Individuals who learn Forex day trading may have a particular bias toward scalping, or trading breakouts, or trading swings, or one of a number of other strategies.
There is a particular market characteristic however than must be faced up to and which happens every day in the Forex day trading world.
A Key Market Characteristic
What is price doing about 70% of the time?
Answer: Not much!
Price spends most of its time, by a rough estimate perhaps as much as 70% of the time, in consolidation!
Can you hear someone saying: “That’s it? That’s hardly an earth shattering piece of information!” Maybe, but many traders fail to recognize this characteristic and suffer as a result.
What Makes This Information So Important
Why is it so important?
Because it will greatly affect how you trade! Trading when price is in consolidation requires a different mindset and very different profit objectives than when price is trending or making a breakout.
So when Forex day trading, you need to regularly ask yourself, what is price doing right now?
Is it trending or in consolidation?
Is trading when price is in consolidation part of my Forex day trading style or do I prefer to only trade breakouts or price swings?
If you prefer to trade breakouts and price swings then realize that probably three quarters of your time is going to be spent merely watching price action move up and down in a channel.
Trading The Channels
On the other hand, if you are a scalper, you can develop your skills to take small profits regularly during this major slice of the trading day when price is in consolidation.
Of course, scalping is a high risk Forex day trading strategy. As it involves a number of trades during the day, there is a higher risk one or more will not be successful.
However, with careful analysis and skills developed from experience and perhaps months spent honing the skills in a demo account, it is possible to regularly take 5, 10, or 15 pips from the market when price is in a consolidation channel.
If you choose to take profits from consolidation channels then mark your charts carefully. You will want to always keep an eye on the 1 hour chart to see where key levels of support and resistance are found.
Then you need to examine the 15 minute chart to get a closer view of current price action and take note of the direction of the immediate short term trend. MACD can help here by examining where MACD is in relation to its trigger line.
Then zero in on the 5 minute chart and draw horizontal lines above and below the top and bottom of the current channel. Is there a movement of 20 pips or more? Then you have a reasonable chance of extracting 10 or so from the market.
Remember to not only take into account the candle wicks but also the candle bodies. Sometimes it makes more sense to draw the horizontal lines marking the consolidation channel across the bodies of the candles rather than the wicks.
You need to use your judgment and skills to determine which makes more sense in the particular session you are in.
Acceptance Leads To Realistic Expectations
Once you accept the fact that price spends most of its time consolidating, you can approach Forex day trading with a healthy mind set.
You will accept there will be long periods of inactivity requiring patience. You will need to decide on your personal trading style and whether you want to add scalping skills to your overall trading experience.
If not, if you just want to concentrate on breakouts and swings, then fix your profit levels accordingly. Don’t be too ambitious and be ready to take some profits early.
Look ahead, see where price is going and where it is likely to stop and enter into another period of consolidation.
Do you have the mental stamina and emotional strength to endure a few hours of consolidation not really knowing whether price is going to move out and on or pull back further?
If this is difficult for you then take most of your profits early and give yourself peace of mind. Leave one or two lots to run after bringing up your stop to break even point and at least you will get additional profits, sometimes quite substantial, if price decides to continue.
Giving careful consideration to this key market behavior pattern will certainly help your Forex day trading sessions.
At least you will approach the market with a realistic frame of mind.