Forex Day Trading – Risks and Rewards
High brokerage costs
If you are intend to conduct short term trading, this will increase your brokerage costs. Trading expenses end up representing a large percentage of any very short term trading profits, as the trading frequency is higher, and gains are smaller. This affects profitability.
Day trading strategies
If you are willing to become a forex day trader, there are some basic strategies you need to follow in order to minimize risks and increase profitability in the market. There are two options available for you in forex day trading:
- Reversal
- Continuation
The Reversal day trading strategy depends on trading ranges where you trade against the market breakout while the Continuation strategy depends on market trends.
Continuation day trading is more appropriate when you are trading in the busy time of a day while Reversal might be the better option when you are trading in a relatively less busy period. In both cases, you can increase your chances of success by trading in the direction of the longer term trend.
You will also need to develop some clear risk rules that define your stop loss points. Your stop losses need to be small enough to protect capital, and large enough to not be constantly triggered by random market movements.
Concentrating on a single pair
Trading a single currency pair allows you to focus on the market movements and recurring patterns of a particular market rather than constantly scanning a number of currencies for opportunities, or managing multiple currency positions.
The EUR/USD pair can be an ideal option for this strategy. It is the most liquid and heavily traded pair in the market and generally offers the lowest bid/offer spread.
Testing your strategy
Before day trading your hard earned money, you should test your strategies on a demo account. Execute as many test trades as possible to find out how well it works in realistic conditions.
Another way to test the effectiveness of your strategy and trading system is by backtesting it on historical data.
Recommendation
The fact is that forex day trading is quite a risky game to play, although it can also be very rewarding. It is easier to be profitable if you trade longer term trends, and many profitable forex traders profit from long term positions.
If you do want to undertake forex day trading, make sure your strategy is well articulated and tested, focus on a single currency pair and consider using automation to reduce stress and effort.
Conclusion
Forex day trading is an approach where a trader executes a number of trades within a day. But due to the unpredictable random short term changes, forex day trading is quite risky. You’ll need to develop a clear strategy to survive.
However, the best way to become a successful forex trader is by trading long term trends. This doesn’t need the same amount of time that day trading does, and provides lower risks and lower trading costs.
Managing risk is important in the forex market. Day traders are no exception, and this is why they often lose out. If you want to play this game, make sure that you have a complete trading strategy that manages your risk and allows you to be profitable over the long term.
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Tags: currency pair, Forex day trading, risk, short term movement, Trends