5-min Day Trader Forex Trading Strategy

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5-min Day Trader Forex Trading Strategy

Day Trader… I don’t know what it is with that title, but I think it sounds cool. It might just be me, but I think many newbie traders also get sucked into the idea of wanting to be one. It might be one of those movies where day traders are glorified into some sort of cool young millionaires who can multiply money every day. Well, that could be true for some, but reality is day trading is just one of the many ways to make money trading the markets.

Trading Styles Based on Holding Time

Trading could be classified into four categories based on the strategy’s holding time: scalping, day trading, swing trading and position trading. All have its advantages and disadvantages. All could be profitable.

First, scalping. Scalping is a trading style wherein traders typically hold the trade for just a few minutes, even seconds. Because traders hold the trade for just a short time, profits are also only for a few pips or ticks. However, because of the multiple trading opportunities that could occur within a trading session, these small profits could also be a huge sum when accumulated. Also, because of the small movements required to profit, traders also tend to risk only a few pips, which also means position sizes could be increased while holding the dollar amount risk the same. While this may sound like a good idea, this could be considered risky. It is not far fetched to have a string of losing trades, which in the case of scalping could occur in a few hours, even minutes. On the flip side, having a high probability trading strategy could also mean earning a lot of money within a short time. One disadvantage of scalping is the cost of trading, which is the spread and commission. These are hurdles that a trade must overcome in order to crossover to profit. In scalping, this would mean a lot because traders typically take profits on small movements. A trade could have been profitable based on price movement yet still end up at a slight loss due to commissions and spread.

Next, day trading. In day trading, traders typically hold a position from minutes to several hours, yet would seldom last more than a day. This means day traders can earn a few more pips or ticks per trade because they also hold positions a tad longer than scalpers. This allows them to cross over the cost of trading hurdle a bit easier. However, the number of trades that they could generate within a day might be a bit lower as compared to aggressive scalpers.

Then, the swing traders. Swing traders typically hold positions for several days even weeks. These traders are after the big moves which could easily be above 100 pips. However, they could generate only a few trades within a week or even a month. On these timeframes, it is said that less noise is generated on the charts. It is there, but it is buried in the candles. However, recently, because of the speed in which news are generated, a single errant tweet from politicians or statement from central bankers could reverse a market’s sentiment in just a few minutes, causing the market to jump 30, 40, 50, even a hundred pips. Good if it goes your way. Bad if it doesn’t. Also, on top of the commissions and spread, swaps are usually added, costing traders a bit more just by holding the position overnight. Swing traders are also at risk of weekend gaps and overnight risks, which is the risk of price moving strongly against your trade position while you were asleep.

Lastly, the position traders. This is where long-term investors and bankers play. Well not all traders in a bank trade this way, but they are generally instructed to hold a certain market outlook for several months. Position trading means a trader takes a position, holding trades for several months. They typically look at the macro-economic and fundamental side of things and trade according to their outlook, layered with some technical analysis.

Personally, among the four, I am quite drawn to day trading. It seems like a sweet spot. No overnight and weekend gap risk. No additional swap cost. Easier commission and spread hurdle compared to scalping. Plus, you could also take several trades in a day depending on your strategy.

Trading Strategy Concept

This strategy is a day trading strategy that is traded on the 5-minute chart. While some would consider the 5-minute chart as a scalping timeframe, this strategy allows for trades which could be held for quite some time but seldom goes beyond a day.

This strategy uses several custom indicators.

One is a variation of the stochastic oscillator, the Stochastic Wallabys. This will be used by looking at the position of the indicator line relative to its mid line. Above 50 means the market is bullish. Below 50 means the market is bearish.

A couple of indicators to be used are based on moving averages, the i-AMA-Optimum and the vr_moving_average. These indicators will be used as a trigger. Crossovers going up should generate a buy while crossovers going down should generate a sell.

Lastly, a standard MACD indicator will be used as a filter. Positive histograms mean the market is bullish while negative histograms mean the market is bearish.

Indicators:

  • vr_moving_average
  • i-AMA-Optimum
  • Wallaby
  • MACD

Timeframe: 5-minute chart only

Currency Pair: preferably EURUSD and GBPUSD

Trading Session: London and New York Session

Buy (Long) Trade Setup

Entry

  • The blue line of the vr_moving_average should cross above the dotted orange line of the i-AMA-Optimum indicator
  • The Stochastic Wallaby indicator should be above 50
  • The MACD histograms should be positive
  • Enter a buy market order at the confluence of the above rules

Stop Loss

  • Set the stop loss below the dotted orange line

Exit

  • Trail the stop loss below the dotted orange line until hit
  • Close the trade manually if the MACD histogram becomes negative

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Sell (Short) Trade Setup

Entry

  • The red line of the vr_moving_average should cross below the dotted orange line of the i-AMA-Optimum indicator
  • The Stochastic Wallaby indicator should be below 50
  • The MACD histograms should be negative
  • Enter a sell market order at the confluence of the above rules

Stop Loss

  • Set the stop loss above the dotted orange line

Exit

  • Trail the stop loss above the dotted orange line until hit
  • Close the trade manually if the MACD histogram becomes positive

5 min Day Trader Forex Trading Strategy 03 5 min Day Trader Forex Trading Strategy 04

Conclusion

This trading strategy is a day trading strategy fixed on the 5-minute chart.

With this strategy, if the trade gathers momentum and starts to trend, the position could be held onto for many candles, even for the whole trading session. This allows the trade to catch quite some pips while at the same time avoiding holding onto the position overnight.

If in case the trading session is about to end and the position is still open, you could opt to use a trailing stop loss to continue the trade, or manually close the trade prior to the close. The close of the session could also be treacherous waters because this is the time when big players settle their positions that were taken because of intraday market flow.

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