Top 3 Reasons Why You Should NOT Daytrade Forex

Top 3 Reasons Why You Should NOT Daytrade Forex -

In the Foreign Exchange market, day trading forex is referred to as scalping, which is when you attempt to earn small gains over the course of the day through several trades with high leverage. Some people attempt to distinguish day trading from scalping, but really scalping is just a form of day trading.

Here are the top 3 reasons why you shouldn't daytrade forex, and why attempting to do so will only result in huge losses. The following reasons are also why some forex traders refer to longer time-frames as the "Holy Grail" of trading the forex market.

Related: Stocks vs Forex: Why Trade Forex?

Reason 1: Forex Daily Trends are Less Predictable

A common question asked from beginning forex traders is: "Why does the market always go against me as soon as I enter a trade?"

The primary reason why is because daily trends are less predictable. In fact, trying to ride the daily trends is almost impossible with regular success. The market trends are just not regular on a intraday basis, which is why attempting to predict daily trends typically just results in losses.

Alternatively, on a weekly basis, the trends are much more regular and it is fairly easy to follow a trend for a few days in order to earn 100 to 200 pips. If trading 100,000 units on the EUR/USD pair (requiring $2,000 margin), that could be gains of $1,000 to $2,000 in only a week.

If you set your candlestick chart to 1 day candlesticks, then you will see some nice waves running for several weeks or even months. This is a graph of the GBP/NZD currency pair:

Long-term successful forex traders will swing trade these larger waves, setting a stop to something like -100 pips depending on the currency pair's average daily volatility, and earn several hundred pips over the course of a week or two (or month).

Some of these long-term forex traders may wait for their trailing-stop to exit the trade for them, letting their profitable trade continue to run, while others may set a take-profit level of 100, 200, or 300 pips.

There are pros and cons to using a take-profit vs a trailing-stop when trading long-term.

The benefit of using a take-profit order is that if the market goes 150 pips in your favor when you set it to 100 pips, then you are guaranteed to get that 100 pips. However, if you use a trailing-stop of 100 pips and the market goes 150 pips in your favor before reversing by -100, then you only end up earning 50 pips in the process.

However, many long-term forex traders prefer stop-orders because they don't want to exit at 100 pips and potentially miss out on a move of 300 or 400 pips.

Granted, even 50 pips on a regular basis is amazing. Stock investors hope for only a 10% gain per YEAR, whereas a regular 50 pip gain can translate into a 30% to 40% gain per MONTH depending on how much of your account you are trading with per trade.

Reason 2: Forex Daily Volatility is Typically Low

"Why does the market always go against me as soon as I enter a trade?"

Another reason why day traders find that trades go against them as soon as they take a position is because minute-to-minute volatility is typically low in the forex market, with movements barely exceeding the spread.

This means that the moment you realize the trend has changed (and you take a position) by the time you enter the trade you will find yourself at the top or bottom of the trend as it reverses again.

Oftentimes, the greatest volatility in the daily forex market happens in a short period of time, called breakouts. Many forex daytraders claim to only trade these breakouts. However, the few people who claim to trade these breakouts aren't even correct a lot of the time.

To them, if they can achieve a 60% success rate, then they think they have a successful strategy. They claim that they can win as long as their winning trades exceed their losses – success rate doesn't matter.

However, the problem with this type of trading is that people psychologically have an extremely difficult time accepting losses while simultaneously they tend to be risk adverse with profits. Therefore, almost all traders end up letting their losing trades run, while they cut their winning trades short.

In contrast, long-term traders are achieving almost a 100% success rate on trades due to the reliability and predictability of larger trends. My personal "win ratio" since I started trading long-term is about 91%, and my wins are always significantly greater than my losses because these mega-trends last for months.

When I enter into a long-term trade, I have some initial risk based on my stop-loss; however, after my trade is 100+ pips in the profit, I can move my stop-loss to breakeven (or use a trailing-stop) and the trade becomes risk-free. Worse case scenario is I get a little bit of profit, and best case scenario is the trade continues to run in my favor.

Either way, I make money, which is why I have such a high win ratio trading long-term.

Trading long-term, I have a high win ratio AND my winners are always a lot bigger than my losers - the best of both worlds. The only time I actually experience a loss is if my stop-loss gets triggered when I first enter the long-term trade. However, once I have let it run for a week or two, I am no longer in danger the trade being a loser.

Take a look at a currency pair like the EUR/USD and you'll see large trends lasting for weeks or months. These mega-trends are extremely predictable, and you can be assured that once the trend reverses it will typically continue for a long time.

Reason 3: Higher Cost of the Spread Compared to Profit

How much the spread actually costs is relative to how many pips you are aiming to achieve in a winning trade. If your goal is to only gain 10 pips, then a 2 pip spread is a very high cost, which places you at a huge disadvantage compared to someone paying 2 pips to gain 100 pips.

When you daytrade forex, you are immediately at a -20% disadvantage as soon as you enter the trade (compared to your goal), because it puts you at -2 pips which is now 12 pips away from your 10 pips goal. However, when your goal is to gain 100 pips over the course of several days, then the spread is a low cost in comparison and has very little impact overall.

Daytrading forex is almost like playing the casino game Roulette with only 3 spaces instead of 37.

The middle green space is the spread, while the one red and one black spaces are your potential wins/losses. The cost of playing the game is much higher when the dealers cut is high compared to your profit goals.

In summary, these three facts are why so many traders lose money trying to day trade the forex market: [1] the daily trends are less predictable, [2] the daily volatility is generally low, and [3] the spread is a high cost compared to profit goals.

And it is also these reasons why longer time-frames are called the "Holy Grail" of forex trading.

Learn more about why long-term trading is more consistent and profitable than daytrading at How to Win in Forex.

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