Day trading is a mugs game – in FOREX currency markets, traders who make day trades instead of following the long-term trends, are making a serious mistake – risk/reward is terrible by comparison.
The Internet is full of brokers and vendors encouraging traders to day trade – and offering “sure fire” day trading systems – which is no surprise, as they mostly have a vested interest – they are making more commission!
Don’t get sucked in by the hype surrounding currency day trading.
You make the big money from the big trends – it’s the big trends that yield the big profits.
There are several day trading FOREX myths, and here are the most common ones:
1. You can keep losses small
Sure you can – but on the other hand you won’t have enough winning trades to compensate for your losses, and you will end up losing in the long run – you simply won’t be in the move long enough to cover your inevitable losses.
Commissions and slippage add up in FOREX day trading, and impact on your profits and losses even further.
Lets say, you win 50% of your trades and lose the others, (a highly respectable hit rate) – this means the profits in the day are going to need to be at least 2 to 3 times as big as your losses, to make meaningful gains – and this is extremely difficult to achieve.
A long term trend following system can make money, based upon a far lower hit rate than 50 – 50, as the profits will (if the system is soundly based) be far bigger than the losses.
3. FOREX day trading systems can and do put the odds in your favour No they don’t! – The fact that people think that they can predict market movement in such a small time frame shows a lack of knowledge.
Any currency price has a basis on the following:
Supply and Demand + Human Psychology = Market Price
The supply and demand, and human psychology equation needs to be measured over the long term – and cannot be accurately predicted in short time frames such as a day.
Why? Quite simply there is not enough information to base your trading on, in short time spans.
Currency markets are all about probability, and it can be measured more accurately by looking at the long term, as there is a greater quantity of reliable data to look at.
Currencies trend longer term, and the amount of data, and reliability of trends in this period make long term trend following the way to make money, and has several advantages:
1. You have a greater quantity of reliable data, and can calculate probability better.
2. The winning trades by their nature will be far bigger than in day trading.
3. Commission and slippage will not impact as greatly on your profits.
FOREX Day Traders don’t make as much as Long Term Trend Followers
Fact is, the odds are in favour of the long term trend followers, who target the big profits from the big moves – NOT Day traders looking for profits (that by their nature tend to be small) – as the profits are being chased in a severely limited time window, which leads to losses over time and high transaction costs.