUSD – Basics, Strategies, and Indicators
Learn how to day trade the EURUSD — including strategies, when to trade, when not to trade, how to handle news, risk management, position sizing, adapting to changing conditions, and technical indicators that may help you.
The EURUSD is where most of the forex volume happens. It typically has the tighest spread and is ideal for day trading. The GBPUSD is also good, and is my alternative if the EURUSD is not moving well.
Before we get into strategies and tools to use for day trading the EURUSD, standard risk management procedures apply. Don’t risk more than 1% of your account on a single trade. Also, day trading is not easy. There is a high failure rate, and expect to spend at least 6 to 12 months of practice (that is after you have done all your research and found a method that interests you) before you are able to implement a viable strategy profitably. It is impossible to read about a strategy and then be able to implement effectively it right away. Hence the high failure rate. Every day the market is different. No two trading days will ever be exactly alike, so once we learn a strategy we need to practice it for months before we are able to implement effectively in always-different conditions.
This article is filled with links to in-depth articles that provide more details on the concepts discussed. Consider this article a “table of contents” for starting your journey into day trading the EURUSD, where all the links are chapters warranting deeper study.
EURUSD Day Trading Basics
If you want to day trade forex, start with understanding the basics: how much capital to use, which broker to use, proper position sizing, and best times of the day to day trade.
In terms of capital, start forex day trading with $2,000 to $5,000 or more. With this amount of capital, it is possible to start building an income stream. $500 is the minimum anyone should start an account with. This won’t produce an income stream, rather you’ll need to build up the account for some time before it is worth withdrawing any of the gains.
Pick your forex broker carefully. Depositing your money with a broker is one of the biggest trades we make as traders. If they aren’t reputable, or provide poor trading conditions, that money is as good as gone. Open an account with tight spreads and low commissions; this is a requirement for day trading successfully.
Next, we need to know how to handle our position size. As mentioned above, keep the risk on each trade to 1% or less of the account balance. Position size, combined with a stop loss, is what allows us to keep our trade risk below 1%. A stop loss gets us out of a trade if it moves against us, which allows us to keep damage to our account small. These factors all work together to manage our risk, so understand them well before attempting to implement any of the day trading strategies discussed below.
Having the correct position size on a trade, to risk about 1%, requires leverage. Leverage, provided by all forex brokers, means we need less capital in our account than what is required to initiate a position/trade. Most day traders utilize between 5:1 and 10:1 leverage.
The currency market is open 24 hours a day during the week, but certain times of the day are better for day trading than others. Stick to trading the EURUSD during the London session, or during the London/US overlap period. Before London opens, and after it closes (when the overlap period ends), the movement in the EURUSD typically dies down and there are far fewer good trading opportunities.
How Forex Prices Move
No two trading days are exactly alike, yet how prices move stay the same. Prices move in only a few ways, and each day is a combination of these factors. Price moves in waves. How large and small those waves are tell us a lot about whether the price is trending, how strong that trend is, and when a trend is reversing.
Another factor we consider is how fast price waves are moving. If the EURUSD rallies 20 pips in 5 minutes that shows stronger buying interest than a 20 pip rally that takes 10 minutes. As we trade, we need to aware of our surrounding, constantly monitoring the size of the price waves, their direction, and how fast they moving.
Most of the trading strategies discussed below involve trading during trends. Therefore, to successfully implement the strategies the trader must know how to interpret the trend and make an assessment of whether it is likely to continue, reverse, or flatten out. These assessments will, in turn, tell us when we can use the strategies and when we should sit on our hands.
EURUSD Day Trading Strategies
I like to day trade the EURUSD (or GBPUSD) using a 1-minute chart. While tracking all these 1-minute price bars is a little overwhelming at the beginning, it shows greater detail of the price movements than a 5-minute chart, for example. Some people say the 1-minute chart is too busy or “volatile.” It may seem busy at first, but is it no more volatile than any other time frame. The price is moving the same amount regardless of what time frame we watch.
Watching charts can be draining, especially on the eyes. I limit day trading to 2 hours per day. If you trade for longer than two hours, take a brief break before starting to trade again. We want our mind and eyes to be sharp, not tired. A tired brain is more likely to make mistakes and lack discipline.
There are several things I look for while day trading. A strong reversal strategy provides trading opportunities, yet also alerts us when a trend is ending or a new trend is starting.
Once a trend gets going, we need to know how to take advantage of the trend. Trend trades provide roughly 60% or more of my day trades. Therefore, having a good trend strategy gives us ample trading opportunities each day for producing an income.
To get into a trade I watch the trend, and any other conditions (see linked articles) the strategy calls for. Once all those conditions are met, I then watch for a consolidation breakout or an engulfing pattern as a specific signal to enter a trade. It is not actually the consolidation breakout or engulfing pattern that is important though…it is what they represent. They represent a move back in the direction I expect the price to go. THAT is the important thing. I am not too concerned about how many bars a consolidation is, or technicalities like that. I am watching for a turn back in the direction I expect the price to go, and consolidation breakouts and engulfing patterns just happen to often show that transition.
Chart patterns are another thing I watch for. Knowing all the chart patterns is important for analysis purposes (see Forex Strategies Guide eBook), yet for day trading I like to watch for triangles and head and shoulders continuation patterns. But I don’t usually trade these in the “typical” way. Since I am mostly a trend trader, I analyze the trend and then try to get an advantageous entry point based on which direction the price is likely to go once it breaks out of the pattern.
Entering a trade is only part of the equation. As mentioned above, we also need to place a stop loss in the correct position so our risk is managed. We also need an exit strategy for when our trade produces a profit. When day trading, prices turn very quickly. Wait too long, and the profit will disappear. Take profits too soon and too much money is left uncollected. Some of the strategies linked to earlier have recommended exit points. If those work for you, great. If not, there are at least 4 viable exit methods that all day traders should know. Use the exit method that produces the best results for you.
With strategies in hand, it would seem like we are on the road to easy profits. Unfortunately, that is not the case. A baby can click buy and sell buttons. Making trades isn’t the hard part, it is determining exactly when to make them, and when not to trade. This means we must constantly analyze the price action and adapt our expectations based on how the price is moving, determining whether such movement warrants putting our capital on the line.
Trade only when the reward potential outweighs the risk, and conditions are favorable for the price moving in the anticipated direction. Based on the evidence/analysis, I only take a trade if I feel the price has at least a 60% chance of hitting my target before hitting my stop loss (and the target must be bigger than the stop loss). If I don’t feel that confident, then I don’t trade.
How to Day Trade Forex in 2 Hours or Less shows how these concepts are combined for seamless day trading, where we integrate different strategies at different times based on our moment-to-moment analysis of the EURUSD.
Finally, special circumstances call for special strategies. News is one such circumstance. Exit all trades at least 2 minutes before major scheduled news events (marked as “high impact” or red on most economic calendars). Once the high-impact news is released, there’s usually a big price move. After that occurs we can start day trading again. Utilize any of the strategies mentioned prior, or, the Non-Farm Payroll (NFP) Forex Strategy covers how to day trade around news events.
EURUSD Day Trading Tools
It isn’t always easy to spot the trend. The price may be dropping now, but looking at the bigger picture it may just be a pullback in a bigger uptrend. Most new traders are constantly questioning whether their analysis is correct. Only time reveals if your analysis is correct. Record your results, take screenshots of each trading day with your analysis and trades marked on it, and pay attention to what you do well. Focus on strategies that cater to your strengths, and work on your weaknesses by practicing to overcome them in a demo account or with very small positions/risk in a real money account.
Technical indicators may also help with analyzing the price action. Indicators are based on mathematical formulas, which make them rigid. This can be good because we know how they will behave. Once we know how an indicator behaves, it can aid us in making trading decisions. Unfortunately, most people who use indicators don’t understand them. This means they don’t know when the indicator is providing helpful or hurtful information. Indicators are not perfect. At times they may tell us it is a good time to buy, but the actual price movement is telling us to sell or exit our long positions. So there is a tradeoff in using indicators…sometimes they work well, other times they don’t. If you study an indicator you will see when it performs well. At those time, use it. You will also know when it doesn’t perform well. During those times, rely on your own analysis skills as opposed to the indicator.
I use price action only. Rarely do I use indicators.
I do use drawing tools. As I’m day trading, I mark up my charts with trendlines that highlight trends, ranges, triangles, or other chart patterns. I also draw trendlines along important highs and lows that caused the price to reverse trend. A high or low that causes a reversal could be a strong support or resistance area, which is worth paying attention to if the price nears that area again.
Source: My Forex Broker, FXopen
Monitor volatility throughout the day, and over time. During the day, make sure the price waves are large enough for us to make a good profit relative to the amount we need to risk (discussed earlier). If the price has only moved 15 pips over the last hour (during the London or US session–the only time we should be day trading the EURUSD), that isn’t a lot of movement and it is best not to trade. Assuming we need to risk at least 5 pips on a trade, we would need an absolutely flawless entry and exit to make about 10 pips. That doesn’t leave a lot of room for error considering we need to pay commissions and possibly the spread to get in and out.
So, if volatility is low during the day, I don’t trade. If the price starts moving more, then I will consider implementing one of the aforementioned strategies. This is a personal assessment. There is a no magic number that tells you when to trade or when not to trade. It depends on how much you are willing to risk, your risk/reward, your spread/commissions, and which strategies you are using.
Monitoring volatility over time lets us know what type of trading conditions we most likely to face day to day. If the EURUSD was moving 150 pips per day, on average, last month, and this month it is only moving 80 pips per day, that tells us a lot about what kind of conditions to expect. The lower the volatility, typically the fewer trades we will end up taking. Assuming we win more trades than we lose, by trading less often our profits will likely also be lower than during volatile times where there are more trading opportunities.
By monitoring volatility over time we keep our expectations in check. Sometimes the market produces big profit, and other times we need to be content with smaller profits. My big profit times typically come during volatile periods. When the EURUSD and/or GBPUSD are quiet, day trading becomes tougher. We need to be more selective about our trades. Since the price isn’t moving as much we may need to exit trades earlier than expected (our trading time is over or news comes out before our targets are reached), which reduces overall profit. It is still possible to trade profitability during low volatility times, but it helps to actually know when volatility is low. Our trading and mind frame should be more conservative during such times, and more aggressive and opportunity-seeking when there’s lots of movement and volatility.
EURUSD Day Trading Insights
Consider this article a Table of Contents for day trading the EURUSD or GBPUSD. All the links in this article provide greater detail on the points discussed. Read through the linked-articles to gain a better understanding of what it takes to day trade forex successfully. It is not easy. After reading through all the articles mentioned above, it will still take at least 6 months of practicing before consistent profits are likely. Don’t be discouraged if you don’t find success immediately. That’s normal. Keep practicing, noticing how the price moves, and how those price waves can help you determine which trades to take and which to leave alone. Practice in a demo account until you’re showing consistent profits over the course of a few months. Only then consider switching to a real money account.
Over 300 pages of Forex basics and 20+ Forex strategies for profiting in the 24-hours-a-day Forex market. This isn’t just an eBook, it’s a course to build your trading skill step by step.
How to Day Trade the Forex Market In 2 Hours or Less a Day (EURUSD or GBPUSD)
Learn to how to day trade the EURUSD in two hours or less per day. See the best times of day to trade, what time frame to us, and how to enter and exit trades. Learn how to manage risk and plan out each trade. View the examples and then start practicing the method yourself.
The following guide assumes a basic understanding of how the forex market operates. If you are new to forex, check out Introduction to Forex, which provides some background on trading currencies.
Day Trading Forex – Basic Guidelines
Most of my day trades in the forex market are based on these simple concepts. For simplicity, assume I am talking about an uptrend unless otherwise noted. The same concepts apply to downtrends.
- Trade when London and/or the US markets are open. I opt to trade from 8:30 to 10:30 AM EST (15:30 to 17:30 on my charts below), but anytime while London is open is fine. I trade for about two hours per day, that is all.
- I use a one-minute chart.
- Only trade in the direction of the trend.
- Wait for a pullback. The pullback must stall out or show signs the price is starting to move back in the trending direction before reaching a major prior swing low.
- On the pullback, the price must consolidate (move sideways)–stop falling–for at least 2 bars+ (2 one-minute bars, or more). Buy a breakout above the high price of the consolidation. This requires patience. If the price stalls and then breaks out in the opposite direction of the overall trend then there is no trade. As long as the trend is intact, continue to look for pullbacks, consolidations, and then consolidation breakouts in the trending direction.
- Stop Losses and Targets are set at the start of each day and may be slightly adjusted during the day based on expanding or contracting volatility. Measure the trending price moves between pullbacks, and then subtract several pips from the smaller ones…that is your target on each trade. The stop loss is placed just outside the consolidation on the opposite side of the breakout. In order to take a trade, the expected profit must be at least 1.5 times the risk of the trade. Determine the stop loss and target based on these methods, then see if the reward is more than 1.5x risk. If all is good then proceed. If prior trending moves show that it will be hard for the price to reach a target that is at least 1.5x risk then avoid the trade.
- Exit all position at least two minutes before major news events. For the EURUSD and GBPSUD that includes major news related to the EUR, GBP, USD, and CHF. Don’t trade until after the news is released. Cancel all pending orders before news and when you are away from your computer. Create a day trading routine to avoid mistakes.
Knowing the strategy isn’t enough, and below there are multiple examples of this strategy in action. Price is constantly moving, so we need to be able to plan our trades before and as they are forming. Before a trade is taken we also need to know what we will do once we are in the trade, depending on what the market does next.
Trading Beyond the Hard Right Edge
If you want to really learn how to day trade the forex market (or any market), master “trading beyond the hard right edge.” Most people look at what has already happened on their chart, come up with one trade idea and then pray it works out. Since we can’t see what happens next (beyond the hard right edge of our chart), inexperienced traders tend to think of scenarios they want to happen, or that they fear. Most people gravitate toward one or the other. They think about entering a trade and the price flying in their direction for an easy profit and high-fives from friends. This is fantasy. Or they enter a trade and imagine the price plummeting against them, stopping them out. This is fear. Either of these scenarios are possible, but so are a host of other possibilities, and which one is more prevalent in your mind will bias your trading.
We don’t want to be biased by one extreme view. Rather, we want to consider all possibilities: the price could drop, rally, or do nothing.
If you are very optimistic, you may miss clues that the market is turning against you. If you are very pessimistic you may avoid a good trade, or jump out of it too early. What is missing? Your strategy gets you into a trade, with an initial profit target and stop loss. Once you are in the trade though, it is a different world. All sorts of things could happen. What if the price moves in your favor slightly and then starts to move against you? What if the price moves to within 0.1 pips of your target and then reverses? What if the price does absolutely nothing after you get in…for 10 minutes? You were expecting something to happen, and now that it hasn’t what do you do?
As a day trader you need to consider the various things could happen, and what you will do in each circumstance. This may seem impossible, but it’s not. Actually, there are only a few things that could happen. The price can rise, fall, or move sideways, and it may do it quickly or slowly. The combination of the price moving higher-quickly tells us something different than higher-slowly. A quick downward movement followed by a slow upward movement tells us something different than slow-down and quick-up.
Have a plan for each combination that could arise. It is a fair bit to think about…but you have a lot of time while trading. Placing an order takes almost no time or effort. Hitting buttons is easy. The real effort is the thinking and analysis that occurs before the trade. Once the trade is placed, you should already know what you will do in any situation. Develop your thinking and analysis skills so you can do this on the fly.
How to Day Trade the Forex Market – Active Trade Management
Trading beyond the hard right edge is an advanced form of active trade management. It is a mind frame, where you look at what has happened and come up with scenarios for exactly what you will do (exit, adjust stop loss or target, or change nothing) in various scenarios after you enter a trade. As discussed above, there are only a few things need to consider–direction, size of moves, and speed of moves.
Here are some examples of how I use these three factors to strategize every day trade.
- If the trend is strong and the market isn’t giving any warnings signs, I will usually let the price do whatever it wants. My target is likely to get hit, so I leave my stop loss where it is and if I get stopped out I get stopped out. It was worth the risk because everything is moving well.
- If the trend is very strong, I also decide before the trade if I am allowed to adjust my target or not. If I am allowed to increase my gain, where am I going to move the target to? This will be based on the length of prior price swings (we play odds/tendencies, not what we hope will happen). If I adjust my target, and then price pulls back from it, do I get out or let it make another attempt at the new target? Decide what you will do before the trade is even placed.
- Usually, I don’t adjust targets. Maybe 1 in 10 trades is worth adjusting the target for. Remember, the target is based on the lengths of prior swings seen that day, so unless there is very good reason that this particular move is likely to be much bigger than the others (a unicorn) there isn’t usually sufficient reason to adjust a target. If a target is approached, and just barely missed, I usually close the trade immediately. Never let a trade that almost hit your target turn into a loss. This is why you need to plan ahead; if you don’t, it will be very hard to hit that “close” button when profit is evaporating and you are experiencing regret/anger/fear/hope.
- Say the trend is up, and we just a had a very deep pullback, retracing all or most of the prior up wave. The trend is still technically up, but the deep pullback could be the first wave lower of a downtrend (if the price proceeds to create a lower high after..called truncation). So thinking ahead, I say to myself “The trend is still up, so I want to get long using my usual entry method, but I also know that selling pressure is present. Therefore, I will buy to capture any remaining upside momentum, but if the price shows any weakness once I am in the trade I will exit immediately.”
- Various situations call for different exits. For example, if things look pretty good, but not ideal, I will allow the price to make three attempts to move in my direction. If it moves in my direction three times but doesn’t hit my target, I look to exit.
- I may also opt to give it only two chances to go in my favor if the setup is slightly less favorable (trend not as strong). Exit after two attempts if it doesn’t hit the target.
- If the trend is likely over but you are squeezing the last bit of juice out, or if the trade is at an inflection point which could go either way, only give it one attempt. If it moves in your direction and then falters, bail immediately. It is probably a false breakout.
- If you take a trade and it immediately moves against you, there isn’t usually much you can do about that. You get stopped out. When we take a trade we need to let it make at least one attempt (or more) in our direction before bailing on it. If you find this happens to you often, you need to work on entries because something is wrong.
To day trade the forex market successfully you need to read and adjust to market conditions. You decide which direction you are going to trade, and before the trade you decide how to manage that trade. Where you entered is no longer relevant; you can’t do anything about your entry price once in a trade. You adapt to what happens after you are in the trade. Like Napoleon on the battlefield, you have calculated everything beforehand.
How to Day Trade the Forex Market – Trade Examples
Here is the April 14 EURUSD 1-minute chart, along with comments below. I traded for about an hour and a half.
How to day trade the forex market – EURUSD 1 minute (click to enlarge)
This day (two hour period) was dominated by news at 830 AM EST (1530 on chart). The brown boxes mark consolidations in the price which is what we are watching for. I used a 10 pip stop loss and 18 pip profit target on this particular day.
- The first trade was the first slow down after a very strong move higher. This is one where you just look at the upside momentum and decide you need to get in, on a pullback, as soon as the price starts moving higher again. The long trade occurs as the price crosses above high of the sideways movement (high of the brown box). +18 pips.
- Trade 2. The price is still rallying, and then has a pullback (just before trade) and then pops higher again. When it pulls back again, it pauses at almost the same low, showing very little selling momentum. This one you want to give a chance to hit the target. +18 pips.
- Trade 3 and 4. Trend was up. Kept buying. Stopped out on both. Trade 3 never really moved my direction. Trade 4 did move in my direction but then reversed. Cut the losses early. -9 pips and -5.3 pips.
- Trade 5. We now have a little downtrend, but we can see the price is still respecting the 1.0655 area (horizontal line). Given the overall moves higher, going short isn’t even a consideration yet. Buy again when the price stalls at support and then moves higher. The price just about reached the target and then pulled away from it. Closed immediately. +14.9 pips.
- Trade 6. Didn’t actually take this one. But it was similar to trade 5…but with the added benefit that just before this trade the price made a short-term higher high (at 16:58 relative to the minor high at 16:42). That would have been another profitable one.
In less than two hours of trading we had 5 trades: 3 winners and 2 losers, for a total of 36.6 pips. Assume you have a $2000 account and risk 1% (can lose up to $20 on each trade). With a 10 pip stop loss you can trade 2 mini lots to stay within this risk tolerance. Therefore, your daily profit is 36.6 pips x $1 (how much a mini lot is worth per pip) x 2 (how many mini lots you are trading) = $73.2, or 3.66%. With a $10,000 account, you make $366 for two hours work. Once consistent, you can increase risk to 1.5% or 2% per trade (no need to go higher than that), pushing your revenue to $732 on a $10,000 account. That’s based on one strategy…the forex strategies guide has many more.
Here is the April 15 EURUSD 1-minute chart (I learned a new trick in MT4–if you drag an order from your account history onto the chart it will put the trade levels for that trade on your chart).
How to day trade the forex market – EURUSD (click to enlarge)
On April 14 we had lots of “clean movement”. On April 15 we had a Euro conference begin right around the time I started trading (1530 on chart) and that created some price whipsaws. Best to avoid…but as we can see I did take one trade in there…
- Based on swings prior to the first trade I opted for a 14 pip target and 8 pip stop loss.
- We can see the price moving mostly sideways but in a very jagged way. Just before the first trade the price tried to move lower, but failed. It rallied paused, and I bought when the price broke above the brown box (I manually draw these…for you…I don’t’ draw them while I am actually trading). This trade was almost 10 pips onside, and then I took a full loss on it. I make mistakes too. Given the choppy nature we were seeing, I should have bailed much earlier. The reversal was very fast, so maybe it is a flat trade, but at worst should have only been only a -5 or -6 pip loss. This is a slightly different strategy than the one discussed above–I wanted in because the price had just had a false breakout, and not necessarily because of the overall trend (like all other trades).
- Trade 2. Sharp move in our direction, little pullback to near old resistance (range top), pause, enter as price starts moving higher. Classic! +14 pips.
- Trade 3. Pretty much the same. The price is now moving a little sideways, but the price held above the prior swing low, and all the elements are there so I am triggered in. +13.6 pips (entry price had slippage slightly reducing profit on trade–target stays at originally planned level despite the slippage).
- x: I marked a box and put an x under it. This slowdown/stall is way too close to a recent high. This trend has been running up and a deeper pullback is likely.
- NFs: tried to get long twice, but to no avail. Price kept dropping. This why we wait for the price to move back in our direction. It never broke above the brown box, so no trade. By the second NF you can see my comments…I am basically saying I will only give this trade one chance to go (if it fills, which it didn’t) because by this time the price had retraced the whole last leg of the rally, indicating weakness.
- The price then lulls a little and it is almost 10:30 AM EST (1730 on chart) so that was it for the day.
Overall, in less than an hour of trading we had 3 trades: 2 winners and 1 losers, for a total of 19.6 pips (a bit higher if I don’t make that mistake on the first). Assume you have a $2000 account and risk 1% ($20 on each trade). With an 8 pip stop loss you can trade 2.5 mini lots. Therefore, your daily profit is 19.6 pips x $1 (how much a mini lot is worth per pip) x 2.5 (how many mini lots you are trading) = $49, or 2.45%. With a $10,000 account, you make $245 for an hour of work….you don’t even need to give up your day job. Once consistent, you can increase risk to 1.5% or 2%, pushing your revenue up to about $490 on a $10,000 account (for this particular day).
To learn more about how to day trade forex, including basics to get you started (order types, currency pairs to focus on, defining trends…), 20+ strategies and a plan to get you practicing and successful, check out my Forex Strategies Guide for Day and Swing Traders eBook.
Here are a few more chart examples, this time from the GBPUSD 1-minute chart.
Here is a chart from July 27. As the US session begins the price is ranging in a small band, which isn’t attractive for trading. By 16:20 (a little more than an hour after the US opens) though we have seen a strong move down, indicating the start of a downtrend. During the first two hours of that downtrend I have drawn three potential trades. These were picked because there was a pullback and a consolidation. There were other pullbacks with no consolidations, and other consolidations with no pullbacks. The three trades highlighted had both. Waves had been moving about 10-12 pips prior to our trades, so a 10 pip target is realistic, along with a 5 to 6 pips stop loss. No problem on any of the trades this day; take home 30 pips, multiplied by however many lots you are trading.
Days like the above are fairly easy. When there is a trend, we continue to trade it until there is evidence of a reversal. At that point, we wait for another signal. But not everyday has a beautiful trend. Sometimes the price action is much choppier, and if you don’t pay attention you can lose a lot of money in a hurry chasing big moves that never come. NOT TRADING WHEN CONDITIONS AREN’T RIGHT IS JUST AS IMPORTANT AS TAKING ADVANTAGE OF OPPORTUNITIES THAT DO ARISE.
The next charts shows the day prior. The London and US overlap session was a snooze, as traders awaited the Fed Interest Rate Announcement later in the day (Tip: if there is a big announcement later in the day, the morning is often fairly quiet as major institutions await the news). One thing to always note is the y-axis. On the chart above the price moves about 90 pips. On this day, the price moved about 30. So those move that look big, actually aren’t. I recommend that you always set your y-axis to about 80 or 90 pips (may change a bit over time), as this will keep movements in perspective from day to day.
Once the US session gets going, the price drops, but then bounces above where the decline began. No short. We then get no consolidations which would offer us a long trade. The price then drops below prior swing lows, negating any long trades. By this point…about 16:15 we can see that average wave is only about 4 pips. That isn’t big enough for us. We typically need at least a few pip stop loss, so if we can only expect to make a few pips, the reward:risk isn’t there.
Also, notice how a trend never really gets going. The price doesn’t move in one direction, pullback and consolidate. Rather, it reverses course abruptly (moving past a prior swing high/low), or doesn’t provide an opportunity to get in. If there is no good setup, don’t trade.
On days like the above, once you see the market isn’t moving very well, it is probably best to step away after an hour or so (especially if you know there is a major news announcement later in the day). If you sit there all day, you are going to be tempted to trade. Instead, if you sit there for an hour and the market is absolutely dead, go do something else for a few hours, and then tell yourself you can come later and see if there are any opportunities in the US session (especially if a news announcement is coming out), or just wait until the next day. If you trade during the London session, and it is dead, stop after an hour and come back and check your charts once the US session begins.
Not finding a good trading opportunity sucks, especially when you sit there all morning. But you know what sucks even more? Losing your capital on trades you know you shouldn’t be taking, which then messes with your head and reduces the capital you have to throw at good trades which may come tomorrow or the day after.
Below is another trading day example. This time, a nice strong trend is in play. On this chart, I have added in a few comments about deeper pullbacks. When you have a very strong trend with long trending waves, like in the chart below, it is reasonable to assume that some pullbacks will be more complex or deeper than others. Those deeper pullbacks are often forecast by the price moving above recent minor swing highs (downtrend, or dropping below minor swing lows in an uptrend) and the occasional weaker wave in the trending direction. These are pieces of evidence that tell us to be a bit more cautious and maybe wait for the next consolidation before trading (assuming overall trend remains intact). They don’t indicate a major reversal though. For that to happen, the price needs to fail to follow through in the trending direction, like it eventually does at the far right of the chart.
Additional Notes on Day Trading the Forex Market
I recommend using a daily stop loss and a loss from top. If you lose 3% (three trades risking 1%), stop trading. Read Day Traders: How and Why to Use a Daily Stop Loss for more details. Once you master this method, this should be a rare event. We call it “blowing up” (when you lose three trades right off the bat and have to stop trading). You should only blow up once every month or two.
On days were volatility is lower, your stop loss and target will be a bit smaller. But by continuing to risk 1% (or 1.5% or 2%), your position size will increase. If you’re well practiced you still should be able to make a good daily income, no matter if volatility contracts or expands. Be aware of super tiny stop losses though, and huge positions sizes…that can spell disaster (see Reducing the Risk of Catastrophic Trading Losses).
For day trading forex, use an ECN account with near zero spreads, and pay the small commission if you plan on day trading forex regularly. When volatility shrinks the tight spread becomes more important. When it is quieter, the spread becomes much more of an obstacle, because if it is quieter our targets are going to be smaller. Our payoff relative to the spread decreases. On really quiet days, or days where you don’t see valid trade setups, you have to be content not to trade. Save your capital for better opportunities.
When daily movement in the EURUSD is below 70 pips, day traders tend to struggle a bit more because there is less movement than when the pair is making 100+ pip moves per day. If overall volatility in the EURUSD is really, check out Find Day Trading the EURUSD Tougher Lately? for some possible solutions.
My order is poised in anticipation of a trade. Assume I want to buy. I set up a buy stop order (don’t confuse buy stop with a stop loss order–the stop loss order is attached to our buy stop order) with a 8 pip stop loss and 14 pip target (or whatever it is on that particular day). I then place it way above the current price (so it doesn’t accidentally get filled before I want it to). When a slowdown forms, I drag the order–with stop loss and target attached–down to the entry price I want (just above brown boxes on charts). That way, my order will trigger as soon as the price moves out of the brown box. If you use market orders and are even a second delayed the price could be well away from the entry point we want (not good!). You can set this up using an MT4 plugin, discussed here. If you trade with a broker that supports NinjaTrader–a great trading platform–that will also work well.
From looking at these examples, day trading may seem easy. It isn’t. It will take 6 months to a year of practicing two hours a day (including a few hours on weekends going through charts, reviewing, self-assessing and working on problem areas) before you will likely be able to trade like this consistently (see 5 Step Plan for Forex Trading Success). What you are basically doing is planning your trades before the market even moves to your entry location. You have an idea of where you want your trades to take place before the market even approaches that area. If the market doesn’t go there, you don’t trade. If the market does something unexpected, you adapt and hatch a new plan. You are always thinking ahead, strategizing exactly how will get in and out of trades (based on all the price movement evidence for, or against, your trade)…before the trade is even placed. This is mentally taxing, which is one reason I only trade two hours a day (when I day trade). It is a skill and it takes a lot of work to develop…and maintain (if you don’t trade for a while, you’ll be “rusty”).
Don’t let a losing trade or two throw you off. Focus on what is happening, plan and then jump on opportunities. Keeping the mind busy with important trading tasks will keep your sabotaging emotions at bay.
Some days you may have 8 or 9 trades. Other days only one or two. Some days your stop loss will be 20 pips and your target 35…other days your stop will be 3.5 pips and your target 6. Adapt..and have fun! That‘s how to day trade the forex market, the EURUSD, or any forex pair.
Here’s a video that provides some additional tactics you can use to find the trend and trade it.
By Cory Mitchell, CMT
To learn more about how to day trade forex, including basics to get you started (order types, currency pairs to focus on, defining trends…), 20+ strategies and a plan to get you practicing and successful, check out the Forex Strategies Guide for Day and Swing Traders 2.0 by me, Cory Mitchell, CMT.
I can’t cover everything in one article. Post your questions, as that lets me know what to focus on in future articles.
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