Forex Day Trading – Risks and Rewards
Most individual traders are attracted to day trading forex because of the dream of ‘making quick cash’ in a matter of hours. But in reality the story is quite different and most day traders find it difficult to turn a profit. Read more to learn why, and how you can increase your chances of surviving and prospering in the forex market.
What is day trading?
Day trading is an approach where a trader enters and exits the market to trade currencies within a single trading day. The whole idea is to earn a good profit in the shortest period of time. Day trading stocks is popular, and the forex as a short term speculative market has also attracted a lot of attention from speculators and would be day traders.
Advantages of day trading
Many traders consider day trading for the following reasons:
- No need to pay interest for holding a position overnight. You open and close your positions in the same day so you don’t need to worry about interest expenses.
- You can take advantage of shorter term movements in currency pairs.
- Day trading can be exciting and be conducted with minimal trading capital.
- You can instantly close out a losing position, minimising your risk. A longer term trader may need more capital to withstand greater adverse movements.
Disadvantages of day trading
Despite the flexibility and liquidity that it offers, forex day trading is very risky. Unfortunately not more than 5% day traders succeed in the market. Here are some of the major reasons behind this:
Random price movements
The biggest problem in day trading approach is that forex can show random, unpredictable market movements. Significant price movements may occur at any time, and hit stop losses, without having any sustained direction.
These market movements often occur for a very short period of time and the market can reverse at any moment. Profits can simply disappear in a matter of minutes.
Delayed execution during fast markets
Delayed execution during fast markets is another problem that day traders often have to deal with. A fast market is when the market suddenly becomes illiquid, for example after the release of market sensitive news. The bid/offer spread increases, stop losses may be filled a long way from their expected point and fills (if any) may be poor, and orders may be ignored by the broker.
Significant time requirements
Since day trading is about capitalizing the short term market opportunities, it requires a lot of trader involvement. It is not easy for a human being to consistently monitor a market where things are happening in a round the clock basis. It is often quite stressful. However, a good automated trading system can assist you by monitoring the market and placing trades 24 hours a day, and removing the emotional elements of trading.
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Tags: currency pair, Forex day trading, risk, short term movement, Trends