A slump in the dollar this morning seems largely confined to a gain for the single European unit. The British pound has nevertheless made gains against the greenback despite a further sign of impending slowdown. Few dealers appear to want to be the first to prod the Bank of Japan into a second wave of intervention. According to further analysis in the aftermath of Wednesday’s initial round of yen sales, the central bank sold far more yen than was initially realized at the time.
U.S. Dollar – There appears to be no obvious catalyst to a 0.4% slide in the value of the dollar index at present. Gold and the euro have both surged at the same time while the response across other majors is muted. There are two relatively data points due for release on Thursday starting with initial unemployment insurance claims. The predicted decline of 4,000 to 451,000 would actually be good news for the dollar. Later in the morning the Philly Fed manufacturing index is forecast to depict a slower pace of factory activity in the region.
Euro – The euro’s surge is something of a mystery at this point in time. It had a positive tone over several hours in the European session and by 7am in Manhattan kicked the dollar out of bed forcing it to $1.3109. That’s the highest the euro has been since August 11. The Eurozone earlier reported that the trade surplus grew last month as imports dropped at a faster pace than did exports.
Japanese yen – The Bank of Japan reported a surge in deposits held by financial institutions by enough to suggest that midweek currency sales totaled ¥2 trillion ($23.4 billion). Banks likely hit by sales at the central bank were today talking larger numbers than yesterday’s initial suggestion of a couple of hundred billion yen. The larger volume of yen sales seems to have nurtured a new found respect for the Bank of Japan as the clinical and well-timed nature of its actions appears to have achieved a goal. The precise nature of the goal, however, remains unclear. Is the central bank trying to guide the yen lower or is it trying to stop its ascent? Investors did attempt to force the yen higher overnight when it reached ¥85.25. Dealers suspect that opportunist exporters were trying to repatriate yen at its weakest in several weeks ahead of the forthcoming end of the first half of the fiscal year. The yen has subsequently weakened to ¥85.70 per dollar while per euro the yen eased to ¥112.05.
British pound – Although the pound remains lower at $1.5611, a failing dollar is masking the performance of the British unit. A horrible retail sales report for August earlier sent the pound briefly to a session low of $1.5538 on deepening worries that the economy is unlikely to be able to stave off a further slowdown. Simply put, weakness in consumption was not expected at this stage of the game. A monthly drop of 0.5% in sales since July was compounded by an ugly downwards revision to the previous month’s data. The result is that the predicted annualized pace of gains in retail sales turned out to be a mere 0.4% rather than the 1.9% expected. I suspect that if the dollar was not nursing a bruise on the head this morning that the pound would be in far worse shape. The pound did lose out to a resurgent euro, which today buys 83.82 pence.
Aussie dollar – Just to prove that the U.S. dollar’s weakness doesn’t appear associated with a risk rally the Aussie remains lower overnight. And that was despite reports of a bullish tone to words from the RBA’s Assistant Governor Philip Lowe who said that the economy was growing at close to full speed and that would help continue to push the rate of unemployment back to full employment. The Aussie nevertheless slipped and is trading at 93.67 U.S. cents and remains weaker against the yen where it buys ¥80.23.
Canadian dollar – The Canadian dollar remains range bound and has barely budged against the U.S. unit where it currently buys 97.27 U.S. cents. Dealers were unnerved yesterday following a weaker than hoped for manufacturing report indicating export market weakness TOKYO (MNI) – In his parliamentary testimony this week, Bank of
Japan Governor Masaaki Shirakawa repeated his recent remarks that the
yen’s strength will benefit firms and households in the long term by
boosting Japan’s terms of trade but the BOJ will watch the short-term
drag from the rapid rise in the yen on exporter profits.
He also told the lower house financial affairs committee on
Wednesday that global investor risk aversion had pushed up the value of
the swiss franc, the yen and the U.S. dollar in that order in forex
trade in the past month while the loss in the euro had been the largest
among major currencies.
“The flight to safety basically comes from the recent weak U.S. and
other economic data in the summer, raising concerns about downside risks
to the global economy,” Shirakawa said, adding that the euro was hit by
heightened concern about the health of European banks.
“For the Bank of Japan, whatever the results (of investor risk
aversion), we are fully aware that a rapid rise in the yen will hurt
business sentiment,” the governor said.
The high yen would prompt firms to move production bases overseas
in order to maintain their price competitiveness but at the same time it
would encourage Japanese firms to buy overseas assets that would help
boost their global operations, he said.
In his own parliamentary testimony this week, Finance Minister
Yoshihiko Noda repeated that the government will take a firm action on
excessive forex moves, “with currency intervention in mind,” while
keeping in close contact with other major nations. He also said the MOF
was conducting various “simulations” on foreign exchange intervention.
Shirakawa repeated his remarks from the latest news conferences
held after the policy board meetings on Aug. 30 and on Tuesday that the
BOJ is more concerned about downside risks to a sustained economic
growth than upside risks.
He added that the threat of the strong yen comprises a large part
in the current downside risks to Japan.
“I said after the Aug. 30 meeting that if necessary, we will take
policy action in a timely and appropriate manner. That’s partly because
I thought if we didn’t make our stance clear to markets, the recent
moves could be accelerated,” he said.
To send a clearer message, the BOJ on Tuesday added to the monetary
policy statement its resolve to “carefully examine the outlook for
economic activity and prices, and, if judged necessary, take policy
actions in a timely and appropriate manner.”
Shirakawa also told lawmakers that interests on 3- and 6-month term
facilities had fallen slightly since the Aug. 30 credit easing, which
shows that the expanded lending to banks for 3- to 6-month cash needs at
a bargain overnight rate (0.1%) is already boosting the effects of the
BOJ’s extremely accommodative monetary policy.
Financial crises are always caused by funding problems, both at
government and corporate levels, but Japan is a top creditor nation,
with its net asset holdings accounting for 50% of its GDP, making it the
strongest among industrialized economies, he said.
This, combined with market confidence in Japan’s macro-economic
policy toward sustained growth with price stability, is prompting a
flight-to-quality move in the forex market, Shirakawa said, explaining
the recent rise in the yen against the dollar and the euro.
Being a forex day trader can be very lucrative. The currency market is by far the most liquid and volatile market in the world and with this come various opportunities. No matter what type of market you chose to day trade you must know the “personality” of the market you are trading.
Every market has it’s own characteristics and it is important to know what they are before attempting to profit from it. The forex market is no different. In this article we will go over very important general day trading principles/rules and then we will see what a day trader has to recognize when specifically day trading the forex market.
As the term implies, day traders are concerned with what happens in the market today. Not tomorrow, not next week and not next month, but today. The day trader’s job is to capture intraday price swings. Depending on the system or trading method employed, this can mean capturing one intraday swing or various intraday swings. The general job of a day trader is (then we will go over the more specific job of the forex day trader):
To control risk
One of the most important jobs as a day trader is to control your risk exposure. Sure, controlling risk is a concept you must use in any type of trading, however in day trading you must look at this issue from a different angle. Since your job is to capture various price swings during the day naturally your profit objectives will be much smaller than that of a swing trader (who places a single trade aiming for a much larger profit objective). So, when placing several trades during the day it can be easy to “drift” away from your pre-determined stop loses. A common (very common actually!) day traders thought is “if I extend my stop loss just a bit I hope the market will turn around”! Hope is one of the trader’s biggest enemies. These little extensions of stop losses add up and suddenly without noticing you are losing more dollars per trade than planed making your risk/reward ratio turn against you.
To be disciplined
This principle is key for any type of trading but particularly for day trading. If I had to name one single aspect of a day trader that can make him or her a winner or a loser it is discipline. You can have a so-so system but still make money if you are disciplined. However, you can have the best trading system in the world but if you are not disciplined I guarantee you will not be a successful trader. So, what is all this discipline everyone talks about when discussing trading? Very simple, it’s respecting and strictly following your trading plan, your trading system, your money management rules, and your commitment to the business. Being disciplined with regard to each and everyone of these components is essential for your success.
It is so easy to deviate from your trading plan, the rules of your trading system or any of the above mentioned components, especially when day trading. Why? Two reasons. First, because the trader is trading very frequent and does not have time to cool down, think, and evaluate. Second, because reality is replaced by hope. Your trading system rules (reality) says: “get our of the trade” hope says “hang in there, maybe it will still be profitable”. Your money management rules (reality) say “risk only 2% of your account on this trade” hope says “since I lost on the last trade I will risk 4% on this next one so I can make up for the loser and also be profitable”. Your trading plan (reality) says “trade each day 4 hours, give yourself Wednesday or Thursday a vacation to rest” hope says “Since I am not doing very well now I don’t need this rest day, and I will also trade 7 hours per day to make up”. I know (not hope!) you now understand the point!
To focus on the appropriate time frame
As a day trader your primary concern is to catch intraday swings. Your trades start and finish the same day. Your world is the day you are trading in. You don’t care what will happen in the market tomorrow or the day after tomorrow. Your objective when trading is focusing on the appropriate time frame chart. My opinion is that day trading should be done on a 1, 5 or 10 minute bar chart. Remember, you are looking to capture several fast moves during the day and hence you must focus on the charts that best illustrate events as they happen in a short period of time. However, the fact that you are day trading on a 1,5 or 10 minute bar chart does not mean you can’t use a larger time frame chart for the purpose of analysis. This however, is very subjective and depends very much on the traders strategies and methods of trading. As an example, many day traders would look at one hour bar charts in order to have a view of how the market has been behaving in the last week. Is it moving sideways (and so maybe I should only place trades between support and resistance areas)? Is it trending (and so maybe I should only be looking at placing trades in the direction of the higher time frame trend)? Are there any major support and/or resistance levels I should be aware of (areas where I should refrain from placing trades since it is uncertain how the market will react when reaching them)? Did the market brake out of a congestion area?
Again, it is very subjective. Some day traders believe that with proper larger time frame analysis they can select better day trades. My personal opinion is that the more you analyze the more conflicts you will have and the more uncertainties will appear (especially if you are new to trading). I like making things simple and I found it very useful when trading (proof of this is that all of the trading systems I use are 100% mechanical). Don’t get me wrong, this is not to say that larger time frames should not be used at all for analysis purposes. But, try to keep it simple and if you see that looking at larger time frame charts interferes with your correct decision process when placing day trades then simply stop.
To trade volatile and liquid markets
Since your job as a day trader is to capture intraday swings it is crucial that the market you are trading has enough movement to allow you to do this. It is also important that the market you are trading has enough liquidity so that order fills do not suffer from excessive slippage. You have to select a market that it’s volatility is permanent and not a temporary occurrence. Since you are basing your trading method on catching intraday price swings you have to know that you are trading in the right place. As a day trader volatility is your allay and you have to know that you can count on it every single day (or at least 90% of the days). Liquid markets will provide you with good order fills. As a day trader this is very important since you are aiming at smaller profit objectives and hence larger slippage will eat away more of your profits. When trading several times a day this adds up and can be the difference between success and failure.
As a forex day trader you have to apply all the above rules and principles plus other criteria that are unique to the forexmarket.
Time of day trading
The forex market is a 24 hour market. Never stops except on weekends. Within this 24 hour period different currencies behave in different manners. As a day trader it is very important to know the “personality” of the currency you are trading. For example, the GBP/USD is more volatile in early to mid European session than any other liquid pair. For a day trader trading in these hours it would be wise to take advantage of the price swings the GBP/USD pair offers instead of trading some other currency pair that constantly shows no movement. The USD/CAD pair is “silent” in the early to mid European session but starts to have more price movement toward the start of the US session. Every time Non Farm Payroll is released most if not all currency pair have a very small price range up to release time. As a day trader it wouldn’t be wise to trade during these pre-announcement hours with strategies that are based on breakouts. It would probably be smarter to use strategies that are based on range support and resistance.
Spread and liquidity
| Forex brokers don’t charge you a commission for every trade you make (at least most forex brokers). Instead, they make their profit on the bid/ask spread which is measured in pips. As a forex day trader you are aiming at capturing small price swings sometimes several time per day. Also, your profit objectives are obviously much smaller than the swing trader’s profit objectives. All this means one thing: every pip counts. You cannot afford to trade currency pairs with large spreads, if you do your profit will get eaten up to a point where you will not be trading with an adequate risk/reward ratio. Forex day trading must be done with liquid pairs. |
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Most forex brokers will provide you with a very narrow spread for the most liquid currency pairs. As an example, many brokers are now offering a 2 pip spread for EUR/USD and USD/JPY and a 3 pip spread for USD/CHF and GBP/USD. These are the most liquid pairs and the ones a day trader should focus on.
Volatility
As a day trader volatility is you friend, a friend you cannot afford to trade without. In it’s basic definition, volatility is simply the amount of price change with relation to time. Volatile currency pairs have various price swings (price changes) during a small period of time (one day). These price swings are what a day trader lives on. In the forex market volatility many times comes hand in hand with liquidity. The most liquid pairs are the ones that are the most volatile. The big 4: EUR/USD, GBP/USD, USD/JPY and USD/CHF are the most liquid pairs that provide the best volatility and hence opportunity for the forex day trader. Within these four pairs, the GBP/USD is the most volatile. Although it’s not the most liquid (the EUR/USD is), but it’s the most volatility. This pair, traded with the right broker (one that provides a 3 pip spread) can present many profitable opportunities for the astute day trader.
Specific news announcements
Currency rates are affected by rumors, news, economic indicators and government reports. As a day trader you must always be aware of what economic reports are scheduled on the day you are trading and at what time. Why? Simply because many of these reports can have a strong momentary impact on the market once they hit the news wires. This impact can be of 10 pips or 100 pips depending on the report and it’s difference from the market consensus. The most important and impacting economic indicators and government reports are issued by the US government. They affect every USD/X or X/USD currency pair. Again, always know what are the release times and the importance of the economic report. For example, suppose you are in a EUR/USD trade at 8:25 a.m. You know that an economic report is scheduled for release at 8:30 a.m. You might consider either exiting the trade before the release (in order to avoid unnecessary speculation as to what impact the report will have on the market) or entering your profit objective and stop loss into your deal station (for risk exposure reasons).
In conclusion, the forex day trader has to be prepared not only with the basic day trading rules, skills and principles. His job is to incorporate into his trading the characteristics and uniqueness of the forex market. Remember, every currency pair might present different opportunities and it is your job to always focus on the ones that best fit the purpose and objectives of day trading. I hope to have contributed to your forex trading education and I thank you for taking the time to read this article.
