Day trading is a term used in the trading world to mean short-term trading, carried out during a single day. Though day trading is a feature in all kinds of trading, may it be bonds, commodities or shares, it is more practiced in FX trading. The reason for this is could be the volatility of the FX market. However, the most pressing reason is the leverage. Leverage is the amount that a broker lends a trader to trade. However, when a trader holds a position for long (in case of FX, a broker will hold that position for the trader), it will come with a fee. FX day traders, in that aspect, are way removed from the need to hold long positions at extra fees.
There is a lot of material written on what one should do to be a successful day trader. In fact, there are effective Forex trading courses for new traders too, that lay a strong foundation towards understanding the FX market. These courses also make traders aware of the market tips that help day traders to make profits. However, it is equally important to keep a tab on what a trader should not do. Dodging errors is one of the keys to avoid making losses. Trading fundamentals remain the same. However, with regards to day trading, there are activities that a trader should not lose sight of.
Here are is a list of mistakes, that a daytime trader must take note of.
Do not put all (the money) into a trade:
There will be good days and there will be bad days in trading. A good day or a good run of luck for a week, should make a trader happy but not to the extent that he puts all his money into one trade. The risk/reward rate, for a day trader should not exceed 1%, per trade. Exceeding the 1% mark will widen the scope of losses by as much.
Keep the Fundamentals clear:
A day trader must keep :
- The Win Rate: The number of trades that a trader wins. For a day trader, his win rate should be above 50%
- The reward/risk ratio: This is an average of how much you win as against how you lose. The perfect ration to maintain would be a constant 1:25 for a day trader.
Do not overlook engaging stop-loss orders:
This is perhaps one of the most important mistakes to avoid. Using stop-loss orders is to taking precaution, beforehand, just in case things get ugly. In day trading, the entries and exits are in the span of a day. The market will fluctuate through the day, hence along with the wins will come losses too. However, there will be a limit till which a trader can bear the losses. That limit is the day trader’s stop-loss order. A stop loss order fortifies a day trader from making further losses
Never misjudge your position size:
Entry and exit from the FX market is a vital judgement in the FX market. However, understanding emphasis must be laid on making correct assessment about the position size too. Position size or trade size is the amount that a trader invests into his trade. FX & Cyrptocurrency day trading expert, Kishore M’s take on position is, “A trader will trade throughout the day. Hence it is vital that he understands the 1% risk factor that he must stick to. If he increases his position size, he increases his trading risks as well. A profit will be as big but a loss will be as humongous as well”.
Trust your broker only after verification:
If a trader is trading online in the FX market, he will inevitably need a broker. This need is also due to the need of “leverage” in the FX trading. However, there is no dearth of scams when it comes to the trading market. Hence look for a broker with reputation. Check the tools offered by the broker. Be alert about any kind of bonus that the broker has to offer, since most of the time it is but a tactic in disguise to loot more money.
Multiple trades, avoid correlated trading:
In FX trading, currencies are bought and sold against each other. Some of the pairings are often at the same level of gain. At this point in time, though it might seem quite tempting to trade in all the likely pairs that are doing good, a little research will probably reveal that most of these correlated. For instance, USD is the most traded currency. USD paired with an EUR (EUR/USD) or GBP/ USD may seem to be moving in the same direction. The graph here is being pulled by the common currency in both the paring i.e. USD. Both of these sets of paring will work towards the same trend as USD is the common currency. If a trader invests all into this pairing, without realizing the fact that a common currency is pulling the strings here, a loss will mean he loses all. For Day traders, Kishore M’s has an advice. He says,” Trade in independent pairs. That is the only way to counter impact because trading in correlated pairs is like heading towards the crash without any recovery plans after an impact”.
Do not fall for fundamental analysis of the market:
In FX trading, a fundamental analysis will mean looking at world events, policies, laws, natural catastrophes etc to draw your conclusion about what can be the best trading strategy. It is a long-term view. This is not for the day traders, who are in the market for a short-term trading. Day traders must stick to their own strategies and see it through. If a trader is making losses, the stop loss checks will close their positions and stop the losses at the predefined point. However, a fundamental analysis and decisions made on the same will prove futile for a day trader.
No plan is an obvious mistake:
With investments, in general, a person must have a charted path planned. All the more so when it comes to trading, especially in a high investment portfolio like FX trading. FX is a highly volatile market. A trader must have his plan, put down in ink, keeping his analysis clear, the tools that he will be using to trade etc. These must be tested out in the demo account. This is especially applicable to new traders, though, many a time, seasoned FX day traders also need to test out their strategies, to be sure about their plans.
A day trader is advised against letting world events affect them. However, FX markets do get impacted by some of the news. For instance, the Non-Farm Payroll report, gets the FX market into a frenzy, especially after its release. In such a case, a day trader must have his strategy ready for how the market will be, for his plans, once the news breaks.
Wrong trading tool chosen is half the battle lost:
As a day trader, you might be full time into trading or you might have a full time or a part-time job. In any case, decide your trading platforms. If you are not into trading full time, dabble in daytime trading and you have enough screen time to give to your profession, you might go with a manual platform. However, if you are working and do not have enough screen time to spare, you should ideally opt for a automatic trading software, also called the Algo system, with a predetermined stop loss check, to trade for you. Another effective legit FX trading system is the Powerup Capital Forex Trading System, which comes complete with a demo account.
Daytime trading is a volatile, short time trading practice. It is high-risk trading, which can bring in huge profits as well as losses. Daytime trading gives a trader that adrenaline rush that challenges his mind, decision making, analyzing power to make profits while keeping emotions in check.