So what makes day trading so challenging and why do most day traders fail? Let’s find out it together and learn how to make your first steps with this trading style.
Main Features of Day Trading
This section is useful for those who are completely new to Forex and hear the term “day trading” for the first time. If you are already familiar with the concept then you can freely proceed to the next section of the article.
There are several basic trading styles on Forex. Their main difference is in the duration of the positions. I will name five main styles:
- Scalping
- High-Frequency trading
- Day trading
- Swing trading
- Position trading
Among the listed styles, daily trading is approximately in the middle considering the duration of trades. Positions are kept open for several hours and are never carried over to the next trading day.
Day traders usually use fairly short time frames - 1-hour and 4-hour. They analyze the market using the same types of charts. In addition, during day trading they have to set rather tight Stop Loss levels. This is what causes the main challenges for day traders.
Main Reasons Why Day Trades May Fail
Lack of Knowledge
Most traders lose because they come to the stock exchange following hyped bloggers or scammers who give "100% trading signals". It encourages newcomers to jump into trading without studying the technical part.
Poor Discipline
Discipline is one of the most important traits that every serious trader should have. If there is no discipline, it means that the trader will constantly suffer losses because he cannot control his emotions and trading.
Lack of Risk Management
Risk management is a must-have. If a trader trades more than 3% of his capital in one trade, and does not use stop loss or protect his capital, it is evident that he will quickly lose it.
The Desire to Make a Lot of Money Quickly
Everyone wants to earn hundreds of dollars daily, and some may even succeed. The only question is, how long will it last? Remember that realistic and achievable goals increase the chances of success many times over.
Failure to Follow a Trading Strategy
Testing different strategies and creating your system is an essential thing for every trader. If there are several of them, it will allow you to trade on the market under any conditions and economic storms. Accordingly, if you don't have a strategy, you are vulnerable.
There is No Trading Plan
Should I move the stop loss or close the trade right now, wait for a pullback, or close the current trade and roll over? The absence of a trading plan means that in stressful situations, when you need to make quick decisions that will affect the success of your trade, you do not know what to do and will make mistakes more often.
Overtrading
Trading, just like work, should be dosed. None of us works all day long, and we all need to rest, right? Constantly opening new trades increases commission costs as well as the chances that each of these trades will not be successful because it is not a cakewalk to control a dozen longs and a dozen shorts at the same time.
Treating Trading as an Easy Way to Make Money or a Hobby
Trading is a real job, and amateurs fail here. Just like working as a developer, banker, or doctor, you need to learn how to trade and devote a lot of time to it.
Why Day Trading Is So Popular
Unfortunately, most novice traders choose their strategies for the wrong reasons. They come to Forex in search of quick and easy money. With such an approach, day trading seems very attractive:
- Trading on short timeframes provides a large amount of suitable trading setups. Traders do not need to wait long to open a trade.
- They also don’t need to wait long for the outcome of their positions and potential profit, since all transactions are closed before the end of a trading day.
I am not saying that these are bad reasons for choosing a trading style. Nevertheless, before you make your final choice you should figure out the potential difficulties of day trading.
What Makes Day Trading So Challenging
The shorter your trades, the less reliable trading signals are. That is why swing trading often shows more positive outcomes than day trading. There are several main reasons for that:
- Unreliable trading signals
- Heavy trading noise
- Stop-Hunting
- Premature closure of profiting positions
- High impact of micro fundamentals
Unreliable Trading Signals
Charts with a short timeframe show higher volatility. The price fluctuates up and down, often forming unreliable trading setups. Inexperienced traders who are not familiar with false signals, such as false breakouts, open trades and see how the price suddenly changes its direction. If they didn’t use a Stop Loss for that trade they might quickly lose a significant part of their capital.
Heavy Trading Noise
There is a lot of trading noise on 1-hour and 4-hour charts. This is usually caused by the reaction of traders to upcoming and current news releases. It is important for daily traders to learn to differ important price movements from unimportant ones. Usually, this comes with practice.
Stop-Hunting
Many traders, especially beginners, set Stop Losses around major price levels. Knowing this, unreliable brokers influence the exchange rates which ends up in a price spike that knocks out all positions with a set Stop Loss. This tactic is called Stop-Hunting.
Stop-Hunting mainly influences charts with higher timeframes but the mentioned spikes often form false breakouts, forcing daily traders to open losing positions. That’s why it is crucial to choose a reliable broker that never uses the Stop-Hunting strategy.
Premature Closure of Profiting Positions
Since day traders always close all of their positions before the end of a trading day, they often miss the opportunity to earn additional income. Of course, there is a chance that a profitable transaction might become unprofitable while you’re asleep. Still, with the competent use of the Stop Loss and Take Profit levels, holding transactions for more than one day might bring you a higher income. That is why swing trading often shows higher profitability than day trading.
High Impact of Micro Fundamentals
Even small news and rumors can affect low timeframe charts. It happens as it is not the events that influence the market but the reaction of the traders to those events. So make sure to be extremely vigilant while day trading.
How to Reach Success in Day Trading
Unfortunately, there is no magic spell that can help you determine which trading signals will work out. It comes with experience. Here are some tips for becoming a successful day trader:
- Start with the theory. Learn as much as possible about day trading. Find out what techniques and tools professional day traders use.
- Even more practice. Start with demo trading. Try out as many trading signals in as many market situations as possible.
- Keep a trading journal even on demo trading. This way you can analyze which signals are more reliable and what you should look at during day trading, while not risking your money.
- Set the main price levels at higher timeframes to determine the main trend more accurately. Afterward, set the same levels on the 1-hour and 4-hour charts.
I hope this information helps you get started as a day trader. Remember that over time your skills will improve. Just keep moving towards your goal.