A Day Trading Strategy that Works

I understand that’s a bit of a provocative title, but I also understand that many of you are out there looking for something that actually works. Unfortunately, far too many of you will be looking for the magic system or the magic bullet to start making money and become rich overnight. In this article, I’ll look at some things that work, and some hype that unfortunately far too many people fall for.

So what’s the magic strategy?

When you look around the Internet at Forex markets, you will undoubtedly come across some information sites put out by gurus looking to make you rich. The amazing thing is that they are willing to make you rich for just $39.99! They will offer some e-book, indicator, or perhaps even system that is “the secret that banks don’t want you to know.”

Day Trading StrategyAs someone who works for large funds, I can tell you that the banks don’t care what you know. In fact, most retail traders don’t have enough in their account to cover the spread of most Forex transactions that many of my clients make on a daily basis. In that scenario, the retail trader in Chicago that is traded with $2500 is an even part of the equation. Whenever you hear that statement in a video or sales pitch, it’s time to leave.

The reality is that trading is rather simple. Think about it: you place a trade and either it goes in your favor or not. Every trade you take has a roughly 50-50 chance to work out. Markets will either go higher or lower. You can help make the odds a little bit more even if you can find tighter spreads. The spread is essentially the same thing that a casino does on a roulette wheel, with those two green numbers making sure that the red and the black players don’t automatically win half of the gains each. The casino acts as a market maker, keeping everything that hits those two green numbers while the red and the black players throw money back and forth at each other. This is essentially how most Forex platforms work. That’s why I say there is “a roughly 50-50 chance to work out.” It’s probably a little closer to 48%.

With all, a trade works out or it doesn’t. It’s no more difficult than that. If you have a little bit of trading acumen, then you can tilt the odds a little further in your favor. Or perhaps you have the ability to hold onto gains much longer than the average trader, and therefore your profits are much larger. In the end, I hate to disappoint you because there is no specific magic strategy. That doesn’t mean there aren’t some things you can do to increase your profitability and the likelihood that you are going to become a profitable trader.

The part of the day trading none of you like

I’m going to use two words that many traders around the world hate to hear: money management. I know it seems like a very boring topic, but at the end it is the only one that truly matters. I know most of you have probably read articles about how only risking 1% on a trade is much better than 10%, mainly because it allows you to take a string of losses, something that will certainly happen eventually.

How would you feel knowing that professional traders very rarely risk more than 1%, and often risk much less than that? I can feel you rolling your eyes. However, this is the reality of a professional trading, and most professional places won’t allow you to lose more than a couple of percent per day. There’s a reason for this, because you need to be able to preserve your trading capital to be in the game. It’s not impossible to lose five trades in a row. Think about how brutal it’s going to be if you lose 10% every time you make a bad trade. It will take you ages to get that back, under the best of circumstances. Most traders fail at that point and then do something truly desperate, cranking up the leverage and losing the rest of it.

Money management is by far the biggest part of succeeding in this world. I know you’ve heard this before, and I also know you’re probably tired of hearing it. However, there’s a reason you heard it more than once.

Does it work? Then prove it.

There are a multitude of trading systems out there that are freely available for you to try on the Internet. It can be simple moving average crossover systems, or something as simple as buying a hammer or selling a shooting star at a large, round, psychologically significant number such as 1.20 on a chart. It really doesn’t matter what your system is, but you need to give anything you’re doing the opportunity to work overtime.

If you are not willing to demo trade any system for a significant amount of time, you are simply looking to gamble. The statistics won’t lie given a large enough sample, and then you will know whether something works. Once you prove that something works over time, then it’s ready to go live. However, this is where psychology comes in, so you need to learn to trust your own system. If it works out over time on demo, it will do the same in live markets. If we have a sample of 1000 trades that has a success rate of 61%, if you try 1000 live trades, your success rate should be somewhere close to that same 61%.

The real question you are going to run into is whether you can believe and trust your system. I truly believe that the psychology of trading is an underserved part of anybody’s system. Unfortunately, that is something that most people will ignore. They are too worried about being right about the market, and not listening. Therefore most will fail. listening. This is why most will fail.

Christopher Lewis has been trading Forex for several years. He writes about Forex for many online publications, including his own site, aptly named The Trader Guy.