Choosing between day and swing trading, or other trading styles in forex, did you devote yourself to the former? Then let us dig further into this risky but rewarding day trading approach and evade the risks it suggests.
1. Stay off the market in the first 15 minutes after opening
As a forex trader, you will be paying special attention to specific currency pairs at certain times of the day. The market opening is typically filled with many uncertainties. Traders are usually blinded by the occurrences leading to the previous day’s close and may make irrational and panicky decisions. Some hope for reversals, some follow the trend, and some adopt a wait-and-see approach. This can lead to volatility during those few minutes. Therefore, you should wait for the market to cool off the previous day’s “hangover” and only enter after spotting a good entry point.
2. Unless you urgently need the money, avoid market orders
Market orders can be tricky sometimes. With this type of order, you are instructing your broker to buy an asset or sell it at the next price available. You may place a market order when the price is favorable to you, only for the market to reverse afterward, thus limiting your profit or increasing your loss.
You should, therefore, avoid going for market orders unless you are convinced that the current price has enough margin to cushion you against losses in case the market goes against you. Instead of using market orders, you should apply a limit order, which defines a threshold below which the broker cannot sell your asset or a ceiling above which they cannot buy it. Limit orders can help you to limit the risk more precisely.
3. Use reliable market news sources and avoid dubious sources
Trading should be based on skills, research, and understanding of the market. However, the trading world is also awash with rumors and often even unsolicited advice on which securities to buy and which ones to dump. Such information is not only risky but may also be illegal, as the regulators may sometimes flag them as insider trading.
Also, such information may easily push you off-track and make you abandon your well-thought-out strategy. In essence, following uniformed tips from untrusted sources makes you a gambler and not a trader. So, do your research well, come up with a strategy and stick to it. Avoid unnecessary distractions and trust your judgment. Otherwise, don’t trade.
4. Learn how to cut your losses
While there are educational materials on trading out there, you should acknowledge that loss-making is part of trading. You should, therefore, not be overly confident and optimistic about a trade.
One of the key building blocks of being successful as a trader is to know how to cut one’s losses once it becomes apparent that the trade is not working. Staying in a losing position for too long may magnify small losses into a hemorrhage that you may not recover from. The same applies to winning positions.
Nothing lasts forever in the world of trading. You should embrace the fact that even when your strategy is spot-on, and you get on a prolonged winning run, the market will reverse at some point.
Therefore, once the market is on a reversal against you, cut your losses and close the trade. Many newbies stick to a strategy even when they are losing money in the hope that the market will once again reverse and favor them. This is a risky approach to trading, and it will rarely result in net profit.
5. Have an exit strategy
For every trade, you open, have a specific target for taking a profit. Once you’ve got your target, take the profit and close the trade. This will help you maintain discipline in your trade and ensure that you don’t lose the profits you’ve made by keeping your position open for too long. You can always return to the market and open a new position when you spot a good opportunity.
Similarly, you should have an exit plan for every trade you open if you find yourself in a losing position. One of the common ways to do this is by employing a stop loss. This approach will ensure that you have a predetermined maximum loss you are willing to take, thereby cushioning you against unforeseen losses.
6. Take time to learn first
The internet is a resourceful place to obtain learning material that will equip you with practical and proven strategies for trading successfully.
You should, however, not restrict yourself to learning via the internet only. You can also learn from experienced traders. Ultimately, nothing beats practice, research, and experience when sharpening your skills as a trader.
7. Only trade with money you can afford to lose
Nothing is assured in trading. Even the most effective trading strategies can lead to losses. Each position you open is a risk you are getting into. Therefore, you should beware that there’s always a chance that you will lose your money. With that in mind, you should not commit more money than you are willing to lose to a trade.
At some point, you will lose money, regardless of how skilled you are. Markets are far too complicated beyond what we can deduce from technical and fundamental analysis.
8. Avoid trading with margins if you are a newbie
If you don’t use too much leverage, it will help you avoid debt traps and minimize your losses.
9. Apply the 1% risk rule
Each trade you engage in should not take more than one percent of the funds held in your account. A fundamental guide to profit target using this rule is to expect a profit between 1.5%-2% per trade.
This approach is based on the idea that since a day trader is an active trader, you will ultimately open tens or hundreds of trades. Therefore, assuming that you attain an average 1.5% profit in 50 trades, you will ultimately end up with more than double the amount spent on trading as your profit.
Trading is a risky but rewarding exercise. For new traders, the risk levels are comparatively high, and, therefore, you must tread carefully in your trade. You should trade based on strategy and not emotions. Maintain your discipline and appreciate that losing is part of trading. Don’t be over-enthusiastic, but learn when to take profit, take losses and exit the market.