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Last Portion of Useful Tips for Your Day Trading

9:14 AM Jan 15, 2020
2300
Forex trading

It’s time for a final article in a series of useful tips for improving your day trading results. Last time, we examined several aspects of competent risk management, how to behave during major news releases and much more.

The tips in this article will prove equally useful. You can use most of them in trading, even without being a day trader. These are universal tips that you can apply to most market situations. So let's get started.

Use the RSI Indicator

If you prefer trading on a trend, then the RSI Overbought/Oversold indicator can become your indispensable tool in finding suitable trading setups with a high chance of successful outcome.

The program works best on charts with a confident upward or downward trend. Using the indicator is quite simple: you will need to follow the RSI line and open a trade after a second breakthrough:

  1. When the indicator falls below 30 for a second time, this indicates oversold currency in the market. So, it's time to open a buy trade.
  2. When the indicator twice exceeds the level of 70, you get a bearish signal - it's time for a sell trade.

Use the Magical 6% Rule

Do you remember the golden 1-2% rule from the first article? The 6% rule is somewhat similar to it, but it indicates the amount of risk you should allow for all your open positions.

Let's say you set a maximum risk threshold of 2% for a single trade. Then you can have 3 open positions simultaneously. Thus, you will risk only 6% of the total capital at a time. Even if all your trades fail, you will lose only a small part of your investment.

If you want to increase the number of open positions, you just need to reduce the risk level for each of them. So, risking 1% of the capital in each trade, you can hold up to 6 positions simultaneously.

Always Wait for a Confirmation of a Trading Setup

Even when a trade meets all the points of your trading plan and risk management system, you cannot be 100% sure that the market will not change its direction in the next second. Often, the best solution is to wait for confirmation of the direction you need. In other words, open your trades based on price action.

Confirmation of trading setups will vary depending on your strategy:

  • For instance, if you open trades based on candlestick patterns then you should wait for the appearance of a suitable candle to confirm your assumption, such as a morning star, hammer, doji, etc.
  • If you trade on breakouts, then you can wait for a closure of the candle that has made that breakthrough. This way you’ll have a confirmation that the signal was not false.

Get Yourself a Trading Journal

This is one of the most useful tools of any trader. Basically, it is a detailed description of each position you open. The journal is used for an in-depth analysis of your trading decisions. Conclusions based on this data will help you understand your strengths and weaknesses, as well as suggest how to improve your trading system.

Write down everything that seems at least somehow important for you. Even data on the trades you’ve never opened can be useful, as there may be missed opportunities, which you can learn about only after analyzing your notes.

At the very beginning, you can analyze your progress kept in the journal at least once a week. Later, when your trading system will prove itself, you can return to the analysis no more than once a month.

Use a Trailing Stop Option

We have previously discussed the importance of protecting your profit. Trailing Stop can help you with this. The system moves your Stop Loss in the direction of the price movement if it goes in the direction you need. If the chart reverses, then the SL level remains in place. This way you can protect your potential profit point by point.

Pay Attention to Correlation of Instruments

If you trade more than one instrument at the same time, you need to always remember the correlation. This is a relation of one currency pair to another. This correlation occurs, as the trading pairs consist of the same currencies. Imagine a situation: when you trade simultaneously on EURUSD and EURJPY, then with the incorrect assumption of the price direction for the euro, you will lose twice as much. If you have already lost on several currency pairs with the US dollar or the euro, you should switch to a currency pair that is inversely correlated with your instrument.

The best solution is to avoid trading on correlated pairs in general. There is a useful tool that might help you out with that called Correlation Matrix. It contains a full list of correlated currency pairs that you can use to avoid unnecessary losses.

To Summarize

These are all the tips that I wanted to share with you today. Of course, you don’t have to use all of them at once. First of all, this might be quite difficult, as habits must be introduced gradually. Secondly, some of them may not be useful to you at all. For example, if you decide to master one trading instrument at a time, then you can forget about the correlation of currency pairs.

What is worth paying attention to from the very beginning? All tips are more or less useful, but the most important ones are those related to risk management. Start with them, and later you can implement all the others. This way you can save your investment and have a chance to test other tips in the future.

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