The sheer breadth of forex trading methods and systems around right now is amazing. There is no shortage of ways to trade in 2018, that’s for sure. Sitting right up there with the most popular trading strategies around is day trading. Representing a snappy and sharp approach to the forex market, day trading principles have resonated with millions around the world. That being said, it isn’t always the easiest strategy to get your head around. To help you get a grasp on what day trading is and whether or not it is right for you, the following takes an in-depth look at why it’s considered one of the most popular forex trading strategies around.
Defining Day Trading
Day trading is defined as the act of buying and selling a financial instrument or commodity during the same day. This term can apply to a single buy-and-sell move or multiple moves, as long as it all occurs before close of play. The goal with day trading is to take advantage of small market price movements to generate little and often profits and even smaller losses. On paper, day trading sounds like it would be the perfect low-risk trading strategy for all, but day trading is actually far from a one-size-fits-all approach. Requiring the perfect blend of trading principles, dedication to trading during traditional hours, and outright timing, day trading is something that can generate big-time returns if approached in the right way.
Common Market Moves
When day trading is discussed, you are going to hear it partnered with the word “timing” regularly, as that’s arguably the key to success here. Most orders are prepped and ready to go as soon as the market opens, so traders can come flying out of the gate. This tends to create some initial price volatility, which day traders will seek to thrive upon. Those with seasoned day trading experience will be looking to recognize patterns and move to make profits off of nominal price movements. That being said, those that are new to day trading may want to avoid the first 20 minutes following the market opening, as it can prove to be a little too volatile for the inexperienced. If you are just starting out day trading, sticking to the middle hours is advised, as they are usually less volatile when heading towards the closing bell. Think about it this way: the early “rush hours” offer the most opportunity for day traders, while the middle hours are the safest in terms of movements without getting run over.
Getting to Grips with Day Trading
There is no denying that day trading has the potential to be extremely profitable, but—as we said earlier—it isn’t something you can take up on a whim. To ensure that you get started on the right foot, here’s a breakdown of what you’ll face when you get started.
The first thing you need to understand is that day trading is an extremely active form of forex trading. There is no “sit and wait” approach here, as you are going to need to have your finger on the button of what’s happening. Because you’ll be making many trades “off the cuff,” as it were, it’s worth implementing the 1% risk rule. In the case of day trading, you need to make sure that your capital is well spread and easily within reach. The rule states that through appropriate risk management steps, you never lose more than 1% of your total capital on any single trade. For example, should you have a balance of $30,000, through the 1% rule you’ll ensure that the most you’ll lose through any trade is $300.
Where day trading can be a fast-paced strategy, composure and discipline are of huge importance. Through other forms of trading, making missteps can be costly, but they can seldom trigger a large-scale domino effect. It’s a very different story when it comes to day trading, as a bad move can be much more impactful. Before you start day trading, you need to seriously evaluate your own levels of self-discipline. If you find that your track record isn’t exactly filled with a quick, yet calm approach to the market, you may have some work to do before day trading becomes right for you.
Think day trading is a one-dimensional approach to forex? Think again, as day trading takes on a number of different forms. Yes, you will be limited in the hours you trade, since you will be looking to open and close multiple positions over the course of a day, but there is absolutely nothing stopping you from switching up your approach. Momentum trading, pullback trading, breakout trading, scalping, and—while not advised—news trading can all be factored into your day trading efforts.
Common Day Trading Mistakes
It has been defined, addressed, and explained above, so by now you should have some idea of how and why day trading has become so popular. Before you start implementing it into your forex trading efforts, it is well worth understanding some common day trading mistakes.
The most common mistake we see is that of investors adopting a day trading strategy with unrealistic expectations in mind. If ever a trading strategy had a “grind” approach in mind, it’s day trading, so you need to understand this. Massive daily turnovers, huge single trade profits, and so forth generally aren’t in the makeup of day trading.
Another somewhat foolish move is to trade off the back of news releases. The temptation to do this is often huge, but moving in the immediate aftermath of a new release can often disturb your trading plan. Prices move aggressively, causing a whiplash-like action to rumble the market. Getting into the mix of this—especially if you don’t know what you’re doing—could present real trouble, as hairpin turns and increased liquidity will do your capital no favours. There are plenty of ways for a day trader to turn profit off the back of a news announcement, but jumping straight into the fold isn’t one of them.
Forget holding, taking long positions, and adopting the “wait and see” approach, as day trading is a strategy that prioritizes making the most of a trading window. While its action-orientated nature won’t be to the taste of everyone, as the above has explained, for those that do want to work within a set window and not hold positions overnight, day trading will certainly be worth looking into.
The information provided herein is for general informational and educational purposes only. It is not intended and should not be construed to constitute advice. If such information is acted upon by you then this should be solely at your discretion and Valutrades will not be held accountable in any way.