Trading stocks on the market short-term is a rather profitable approach if planned correctly. Not only does the money come in fast, but it also gives you the opportunity to witness your results in a matter of hours and identify what could be perfected about your strategy. To help with that here is everything that you need to know about forex day trading.
What Is Forex Day Trading?
As stated the definition of day trading is right there in its name. It means holding a position for no more than a day. Of course, this implies that it can also last for 15 minutes, one hour, four hours, and so on. It is not the same thing as scalping, which takes place in less than 15 minutes. In fact, sometimes its duration can be of just one minute.
The recommended amount for a beginner is of four hours at most. Trying to drag your position out for the entire day is dangerous when you don’t possess the necessary experience to do so. Nevertheless, the main advantage of this approach is that your capital is at risk for a limited time frame only.
Therefore, even if you make a mistake, you will know in a matter of hours. This gives you enough material to learn from your failures and become a better trader in the long run. Another benefit of short-term trading is that risk ratios and profit targets are a lot more clearly defined, which means that you will know exactly what to expect.
What is more, day trading defines market orders. This is rather gainful for investments because it helps you manage daily potential investments more efficiently in an intraday setup. All in all, it is quite a profitable approach when applied correctly. So, how can you bring in a true profit with it? Let’s find out.
How to Turn a Profit
The number one essential for making money in the forex market is proper risk management. This is true in the case of every single approach, including day trading. Keep your risk at 1% to achieve the best results. For example, if your account is a 5,000-dollar one, you shouldn’t lose more than 50 dollars at a time.
A reliable day trading strategy should always contain an adequate win rate assessment, as well as one for the risk to reward ratio involved. The former is easy to calculate because it basically refers to how many trades are winning ones out of a total of 100. Thus, if you make a profit from 60, your rate will be 60%. Anything over 50% is sought-after.
As for the latter, it is determined after analyzing how much capital is put at risk. For example, if you lose 10 pips, but win 15 in return, then your trades will be profitable even if your rate is barely at the 50% threshold. Thus, many day traders strive to make more pips on their winning trades so that they have some leeway.
Of course, the higher your win rate, the more flexible the ratio is as well. Reverse the situation, and a beneficial risk to reward ratio means that you can afford to lose a couple of extra trades than you could otherwise. In order to turn profits, you must aim for the ideal balance between these at all times.
Nevertheless, the market sometimes doesn’t make sense in spite of your most suitable predictions. It can be illogical, volatile, and downright choppy at times, which means that failures are bound to take place from time to time. For this reason, having realistic expectations is essential for your strategy.
Even the most notorious players in the field have had their fair share of downfalls. One of the most famous traders in the world, Bill Lipschutz, lost a lot of money in a bad trade due to poor risk management. But then he took the experience and saw it as a learning opportunity. Nowadays, he is one of the most respected investors in the world.
If there is one essential takeaway from this article, it’s the fact that mistakes should be seen as lessons, not an incentive to give up. Take a step back and go over your reports with a clear head. Where did you go wrong? What could have been executed better? The next time you’re faced with an obstacle, you will surely overcome it with more ease.
Day trading on the foreign exchange market is a prolific approach as long as it is carried out with proper risk management. But even when your plan is thoroughly put together, it’s important to have realistic expectations. Stocks sometimes have a mind of their own, which is why you need to accept that you can’t predict everything.