Basics of Forex: Daytrading Versus End-of-Day Trading

11/24/2009 12:01 am EST

Focus: FOREX

"Do I have to daytrade forex?" is one of the most common questions asked about trading the forex markets.

Daytrading forex is very widespread, but most people cannot commit the time to daytrading because it requires that you watch the markets on an up-to-the-minute basis.

Another approach, however, is to trade the forex on an end-of-day basis (considered as 5 pm 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 daytrading.

You will need to identify a good trading method that is specifically designed for end-of-day trading, as many of the rules governing daytrading 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 daytrading environment. (In fact, I believe you'd perform worse.)

This is due to the time pressures needed to make instant decisions on order entry and 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.

Daytraders need to make quick and (usually) smaller profits, while end-of-day traders can have the patience to take longer and make potentially larger profits.

So, don't believe that the only way to trade forex is in a daytrading environment. You can do as well (or better) trading forex on an end-of-day basis.

Fundamental Versus Technical Analysis

Once you've determined whether you want to trade as a daytrader or an end-of-day trader, the next important decision you'll be faced 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 even argue that it's too much information. The forex 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 traders tend to be "always on," or daytrading, 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," and 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.

NEXT: How to Use Technicals to Trade Forex

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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 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 when 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 overcomplicate 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 should 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.

By Bill Poulos of ProfitsRun.com

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