• June 19, 2018

Day Trading Forex: Smart or Stupid?

We have all seen them, there are countless sites and articles which promise to turn you into an overnight trading success. Alternatively, they might promise to turn you into a millionaire from one day to the next, or at least enable you to quit your job take your computer to a beach and live the dream. And they promise all of this with just a few hours trading a day. Not bad at all. But a little far fetched, right?

First of all, we should consider what a day trader actually is. A day trader will open and close their trading positions within the day – on most days by the end of the trading day they will have no positions left open. They generally don’t hold risk overnight let alone over a couple of days. Therefore, they don’t risk the market turning against them overnight, which could result in a heavy loss. So, is forex day trading actually a clever way to invest?

If you are new to trading, day trading can be quite scary and could feel like you are playing with fire. There is a general feeling that if you hold a position open for a longer period of time you are giving it plenty of time to swing round in your favour. However, this isn’t necessarily a helpful sensation. Not only are you giving your position plenty of time to swing in your favour, you are also giving it plenty of time to go further against you. Therefore, this point is null and void. You should always have a sensibly placed realistic profit taker and a stop loss.

Day trading requires more capital. In a day, a forex pair is going to have a relatively small move, compared to across several days, a week or even a month. Therefore, in order to make a reasonable sized profit from small market movements you need to trade larger sizes which means having more capital in your account. This means that if you are looking for trading to be your main income, and this to be achieved through day trading, then you must be prepared to put a large amount of capital in your account. However, this is not just a matter of putting more funds in the account.

Trading large trade sizes will have a larger psychological impact on the less experienced trader. Seeing large sums of money swing around can cause a trader to start allowing their emotions to take control, which can be detrimental to trading. Therefore experience is also necessary in order for you to be able to keep the psychological element under control.

The alternative is having a smaller capital, smaller trade sizes but accepting smaller profits. However, this is not always sensible if there is a minimum commission cost which is relatively large as you will never be able to turn a profit in the trade; you will be too busy earning the commission back. Furthermore, at this level there is no way that you could ditch the day job.

A pretty interesting post, huh?

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