This week, Rolf sat with Moritz who has been day trading for many years.
Rolf asked Moritz the most common questions we get from new and aspiring day traders. Moritz also shares his most important day trading tips.
Below the video, you find a summary of the points we discussed.
1 Best instrument(s)
When it comes to choosing your instruments for day trading, there are two main things to look for:
The most important factor is the spread of the underlying instrument. For day trading it is essential to have the tightest spreads possible. In Forex, therefore, trading the exotic currency pairs is nearly impossible and not recommended. The spreads on exotic Forex pairs are just too high.
Because day traders only capture small trades, spreads can quickly eat up your profits, completely ruining your reward:risk ratio and turn even the best system into a losing one.
Second, day traders need to make sure that they stick to instruments that have a large enough daily range and exhibit decent volatility.
The ratio of daily range to spread is particularly important. Although some minor Forex pairs may have higher spreads compared to some major Forex pairs, the larger daily volatility can still make it profitable to trade some minors.
Thus, when choosing your day trading instruments, check for the volatility to spread ratio.
2 Best time to trade
As mentioned in the first point, day traders need volatility. To find the most amount of volatility in a reliable way is by focusing on trading the sessions open.
Especially the London and the New York open are very popular for day traders in the Forex market. Those two sessions are the most active ones and upon the open, you can usually, very reliably, find high volatility and high momentum price movements.
Day traders usually start their trading day 30 minutes prior to the open to get ready (more on that in the next point) and then trade the session for anywhere between 60 and 180 minutes after the open until the first volatility wave is declining and traders head for the lunch break.
3 How many instruments for new traders?
Moritz recommends focusing on the 28 major/minor Forex pairs. However, you don’t trade all of the 28 currency pairs at all times. Instead, before your trading session, you go through your whole list and filter out the best movers and the ones that show the best possible trading opportunities.
Usually, you then arrive at a list of around 5 – 8 Forex pairs for the given day that show promising trade setups and patterns.
Creating trading plans pre-session is one of the most important things a day trader can do to prepare for the optimal trading day.
4 Best timeframes
First, it is always recommended to establish a multi-timeframe and top-down trading approach. The higher timeframe provides the directional bias and on the lower timeframes, you time your entries.
Moritz’s strategy usually uses the 1H as a higher timeframe and then he goes as low as the 1min timeframe to find the right entry and place his trade orders. This allows you to trade with the higher timeframe direction and use tight trade orders on the lowest timeframes for the optimal reward:risk ratio and short holding time.
5 What do you look for in a broker?
The most important thing to look for in a broker is the regulation situation. Where is the broker regulated? It usually pays off to go with the biggest brokers, regulated in the strictest jurisdictions.
Second, as a day trader, low spreads are essential. Even better, go for a broker with a fixed spread model. This allows you to establish a, as close to, worry-free trading approach and not run into spread spikes.
6 Position size as a daytrader
The risk management approach of a day trader differs significantly from a swing trader. As a day trader, your percentage risk per trade should be always fixed and every trade should have the same percentage risk.
At the same time, day traders also use significantly less per trade risk than swing traders. The reason being is that day traders encounter losing streaks and drawdowns in a much shorter time. Although day trading is not necessarily less profitable than swing trading, you are going to have significantly more trades in a given day/week as a day trader and, thus, the emotional pressure can be much higher as a day trader.
Having 5 losses in a row can happen quickly as a day trader and risking 2% per trade, as swing traders do, would lead to a daily drawdown of 10%. This can easily cause emotional struggles and mess with a trader’s psychology.
Swing traders can slowly grow into their losing streaks and taking extended breaks between trades will also help swing traders manage their mental capital more effectively.
7 Is day trading more challenging emotionally?
The next logical question that arises is whether day trading then is more challenging compared to swing trading?
And, as always, the case is not as black and white and the answer is somewhere in the middle.
The advantage of being a day trader is that your trading day is very short and day traders usually don’t trade more than 3-4 hours per day at a maximum. And once they are done, they don’t have the stress of holding trades overnight and being in positions for extended periods of time. FOMO is also greatly reduced because you don’t have to wait that long for a trade.
On the other hand, you need to be able to perform at your best every single day as a day trader. Focus, emotional resilience and preparedness are key attributes of successful day traders.
In the end, there is no better or worse and each person will prefer a different trading style, based on their own personal profile and strengths.
8 Day trading with a job
Day trading while having a regular 9-5 job can be a challenge, but there are ways to make it work.
First of all, it greatly depends where you live and subsequently which session open time is available for you.
For example, a trader living in the Asian timezone may be able to trade the New York open after work. However, the trader must then still be able to focus and perform at a high level after a day of work.
A trader living in North America, especially the west coast may be able to trade the New York session before heading to work if he is ready to sacrifice a few hours of sleep.
A trader in Europe will have more difficulties since the London open will fall right in his early work day and the New York open takes place around the early afternoon. Trading the Asian session open is then the only option left. However, the Asian session may require the trader to go to bed much later and lose hours of sleep.
To see if day trading is a good fit, some aspiring traders utilize their annual holiday as an experiment. Reserve two weeks while being off work and simulate a day trading life and implement the schedule of a day trader. Within two weeks, you will get a rough idea of day trading is something you are comfortable with or whether you prefer to be a swing trader.
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