Trading the Forex market can be a fun and enjoyable, exciting activity that gives you a good adrenaline rush trying to battle the market everyday. Volatile movements and unpredictable reactions to news events can make trading this market the best thing in the world. But from what I have seen over the years, day traders who try to do this everyday will always struggle compared to long term traders who will be laughing all the way to the bank-every time.
Short-term targets, which I have come to realize are nothing more than low-hanging fruit, are nice to get after doing your analysis and seeing the market move to your target after several hours of patience and perseverance. But because of the cost of your average trade, the limited range of the daily movements and a number of other market and real life factors, day trading might really turn out to be nothing more than an enjoyable hobby.
Short-term, day traders essentially try to predict the daily movements of currencies during peak trading hours, while long-term traders, attempt to capture the weekly (swing) and monthly ranges. Using the most popular and liquid currencies in the market, the comparisons below reveal the real monetary differences between short-term and long-term trading.
AVERAGE RANGE OF MOST LIQUID CURRENCIES
DAILY RANGE - 80 - 150 pips
WEEKLY RANGE - 250 - 500 pips
MONTHLY RANGE - 800 - 1,000 pips
Assuming that all styles of traders use an average stop loss of less than 50 pips using the smaller time frames, day traders will have a harder time struggling to move their accounts by a large rate due to the smaller net gains per trade when losses are taken into account. Although you might be able to get several trades in succession that hit their targets, the losses that you incur along the way – since no one is perfect- will always eat into your gains.
Take this trend in the GBP CHF for example. The trend using the Daily Chart shows some trades that were made successfully. Those pips of 102 and 85 and the nice 158 look great and even when you include the loss of 35 pips, they still add up to a decent 308 pips which can make your account look good and make you feel great.
GBP CHF DAILY CHART
But then when you take a look at this trade for the CHF JPY last week in which a single Weekly Range trade got 371 pips in only 3 days, you can see the big difference between a day traders and long term traders profit potential.
CHF JPY DAILY CHART
Is it better to be fighting the market with several trades hoping that they add up to a decent amount despite the losses along the way, or aim for larger targets that give you more per trade?
The other thing about day trading is that it can be extremely exhausting to have to trade while taking into account several other factors. Fundamental announcements can have some very large moves if you are able to get them, but they can be very unpredictable and distracting as well. If a major news release is scheduled for the day, you need to decide whether you are going to ignore it or trade around it. You have to consider how the market might respond, which currencies will respond to it with the least volatility and then hope at the end of it all, your decision will still provide you with the targeted amount of pips for the day or week.
Swing and Monthly traders on the other hand, realize that the individual news releases hardly affect the bigger trend for the currencies and place very little attention to these events that hardly affect their profits from longer term trades. Take the recent drama related to the United States and the deadline of August 2 for the government to come to an agreement about the debt ceiling.
Long term traders of the USD CHF would have seen the Daily Signal to resume the downtrend on July 25th, aiming for the Breakout Equivalent area of the range that was broken – the normal target for a range breakout. Instead of becoming anxious about how the uncertainty about the debt ceiling would affect the pair, they would have held out for the target for a 400 pip profit. They know that in 99% of the time when a trend is strong and clear and the right signals are given, it will go to the target regardless of the events taking place.
USD CHF – DAILY CHART
This is not the same for a day trader. The average day trader, who spends more time on the smaller charts, would probably have seen the sideways movement on the 30 minute chart and misinterpreted it is a sign that the trend may have ended and could reverse because of the problems in the US. He is likely to have got impatient and exited early for a `nice´ 40 pip profit at 0,8000 at the support of the range, since ranging for 3 days is a long time for a day trader to stomach. However after seeing the USD CHF eventually storm to the larger target a few days after that consolidation, he would not have been too happy about his decision.
USD CHF – 30 MINUTE CHART
Emotions play a bigger role than most traders are willing to admit. You could have the best trade strategy in the world, but the more losses you need to deal with the more it can affect your confidence and ability to keep a clear head. You are more likely to want to take revenge on the market for losses, blame brokers and everything else under the sun because you have less time in between trades to have a calm and objective approach to your losses. Even gains can affect you negatively as well since you can become overconfident and brush aside the discipline that your strategy requires or even risk much more than your strategy allows as a way of compensating for the losses you had earlier.
The unpredictable times that the market moves also affects day traders more than long term traders. Since most of the major moves start within a large 12 hour period between 12 00 am EST and 1 00 pm EST, the day trader has to be up monitoring the market until it starts to move. I´ve heard the stories of recent traders who have won competitions talking about spending 16 hours a day or more and not eating, glued to their computer screens and risking 100% of their capital in order to get as much out of the market as possible in a short period. Good grief! They may have got their goal, but when you add up all of the time they spend and factor in the lack of sleep, exercise, proper eating habits, etc. is it really worth it and can they really continue trading like this?
Weekly and monthly traders spend less time trading and more time enjoying life with the larger amount of money they make. They know that even when they incur losses along the way, their gains will always compensate for these losses by a much larger margin than for day traders. They also have more time to recover emotionally from losses and remain objective for their next trades. That is why for these traders, less is more and quality always trumps quantity.