Forex Day Trading: Keeping Perspective With The Long-Term Market Trend

Many people who actively trade the foreign exchange market prefer to use a shorter time frame such as a 5-minute or 15-minute price chart, and since earning just 2 trades with a 10-pip profit for the day can be $200 per day with a standard account and a single lot then many people can earn a basic living from this. However, many forex day traders make the mistake of only looking at their short-term chart without taking into account the overall trend of the currency pair, and for this reason they make their trading much more risky than it needs to be. Even if you are only concerned with the price movement on a 5-minute or 15-minute price chart, it is very important that you do not lose your perspective and always stay mindful of the larger trend.

For most trading purposes, the trend as conveyed on a daily price chart will be sufficient to convey the overall trend, since each bar or candlestick on the chart displays the price data of that day's trading sessions and the scope of the chart itself should cover 3-9 months or longer. So why is it so important to identify the major trend of the market? Remember the old trading adage that "the trend is your friend" and even though your signals are coming from a five-minute chart you will only want to trade those signals that correspond with the larger market trend as shown in the daily chart. If you were to ignore the daily chart and focus only on your short-term prices, your trading system might be showing you a sell signal even though it is clear that the overall trend for the currency pair is bullish.

Now even in an uptrend there is still money to be made by selling the market retracements, but this is the exception to the general rule and it is foolish to blatantly trade in the opposite direction of the major trend simply because the indicator on your five-minute chart tells you to do so. It is likely most of your losing trades will occur when you ignore or try to fight the direction of the major trend, so if you are aiming for consistent gains then it is wise to screen out your day trading signals and only trade on those that align with the overall trend on the daily chart, whether that is bullish or bearish for the pair.

One good way to determine the overall trend on your daily chart is to incorporate two indicators: One is called a simple moving average and the other is a momentum indicator called a stochastic oscillator (both should be included in normal charting packages). The simple moving average is called "simple" for a reason, because all you really need to do to see the direction of the trend is follow the line across the screen with your finger and see if it points up or down. If it points up the trend is bullish, if it points down the trend is bearish. The momentum indicator can also confirm the trend and also the strength of the trend, since this indicator measures the rate at which prices are moving.

A momentum indicator will typically move parallel to the actual price data, but a change in the direction of the oscillator will usually precede a change in the direction of the price movement meaning that it is a good predictive indicator. The oscillator can show you a potential change in the buying or selling pressure before that change is translated into the price, and so it can tell you when the trend is ready to fizzle out and switch directions. So if the overall trend is bullish but the momentum indicator is moving down against the current trend, a sell signal on your short-term chart may be relevant as this may indicate that a price reversal is eminent.