Do you know an estimated 96 percent of Forex traders lose money and end up quitting?
It is obvious that the market can shake you out if your intention is to get so much from it with too little capital. No wonder new traders find it difficult to generate revenue.
Having the mindset of beating the market is something you should deal with first. This is because it has caused people to trade against trends, which is usually the best recipe for losing money.
If you’re reading this, then you have decided to be among the four percent of traders who want to become successful in Forex day trading.
Read on to find out how to go about it the right way.
What Is Day Trading?
Day trading is the buying and selling of a security or stock within a single day of trading. This kind of trading runs in any marketplace. Thus, it’s most prevalent amongst the Stock Market and Foreign Exchange market (FOREX).
As a day trader, you must be well-educated and well-funded. Also, you must make use of short-term trading strategies and high amounts of leverage. This way, you will make a profit from small price movements in high liquid currencies or stock.
Yet, being well-educated and well-funded doesn’t guarantee instant success. That’s because of the “invisible hands” that influence prices in an intraday Forex session.
There are two crucial functions of traders in the market. There are traders who provide most of the liquidity for the market and traders that run the market in all efficiency through arbitrage.
Most times, day traders look out for a currency or stock with a high liquidity and trade with them. The major currency pairs are always seen as the most preferred choice. This is because they have the largest trading volume on a given day.
If you’re a beginner, using the EUR/USD pair will come as your best bet because it has the most reliable trading condition for the market. Also, there are a lot of fluctuations in its price.
Besides, some traders use Forex day trading to avoid paying fees to keep a position overnight. These fees are swaps.
The Forex trading is a speculative activity, but it keeps the market running smoothly.
Now you have an overview of Forex trading. But there are four crucial things you must know before starting your day trading.
Market Knowledge and Experience
Before you start trading, make sure you have a solid knowledge of the Forex market. Avoid placing any money to trade without knowing how the market works.
Also, it’s advisable that you trade for some time with a demo account before using your real money. This will help reduce the risk of losing so much money at the beginning.
Have Enough Capital
As a trader, you must have an adequate amount of capital at your disposal. It should also come with a sufficient risk/reward ratio whilst keeping the trade size low.
To capitalize on intraday price movements, you will need a large amount of capital.
As a matter of fact, it’s recommended that you only trade what you can afford to lose.
Have a Good Trading Strategy
To be a successful trader, you must have an edge over the market.
Just as the market conditions change every trading day, so should your trading strategies. This will require you having a productive mind.
As a day trader, you must keep refining your approach until you can effectively limit losses and generate consistent profits.
Without discipline in your Forex day trades, your strategy will be useless. Most traders lose money because they make trades that don’t meet their criteria.
In Forex, when you plan the trade, stay disciplined to trade the plan.
Common Forex Day Trading Mistakes
The mistakes you should avoid in order to increase your winnings in day trading Forex include:
Day Trading with a Poor Win-Rate and Risk Ratio
There are two trading statistics you should pay close attention to. These are your win-rate and risk ratio.
Your win-rate refers to the number of trades you win, expressed as a percentage. For instance, if you win 70 trades out of 100, your win-rate is 70 percent.
As a day trader, it’s important to keep your win-rate above 50 percent.
Your risk ratio refers to how much you win in relation to how much you lose on an average trade. If your losing trades are $60 and your winning trades are $85, your risk ratio is $85/$60 = 1.4.
As a day trader, try to keep your risk ratio above 1.25.
Not Day Trading with a Stop Loss
A stop-loss is an offsetting order that allows you get out of a trade. This happens if the trade moves against you by a particular amount.
A stop-loss is usually placed at a location that shouldn’t be touched if you’re right about the direction of price in a short-term.
For instance, if the price doesn’t move in the direction you expected, the stop loss function enables you to stay out of a losing trade.
In as much as the stop loss helps you get out of a trade that is not profitable, it cannot help you control your risks.
Lack of Risk Management for Each Trade Each Day
Not having a risk management for each trade is one of the day trading mistakes that you should avoid.
There are two parts to risk management. The first part is to know how much of your capital you’re willing to risk per trade.
It’s ideal for day traders to risk one percent or less of their capital on any trade. That’s because in case you lose so many trades, only a small amount of your capital will be lost.
The second part of risk management is controlling daily losses. If you have a lot of losses in a day, you could lose a substantial amount of your capital even if you risk one percent for each trade.
Anticipating How the News Affects the Price of a Forex Pair
News on the economy can cause pairs to fall or rise sharply. But this doesn’t mean you should take a position before the news comes out as an easy way to make a profit.
This is because there is so much volatility in price and it may or may not swing in your favor.
Devise a strategy that will get you into a trade after the news. This allows you to make a profit from the volatility.
Day Trading without a Plan
A trading plan is a written document that outlines exactly how you intend trading each day. It’s important to ensure that your trading plan is easy to follow.
It should include what time frame and markets you will trade. This makes analysis and trading easier.
Not Researching and Testing Your Broker
Carrying out proper research and testing of your broker is a must. This helps avoid depositing your money with a trading scam or a poorly managed broker.
Avoid these six mistakes whenever you engage in Forex day trading. Make a trading diary and stick to it. This way, your experience will be interesting and profitable.
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