The learning curve whenever you want to start out in a new career is always steep. For Forex day trading, it is not less so, too. In fact, arguably, you have far more to learn when you want to start day trading Forex than you have compared to any other career. Hence, you should be ready for that.
For that purpose, we have provided this guide. Here, you will learn what day trading is all about, the tools you need to get started in it, and how you can manage its associated risks. So, read on.
What is Day Trading?
Day Trading is the style of trading whereby trades are entered and exited within a day. Typically, a day trader initiates and closes at least two trades per day. Although it is highly risky, day trading successfully avoids the huge risks associated with keeping positions overnight.
Day Trading can be applied to a wide range of financial markets so long daily liquidity is not a problem in it. There are day stock traders, day Forex traders, and even day futures traders. No market is better to day trade than another. However, day trading the Forex Market is less problematic as it requires the least capital to start.
Tools You Need for Day Trading
Trading generally does not require much. The most important requirements are capital, knowledge and discipline; other things follow. The following are the most important of those other things.
· A computer
A computer is a must-have if you will be trading at all, and if you will be day trading especially. However, not just any computer can do. You have to ensure that your computer is of good quality. It must have enough memory, with a high-speed processor.
Day Trading is fast, so you will not want to be using a computer that lags. Also, a fast internet connection is essential. In fact, you cannot access the market without it. So, you should also seek to get a reasonable one.
The type of broker you use is important from two perspectives. First is cost; second is the quality of the trading platform it offers. Day trading requires you to frequently place trades so you have to pick a low-cost broker. Else, all your profits will be eroded.
Also, the platform a broker offers must be suitable for your style. The execution speed must be fast. The customer support service must be top-notch. And the markets it avails clients must be wide enough.
Managing Your Day Trading Risks
Day Trading the Forex Market is not only stressful; it is risky, too. Hence, you should brace yourself up for the risks as much as you do for the stress. Naturally, the Forex Market is highly risky in and by itself. However, it becomes more so when you attempt to day trade it.
Forex Traders are as much of risk managers as much as they are analysts. You should not be an exception, too. You can manage the risks associated with day trading the Forex Market with the following strategies:
Risk/Reward: The first risk management step in Forex Day Trading is to set a healthy risk-reward ratio. This translates to the ratio of the amount of money you are willing to lose to the reward you are looking forward to gaining on each trade you take.
If your risk-reward ratio is 1:3 for example, that means that on every $1 you are willing to lose, you are looking forward to making 3. Risk-reward can also be expressed in terms of pip. A risk-reward ratio of 1:3 can also mean that for every 3 pips you are looking forward to gaining, you are willing to lose one.
Stop Loss: Now, make a promise to yourself that never will you enter any trade without setting a stop loss. Yes, this is important. Many times, the market will not go as you anticipate. Sometimes, you will be on a buy, while the market will start falling.
Other times, you will be on a sell, and the market will start to rise. As a result, you must always protect your positions. You can do that using a stop loss. You should set stop-losses based on your risk-reward profile. For example, a risk-reward profile of 1:3 will require you to set a stop-loss of 10 pips for every 30 pips you want to gain.
Position Sizing: Forex Trading is highly leveraged. And that can lead you to trade too big, which can be of fatal consequences. Hence, you should always size your positions. To calculate position sizes, you need details such as the amount you are risking, stop-loss, and value per pip. Let’s say you are willing to risk $10 per trade, your stop-loss is 20 pips, and the value per pip on your account is $1, then your position sizing will be ($10/20× $1) which is 0.5 lot, the position size you should trade.