19 March, 2015
Forex Day Trading: Explained
What is day trading?
Day trading is one of the most popular ways of performing foreign exchange trading (Forex trading). One top Forex educational provider, academy of financial trading makes a good point of encouraging persons new to Forex trading to open demo accounts, for practice to learn how to predict market trends as well as short term market analysis- before they actually invest.
Day trading deals usually open and close on the same day. The number of trades you make per day is up to you as there is no limit. Though these trades are called ‘day trades’ it is possible for a day trade to go on longer than one day. However, when this happens, there is an automatic renewal of the deal at 22:00 GMT each night for as long as it takes the deal to be closed. A fee is also charged to the trader for continuing the deal for an extra 24 hours, and it is collected once per day for each day the deal is renewed. This fee is usually collected from your balance in your trading account, and if there is insufficient funds then it is collected from any credit card you might have on file. If there is no credit card then it will be taken from any free balance on your account at a later date.
Day trading has become far more popular now that there is an increase in the number of people who use the internet.
A day trade deal has four main steps:
1. The decision to perform a Forex deal
Hypothetically, you believe that the value of the USD will rise due to the fact that you have been following the market. You then decide to buy the currency before the rise so that you can then re-sell it while it is rising and before it falls. This way you will actually make a profit if it rises.
2. You decide on the deal you actually want to make and then you build your account online.
You cannot trade without a currency pair. If your choice is that the USD will rise then there has to be another currency against which it is rising. At this point you will choose your pair, and there are several options: EUR/USD, CAD/USD etc. Say you choose to trade on the EUR/USD, this means you are buying or selling the USD against the EUR, so once the USD rises to the level you want or expect, you can the close the deal. Once this happens you get more EUR for whatever amount of USD you had bought.
Here is a more detailed example:
Let us assume the rate for EUR/USD is about 1.2600. This would then translate to 1 EUR =1.2600 USD. If the EUR starts strengthening/ the rate is increasing and goes up to 1.2800, you will in turn have to pay 1.2800 USD to buy 1 EUR. This means your USD is now worth a bit less. Therefore, when you sell back the EURO at 1.2800 in exchange for USD you will make a profit 0.0200 UDS. For this example, if you bought 10,000 EUR, you would have made 200 USD in profit. In order to buy 10,000 EUR you would only require 100 for a security deposit in USD, assuming you are using a 1:100 leverage. If the Euro had decreased to 1.2500 you would have lost the 100 USD security deposit you made.
In a real life situation however, the maker of the market is charging you a spread. A spread is the difference between the bid you make and the ask price at any given time. The idea behind this is that if there is a change in whatever the exchange rate is, and it exceeds the actual value of the spread (in pips), investor to makes a profit.
The next move you will make, is to decide how much money you want to trade. The good thing is that you will not have to buy an entire amount because you will have access to leveraged trading- the most common of which is 1:100. You will have to choose how much you want to risk, because this is your investment. It is the risk that is involved here why persons new to Forex trading are strongly advised to firstly use demo accounts to learn the market strategies. This way you can make educated risk calculations before investing.
You will also have the ability to set up the ‘stop-loss’ rate. This is the rate where your deal will automatically close out if it begins to go against what you predicted. While your deal remains open, you can change this rate at any point during that time. This helps to prevent excessive loss. In any event you should not risk more than you know you can lose.
3. Monitoring the deal you make
You will need to log into your account regularly to see how your deal has been progressing. Watching the progressing of the trade chart will help you to learn how to analyse the market, and help you make more experienced trades as you go along. Monitoring your account also gives you the chance to change your rates to suit the movement of the market to prevent loss and increase profit. It is also through monitoring your account that you will be able to determine when a deal should be closed for those same reasons.
4. Closing the deal
The choice to close a deal is solely up to you, and it is in your best interest to select a Stop-Loos rate, so that when the deal reaches a certain point it will automatically close. If you do not have a stop-loss rate, closely monitoring your account will help you to decide when it is best to close the deal.
Day trading is not as daunting and risky as it might sound. Once you have taken the time to learn the basics of this type of trading.