If you are a day trader, you have to set much lower profit targets compared to a swing or position trader because most currency pairs and other assets can only move a certain number of pips per day. However, this does not mean that you will be a less profitable trader compared to swing, trend and position traders as each trading style has its own unique advantages. Here’s how you can be a very profitable day trader despite the profit target limits.
Trade on the lower timeframes
The first step to overcoming the restrictions posed by the daily pip limits is to trade the lower timeframes, such as 30 minutes and lower. Any timeframes above the 1-hour limit should be avoided and only used as reference points to establish long-term trends as well as support and resistance levels.
Chart 1: EUR/GBP daily chart with key levels
The only time you should use higher timeframe charts, such as the daily and 4-hour timeframes, is to identify the key levels where the price momentum is likely to change. For example, the EUR/GBP daily chart above shows the key support and resistance levels that the price is likely to respect, and they could also signal a change in the trend if broken.
Chart 2: EUR/GBP 4-hour chart with key levels
The EUR/GBP 4-hour chart above shows the most relevant key levels that define a wide trading range that was recently broken. However, price is currently retesting the key 0.8677 level. Meanwhile, the former support level, which is now acting as a resistance zone, is holding up. Day traders should be mostly bearish given the price structure of the higher-timeframe 4-hour chart.
Chart 3: EUR/GBP 1-hour chart
We can glean a lot of information from the EUR/GBP 1-hour chart above, which reveals that the price is trading within a range. The fact that the price is in a range means that we can now apply a trading strategy suited to this type of structure, where we can sell at the highs while buying at the lows of the range.
Let’s explore whether the 30-minute chart has better trade setups for us as day traders.
Chart 4: EUR/GBP 30-minute chart
The EUR/GBP 30-minute chart has the same setup as the 1-hour chart, but it allows us to see that the currency pair’s price was trading in an 80-pip range. The above chart shows us that we could have had two very profitable trades playing both sides of the range by selling at the highs and buying at the lows to secure a 110-pip profit at the time of writing. We could have secured a maximum profit of 160 pips if the price rallied to the top of the range by the end of the day.
How to generate more profits than swing and position traders
By breaking down the EUR/GBP chart above, we have identified an excellent trade setup on the lower timeframe charts where we could have pocketed a 160-pip profit within a day. Most currency pairs do not move 160 pips in one direction within a day, but they can move more than 200 pips in two directions within a single session.
As day traders, we can play both sides of the market and make decent profits each day instead of waiting for several days to secure a 200-pip profit trading in one direction like swing and position traders.
Pro tips for day traders
You can follow the process outlined in this article to analyse a trading chart starting with the higher timeframes, which in this case are the daily and 4-hour timeframes, before using the same approach to break down the lower-timeframe charts such as the 1-hour and 30-minute charts. You can use the same process to analyse the 15-minute and even 5-minute charts if you want to find more trading opportunities.
The bottom line
Being a day trader should not limit you when you are trading any markets, especially the forex markets. You can be quite profitable as a day trader by playing both sides of the market, which is something that swing and position traders cannot do within a single day.