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10 Day Trading Strategies for Beginners
Basic Day Trading Tips
Day trading is the act of buying and selling a financial instrument within the same day or even multiple times over the course of a day. Taking advantage of small price moves can be a lucrative game—if it is played correctly. But it can be a dangerous game for newbies or anyone who doesn’t adhere to a well-thought-out strategy. What’s more, not all brokers are suited for the high volume of trades made by day traders. Some brokers, however, are designed with the day trader in mind. You can check out our list of the best brokers for day trading to see which brokers best accommodate those who would like to day trade.
Online brokers on our list, including Tradestation, TD Ameritrade, and Interactive Brokers, have professional or advanced versions of their platforms that feature real-time streaming quotes, advanced charting tools, and the ability to enter and modify complex orders in quick succession.
Let’s take a look at some general day trading principles and then move on to deciding when to buy and sell, common day trading strategies, basic charts and patterns, and how to limit losses.
- Day trading is only profitable when traders take it seriously and do their research.
- Day trading is a job, not a hobby or passing fad of a pastime. Treat it as such—be diligent, focused, objective, and detach emotions.
- Here we provide some basic tips and know-how to become a successful day trader.
Day Trading Strategies
1. Knowledge Is Power
In addition to knowledge of basic trading procedures, day traders need to keep up on the latest stock market news and events that affect stocks—the Fed’s interest rate plans, the economic outlook, etc. So do your homework. Make a wish list of stocks you’d like to trade and keep yourself informed about the selected companies and general markets. Scan business news and visit reliable financial websites.
2. Set Aside Funds
Assess how much capital you’re willing to risk on each trade. Many successful day traders risk less than 1% to 2% of their account per trade. If you have a $40,000 trading account and are willing to risk 0.5% of your capital on each trade, your maximum loss per trade is $200 (0.005 x $40,000). Set aside a surplus amount of funds you can trade with and you’re prepared to lose. Remember, it may or may not happen.
3. Set Aside Time, Too
Day trading requires your time. That’s why it’s called day trading. You’ll need to give up most of your day, in fact. Don’t consider it if you have limited time to spare. The process requires a trader to track the markets and spot opportunities, which can arise at any time during trading hours. Moving quickly is key.
4. Start Small
As a beginner, focus on a maximum of one to two stocks during a session. Tracking and finding opportunities is easier with just a few stocks.
Recently, it has become increasingly common to be able to trade fractional shares, so you can specify specific, smaller dollar amounts you wish to invest. That means if Apple shares are trading at $250 and you only want to buy $50 worth, many brokers will now let you purchase one-fifth of a share.
5. Avoid Penny Stocks
You’re probably looking for deals and low prices, but stay away from penny stocks. These stocks are often illiquid, and chances of hitting a jackpot are often bleak. Many stocks trading under $5 a share become de-listed from major stock exchanges and are only tradable over-the-counter (OTC). Unless you see a real opportunity and have done your research, stay clear of these.
6. Time Those Trades
Many orders placed by investors and traders begin to execute as soon as the markets open in the morning, which contributes to price volatility. A seasoned player may be able to recognize patterns and pick appropriately to make profits. But for newbies, it may be better just to read the market without making any moves for the first 15 to 20 minutes. The middle hours are usually less volatile, and then movement begins to pick up again toward the closing bell. Though the rush hours offer opportunities, it’s safer for beginners to avoid them at first.
7. Cut Losses With Limit Orders
Decide what type of orders you’ll use to enter and exit trades. Will you use market orders or limit orders? When you place a market order, it’s executed at the best price available at the time—thus, no price guarantee.
A limit order, meanwhile, guarantees the price but not the execution. Limit orders help you trade with more precision, wherein you set your price (not unrealistic but executable) for buying as well as selling. More sophisticated and experienced day traders may employ the use of options strategies to hedge their positions as well.
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8. Be Realistic About Profits
A strategy doesn’t need to win all the time to be profitable. Many traders only win 50% to 60% of their trades. However, they make more on their winners than they lose on their losers. Make sure the risk on each trade is limited to a specific percentage of the account, and that entry and exit methods are clearly defined and written down.
9. Stay Cool
There are times when the stock markets test your nerves. As a day trader, you need to learn to keep greed, hope, and fear at bay. Decisions should be governed by logic and not emotion.
10. Stick to the Plan
Successful traders have to move fast, but they don’t have to think fast. Why? Because they’ve developed a trading strategy in advance, along with the discipline to stick to that strategy. It is important to follow your formula closely rather than try to chase profits. Don’t let your emotions get the best of you and abandon your strategy. There’s a mantra among day traders: “Plan your trade and trade your plan.”
Before we go into some of the ins and outs of day trading, let’s look at some of the reasons why day trading can be so difficult.
What Makes Day Trading Difficult?
Day trading takes a lot of practice and know-how, and there are several factors that can make the process challenging.
First, know that you’re going up against professionals whose careers revolve around trading. These people have access to the best technology and connections in the industry, so even if they fail, they’re set up to succeed in the end. If you jump on the bandwagon, it means more profits for them.
Uncle Sam will also want a cut of your profits, no matter how slim. Remember that you’ll have to pay taxes on any short-term gains—or any investments you hold for one year or less—at the marginal rate. The one caveat is that your losses will offset any gains.
As an individual investor, you may be prone to emotional and psychological biases. Professional traders are usually able to cut these out of their trading strategies, but when it’s your own capital involved, it tends to be a different story.
Deciding What and When to Buy
Day traders try to make money by exploiting minute price movements in individual assets (stocks, currencies, futures, and options), usually leveraging large amounts of capital to do so. In deciding what to focus on—in a stock, say—a typical day trader looks for three things:
- Liquidity:Liquidity allows you to enter and exit a stock at a good price. For instance, tight spreads or the difference between the bid and ask price of a stock, and low slippage or the difference between the expected price of a trade and the actual price.
- Volatility:Volatility is simply a measure of the expected daily price range—the range in which a day trader operates. More volatility means greater profit or loss.
- Trading volume: This is a measure of how many times a stock is bought and sold in a given time period—most commonly known as the average daily trading volume. A high degree of volume indicates a lot of interest in a stock. An increase in a stock’s volume is often a harbinger of a price jump, either up or down.
Once you know what kind of stocks (or other assets) you’re looking for, you need to learn how to identify entry points—that is, at what precise moment you’re going to invest. Tools that can help you do this include:
- Real-time news services: News moves stocks, so it’s important to subscribe to services that tell you when potentially market-moving news comes out.
- ECN/Level 2 quotes: ECNs, or electronic communication networks, are computer-based systems that display the best available bid and ask quotes from multiple market participants and then automatically match and execute orders. Level 2 is a subscription-based service that provides real-time access to the Nasdaq order book composed of price quotes from market makers registering every Nasdaq-listed and OTC Bulletin Board security. Together, they can give you a sense of orders being executed in real time.
- Intraday candlestick charts:Candlesticks provide a raw analysis of price action. More on these later.
Define and write down the conditions under which you’ll enter a position. “Buy during uptrend” isn’t specific enough. Something like this is much more specific and also testable: “Buy when price breaks above the upper trendline of a triangle pattern, where the triangle was preceded by an uptrend (at least one higher swing high and higher swing low before the triangle formed) on the two-minute chart in the first two hours of the trading day.”
Once you have a specific set of entry rules, scan through more charts to see if those conditions are generated each day (assuming you want to day trade every day) and more often than not produce a price move in the anticipated direction. If so, you have a potential entry point for a strategy. You’ll then need to assess how to exit, or sell, those trades.
Deciding When to Sell
There are multiple ways to exit a winning position, including trailing stops and profit targets. Profit targets are the most common exit method, taking a profit at a pre-determined level. Some common price target strategies are:
|Scalping||Scalping is one of the most popular strategies. It involves selling almost immediately after a trade becomes profitable. The price target is whatever figure that translates into “you’ve made money on this deal.”|
|Fading||Fading involves shorting stocks after rapid moves upward. This is based on the assumption that (1) they are overbought, (2) early buyers are ready to begin taking profits and (3) existing buyers may be scared out. Although risky, this strategy can be extremely rewarding. Here, the price target is when buyers begin stepping in again.|
|Daily Pivots||This strategy involves profiting from a stock’s daily volatility. This is done by attempting to buy at the low of the day and sell at the high of the day. Here, the price target is simply at the next sign of a reversal.|
|Momentum||This strategy usually involves trading on news releases or finding strong trending moves supported by high volume. One type of momentum trader will buy on news releases and ride a trend until it exhibits signs of reversal. The other type will fade the price surge. Here, the price target is when volume begins to decrease.|
In most cases, you’ll want to exit an asset when there is decreased interest in the stock as indicated by the Level 2/ECN and volume. The profit target should also allow for more profit to be made on winning trades than is lost on losing trades. If your stop loss is $0.05 away from your entry price, your target should be more than $0.05 away.
Just like your entry point, define exactly how you will exit your trades before entering them. The exit criteria must be specific enough to be repeatable and testable.
Day Trading Charts and Patterns
To help determine the opportune moment to buy a stock (or whatever asset you’re trading), many traders utilize:
- Candlestick patterns, including engulfing candles and dojis
- Technical analysis, including trend lines and triangles
- Volume—increasing or decreasing
There are many candlestick setups a day trader can look for to find an entry point. If used properly, the doji reversal pattern (highlighted in yellow in the chart below) is one of the most reliable ones.
Typically, look for a pattern like this with several confirmations:
- First, look for a volume spike, which will show you whether traders are supporting the price at this level. Note: this can be either on the doji candle or on the candles immediately following it.
- Second, look for prior support at this price level. For example, the prior low of day (LOD) or high of day (HOD).
- Finally, look at the Level 2 situation, which will show all the open orders and order sizes.
If you follow these three steps, you can determine whether the doji is likely to produce an actual turnaround and can take a position if the conditions are favorable.
Traditional analysis of chart patterns also provides profit targets for exits. For example, the height of a triangle at the widest part is added to the breakout point of the triangle (for an upside breakout), providing a price at which to take profits.
How to Limit Losses When Day Trading
A stop-loss order is designed to limit losses on a position in a security. For long positions, a stop loss can be placed below a recent low, or for short positions, above a recent high. It can also be based on volatility. For example, if a stock price is moving about $0.05 a minute, then you may place a stop loss $0.15 away from your entry to give the price some space to fluctuate before it moves in your anticipated direction.
Define exactly how you’ll control the risk on the trades. In the case of a triangle pattern, for instance, a stop loss can be placed $0.02 below a recent swing low if buying a breakout, or $0.02 below the pattern. (The $0.02 is arbitrary; the point is simply to be specific.)
One strategy is to set two stop losses:
- A physical stop-loss order placed at a certain price level that suits your risk tolerance. Essentially, this is the most money you can stand to lose.
- A mental stop-loss set at the point where your entry criteria are violated. This means if the trade makes an unexpected turn, you’ll immediately exit your position.
However you decide to exit your trades, the exit criteria must be specific enough to be testable and repeatable. Also, it’s important to set a maximum loss per day you can afford to withstand—both financially and mentally. Whenever you hit this point, take the rest of the day off.
Stick to your plan and your perimeters. After all, tomorrow is another (trading) day.
Once you’ve defined how you enter trades and where you’ll place a stop loss, you can assess whether the potential strategy fits within your risk limit. If the strategy exposes you too much risk, you need to alter the strategy in some way to reduce the risk.
If the strategy is within your risk limit, then testing begins. Manually go through historical charts to find your entries, noting whether your stop loss or target would have been hit. Paper trade in this way for at least 50 to 100 trades, noting whether the strategy was profitable and if it meets your expectations. If it does, proceed to trading the strategy in a demo account in real time. If it’s profitable over the course of two months or more in a simulated environment, proceed with day trading the strategy with real capital. If the strategy isn’t profitable, start over.
Finally, keep in mind that if trading on margin—which means you’re borrowing your investment funds from a brokerage firm (and bear in mind that margin requirements for day trading are high)—you’re far more vulnerable to sharp price movements. Margin helps to amplify the trading results not just of profits, but of losses as well if a trade goes against you. Therefore, using stop losses is crucial when day trading on margin.
Now that you know some of the ins and outs of day trading, let’s take a brief look at some of the key strategies new day traders can use.
Basic Day Trading Strategies
Once you’ve mastered some of the techniques, developed your own personal trading styles, and determined what your end goals are, you can use a series of strategies to help you in your quest for profits.
Here are some popular techniques you can use. Although some of these have been mentioned above, they are worth going into again:
- Following the trend: Anyone who follows the trend will buy when prices are rising or short sell when they drop. This is done on the assumption that prices that have been rising or falling steadily will continue to do so.
- Contrarian investing: This strategy assumes the rise in prices will reverse and drop. The contrarian buys during the fall or short-sells during the rise, with the express expectation that the trend will change.
- Scalping: This is a style where a speculator exploits small price gaps created by the bid-ask spread. This technique normally involves entering and exiting a position quickly—within minutes or even seconds.
- Trading on news: Investors using this strategy will buy when good news is announced or short sell when there’s bad news. This can lead to greater volatility, which can lead to higher profits or losses.
Day trading is difficult to master. It requires time, skill and discipline. Many of those who try it fail, but the techniques and guidelines described above can help you create a profitable strategy. With enough practice and consistent performance evaluation, you can greatly improve your chances of beating the odds.
Tips to Improve Your Trading Mindset
Trading the financial markets can be a tough journey, especially if you constantly feel that your mental energy is depleted and that you have a difficult time to focus on the markets.
Fortunately, there is an effective way to return the excitement that trading carries along – by improving your trading mindset. In this article, we’ll take a look at what a trading mindset is all about and why it has such a large influence on your trading performance.
Are you short on time?
Here is a list of the most important points to develop a positive trading mindset:
- Develop an effective morning routine. Wake up earlier than usual. Working out or mediating early in the morning can help you to approach the market relaxed and calm.
- Never stop learning. A financial market education forms the foundation of any successful trader.
- Always have your losses under control. Develop effective risk management rules.
- Keep a trading journal. Spot common mistakes and fine-tune your trading strategy.
- Observe others. Replicate successful strategies and learn from the mistakes of other traders.
- Control your emotions. Don’t get overly emotionally attached to a trade and practice your trading discipline.
- Remember that the market is neither moral nor immoral – it’s amoral. Losses are nothing personal, and even professional traders take a hit from the market from time to time.
What is a Trading Mindset?
Markets are neither moral nor immoral – they’re amoral.
The markets have no emotions at all, so it’s completely up to the traders how they perceive the market to be. If your goal in the long run is to attain and maintain the status of a trader, it’s very important to develop a mindset that helps you observe the market from an unemotional perspective.
Your mindset will ultimately define your reactions during losing trades or large profits – will you be able to stay calm during these events and avoid reacting based on emotions?
This is what a well-rounded trading mindset is all about. A disciplined trader will never let emotions to interfere with his or her trading decisions. However, bear in mind that it takes much effort to achieve the status of a disciplined trader. You don’t become a professional overnight in any business, and trading is no different. As one famous trader said,
“… don’t be a hero. Don’t have an ego. Always question yourself and your ability. Don’t ever feel that you are very good. The second you do, you are dead.” – Paul Tudor Jones
Why is a Positive Mindset Important?
As we already said, the market has no emotions at all. All emotions come from market participants, who are still predominantly humans. This is why chart patterns and trend-following techniques work so great in trading – they rely on well-known patterns of human behaviour and take advantage of market psychology.
However, you may have heard that 90% of traders lose 90% of their trading funds within 90 days. It’s important to ask yourself what are the main psychological traits that distinguish the remaining 10% of successful traders from the majority of other market participants.
All of them humans, but a small group of traders still succeeds to significantly outperform all other traders combined. While it’s very unlikely that they have found the holy grail of trading, the truth is that one psychological trait comes very close to it – a trader’s mindset.
Watch: Traits of Top Trader
Top Tips to Improve Your Trader Mentality
If you feel that your trading mindset needs a push, follow these top tips outlined below to learn how to survive the trading game.
#1 Get in the Right Trader’s Mindset
Traders can benefit a lot from approaching the market from a calm and relaxed mentality. If you have proper risk management guidelines in place, there is no need to worry about trades at all. In the end, what can go wrong?
Even if a trade hits your stop-loss level, it’s not the end of the world. Losing trades happen all the time, and even professional traders have a winning rate closer to 50% than you might think. With a high enough reward-to-risk ratio, which is the ratio of your potential profit and potential loss on a single trade, you’ll still end up in profit even with a 50% winning rate.
A losing trade doesn’t mean anything personal. Markets go up and down all the time, and you need to have faith in your market analysis. Remember, markets don’t have emotions, and traders who avoid succumbing to their own emotions tend to significantly outperform traders who let their emotions interfere with their trading decisions.
Having a morning routine may also help a lot to approach trading relaxed. Try waking up earlier than usual, work out or meditate and sit in front of your trading desk with faith in your analysis and risk management principles.
#2 Keep Learning
Education is probably one of the most important factors that separate successful traders from unsuccessful ones.
Even if you already have the right mindset, you need to have a solid foundation of the markets to understand the reasons behind certain price-moves or market reactions. While there are many concepts in trading worth learning, your best bet would be to keep learning until you find the tools that best suit your needs and trading style.
Try to spend at least one hour before bedtime to read a trading book in order to get an insight into the practices of other successful traders. In addition, online trading courses are also a great way to increase your knowledge about the markets.
#3 Don’t Let Losses Get Out of Control
A common mistake among beginners in the market is the way they manage their losing trades. Usually, novice traders wait for a losing trade to become profitable again, as they don’t want to close the trade in loss. As you can see, emotions are again interfering with rational trading decisions which can be very costly in the long run.
The following table shows how much return a trader has to make to return to his initial balance, after losing a certain percentage of his trading account:
Amount of Balance Lost
Amount Necessary to Return to Initial Balance
If you lose 50% of your trading account, you’ll have to make a 100% return to be break-even! This can be a very tough undertaking.
Instead, try to manage losing positions like a professional trader, who are very impatient with losers. If one of their trades is slightly in minus, signalling that their trade setup isn’t playing out as expected, successful traders will close that trade and move on. They cut their losers short, and let their winners run. In the long run, this can make a real difference to your bottom line.
#4 Keep a Trading Journal and Make Regular Retrospectives
Another great way to attain a successful trader’s mindset is by keeping a trading journal. Trading journals are just like regular diaries – only that they include the trades you make. Journals consist of journal entries, which can cover anything that you think might be important about a particular trade.
Standard journal entries include the currency pair that you trade, the reasons why you got into a trade, its entry and exit levels, and additional market commentaries. Once you close your trade, develop the habit to update its journal entry by the trade’s profit or loss, and any additional comments which might give an insight into the performance of the trade.
Making regular journal retrospectives can reveal a wealth of information about your common trading patterns that lead to losing trades. Maybe the majority of your pullback trades turned into losers? Your trading journal will show that and help you to improve your trading skills.
#5 Observe the Actions of Other Successful Traders
One of the best ways to learn a skill is by observing the actions of people who have already mastered the skill. Trading is no different from any other skill, and replicating the process and work routine of other successful traders can make miracles for your trading mindset.
Finding a role model among successful traders might be difficult at best, but fortunately, there are dozens of excellent books that you can pick to get an insight into the mindset of those traders. “Trading in the Zone” by Mark Douglas is a classic that every beginner in the markets should read early in his trading journey. Another exceptional book which could help you in attaining an effective trader’s mindset is Stephen R. Covey’s “The 7 Habits of Highly Effective People.”
#6 Control Your Emotions
Emotions play a big role in trading. In an ideal world, there would be no emotions attached to the markets and all traders would analyse trade setups from a completely objective standpoint. Nevertheless, the majority of traders are still humans with emotions such as fear and greed, which more often than not interfere with a rational decision-making process.
Inevitably, there is fear involved with a losing position and greed when a position turns green. Our job as traders is to learn how to control those emotions so that we can maintain a clear picture of the market and make rational trading decisions. This is how Colm O’Shea, a trader at George Soros’ hedge fund, describes his boss’ complete absence of emotional attachment to a trade:
“I remember”, he says, “one time he had this huge Forex position. He made something like $250 million in one day. He was quoted in the financial press talking about the position. It sounded like a major strategic view he had. Then the market went the other way, and the position just disappeared. It was gone. He didn’t like the price action, so he got out. He doesn’t let his structural views on how he believes the market will play out get in the way of his trading.” – Colm O’Shea
#7 Remind Yourself that the Market Doesn’t Owe You Anything
One common mistake that many traders continuously make is overtrading the market. Especially after a trade goes wrong, some traders feel the urge to chase the market for trade opportunities, only to accumulate hefty losses by the end of the day.
This is not how the market operates.
The market doesn’t owe you anything, and it might be a wise decision to repeat this mantra every morning you wake up. Some days there are extremely lucrative trade setups, and the other days there might be nothing.
This point strongly relates to the previous point of controlling your emotions and having trading discipline. Don’t feel angry at the market once a trade turns into a loser – remember, the market has no emotions about you at all.
- How to develop the right mindset when trading?
Developing and maintaining the right trading mindset is crucial for long-term success. While it can’t come overnight, certain techniques can help to accelerate your performance.
Some of them are developing an effective morning routine, educating yourself about the markets, having losses constantly under control, keeping a trading journal and making regular retrospectives, observing and replicating the actions of other successful traders, controlling your emotions and not getting too much emotionally attached to a trade.
- How not to sabotage performance?
While there are many reasons why traders sabotage their performance, arguably the most destructive one is letting emotions to interfere with your trading decisions. Fear and greed are common emotions that many undisciplined traders have all the time while trading.
Would you let fear of losing those $1,000 of unrealised profits interfere with your analysis, or would you let the trade run until it reaches its initial profit target of $3,000? Having faith in your trading strategy and analysis is very important in maintaining a trade’s reward-to-risk ratio.
- What are some brain exercises for traders?
In my personal opinion, the best exercise you can get is both joining a community such as My Trading Skills and practicing trading on a demo account. Whether it’s a demo account or real account, the best way to gain experience and trading knowledge is by constantly following the market and questioning why a trade is performing good or bad.
Speaking about brain exercises for traders, did you know that you can even trade during weekends?
Well, not always with real money.
Simply open a chart, scroll it to some past date, and make a few paper trades to fine-tune your trading strategy. The good part about this approach is that you can cover weeks of price-data in just a few hours.
High Probability Trade Setups: 4 Methods
The Forex market is constantly offering lower and higher quality trade setups. It is our job as traders to scan, recognize, select, enter and exit the ones with the best odds and reward to risk.
The best way is via a strategy. A Forex strategy helps identify setups with a long-term edge because it allows traders to analyze the charts with a fixed process and rules. Traders can tackle the market either via a discretionary or non-discretionary system.
The discretionary method provides the advantage that traders can make a final judgment whether any one particular setup has a decent probability of succeeding. In that way, traders can choose higher quality setups and ignore lower quality setups within their strategy.
This article explains a simple tactic that helps Forex traders recognize the high probability trade setups with help from a few trading setups examples. You can also take our Trader Profile Quiz.
DECISION SPOTS AND TRIGGERS
New information is available on all currency pairs and all time frames every minute. The market is basically in a constant change and each moment offers the potential for a new setup.
Many of these moments, however, do not provide an edge to the trader. These setups do NOT offer a distinct advantage and have a low probability of success.
Setups with a high probability of success have a certain scarcity. The Forex trader must wait patiently for these setups to occur, like a tiger waiting for their prey, and then execute with discipline when the moment arrives.
But how does a trader recognize the moments of waiting and executing?
This is when introducing the concepts of decision spots and triggers are crucial!
WAITING FOR THE LINES IN THE SAND
Decision spots are important and key levels of the time frame of your choice. Identifying decision spots allows traders to ignore price action in the ‘middle of nowhere’ and wait for the price to reach the ‘lines in the sand’. This is critical because setups in the middle tend to be of lower probability and setups at key levels are of higher quality.
Using high probability forex trading strategies has enormous advantages for trading psychology. First of all, it does not cost a trader any money. Most importantly, traders do not have to worry about missing a setup, chasing a setup, entering a setup too soon, etc. It is an enormous help for remaining patient and keeping the discipline needed to succeed in trading. Plus traders can avoid revenge trading by keeping a cool mindset. Taking too many doubtful trades can easily lead to overtrading which leads to a slippery slope where a trader wants to earn back their money quickly.
WAITING FOR THE ACTION OF THE TRIGGER
The trigger is the signal of interest a trader is waiting for. The trader has been patiently waiting for the price to move to one of their decision spots. And now the price has reached it… now what? How and when to trade? This is what the trigger solves. It basically is a call for taking action.
The trigger provides confirmation on how to trade at the decision level. It provides clues whether a trader will go long or short, or in other words whether they will take the break or bounce.
DECISION SPOT VS TRIGGER
Each Forex trader can choose their own indicators, tools, patterns, trends, and support and resistance for the roles of decision spot and trigger. There is no right or wrong method and you should pick something which you like to use and that matches your trading plan and psychology.
With that said, I will now present to you my own preferences for various decision spots and triggers and it is up to you if you use the same.
For decision spots, my number one tool is the strike trigger candle and trend lines. Runners-up are support and resistance, patterns, and moving averages.
For triggers, my number one tool is the candlestick and candlestick patterns. Runners-up are fractals and trend lines.
Here is an example: price is in an uptrend but far from support. After a while, price moves back to the support trend line. The trend line is the decision spot. Price can then show 2 different reactions via candlesticks. Hence the candlestick (pattern) is the trigger:
- A pin bar at the trend line à a bounce trade
- A breakout candle through the trend line à a breakout trade (the requirement for avoiding a false breakout: a candle close to a close near the low and most of the candle through the candle)
Traders can use different tools and indicators for each of the two roles. The above is just an example but one I use often for my own trading.
The best opportunities, which we name “sweet” spots, are areas where the strong confluence of levels exists AND wide open space is present.
- Confluence zones are actually the best decision spots available because it increases the probability of a trade setup succeeding. This happens because more support or resistance is available in that decision area, which makes the decision spot more valuable compared to decision spots with no confluence (see an example of confluence in the screenshot above).
- Wide-open space is the potential movement price can make after reaching the confluence zone upon a break or bounce before hitting another decision spot. The more space the better as it allows the trader to have more options regarding exits.
Other sweet spots can be identified by using the concepts of impulse and correction. Price is always in either of the two and it depends on the strategy for which one is better for you.
For my own trading, I prefer catching the completion of a correction, the middle of an impulse and also the start of the impulse. I try to avoid trading the end of the impulse, start of the correction, and the middle of the correction.
Conclusion: I use the concepts of decision spots, triggers, confluence, and wide-open space to judge the best and highest probability setups.
Do YOU use decision spots for your trading setups?
How do YOU set up triggers?
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