Forex Day Trading: What is Forex Day Trading

By June Campbell

You have heard of FXCM. It's the huge financial market that trades in international currencies. Forex day trading is one component, although a significant one, of global Forex trading.

Day Trading Explained

Day trading exists in all markets. A day trader is a person that opens and closes all positions throughout the course of a single day. They hold no positions overnight.

By ensuring all positions are closed before shutting down for the night, the day trader removes the stress of wondering what is happening to his or her investments overnight. In theory, this removes the stress and promotes a decent night's sleep.

The downside to day trading is that the trader loses out on a number of hefty currency swings that have been building up for an extended period of time. Some of these swings are in the making for months at a time before they occur.

On the other hand, day traders maintain that they can take advantage of short term price fluctuations that long term traders miss out on.

Day Trading Means Many Small Profits

On a typical day on the Forex market, numerous price fluctuations occur and can be acted upon for profit. Since the majority of the day traders trade only in the majors, they may see a price fluctuation as much as 50 to 200 percentage in points in one currency pair. (Percentage in points are referred to as pips. A pip is the smallest increment in Forex trading.)

When day trading, the trader tries to monitor all the majors and make several trades. With this approach, a person might many small gains of ten or twenty pips. From time to time, he or she might make as much as fifty pips in a trade. Although none of these pips amounts to much individually, when you add them together you could end the day with a nice little profit.

Your profit is determined by your leverage.

Forex Leverage

While leverage is important to all Forex traders, it is much more significant to the day trader. If you are making as little as twenty or twenty-five pips a day, and engaging in only half a dozen trades, with sufficient leverage, you could end up making a few hundred dollars by closing time. On some days, you might make a thousand dollars.

Leverage refers to the percentage amount of money that you put up from your cash reserves when you open a position as compared to the percentage amount you borrow from the Forex broker.

As an example, suppose your opening position (the amount you are trading) is $1,000. If the Forex broker loaned you $900, you would have to put up only $100 or 10% of your own money. This frees up your own cash so you can enter into more trades.

However, there is a risk. If the market shift is not in your favour, you will have to add more money to get to the 10%. If it is in your favour, you will profit.

Because of leverage, it is possible to have as much as ten times the position and consequently make up to ten times more profit. Keep in mind that you are multiplying your risk by ten times also.

Successful day traders minimize their risks through counter measures such as stop-losses. In Forex, a stop loss is an order type in which you stipulate from the beginning the price at which you want to cut your losses and sell.

Forex Day Trading Strategies and Tips

For the most part, the strategies used in global Forex trading are also applicable to day trading. It is critical that you control your emotions and use your head. Be sure to have a logical, well-thought out reason for any trade you make.

"Bot" software is the answer for some traders. Bot software is programmed to make small but numerous profits by acting on build-in rules.

Anyone who is looking for a structured system or set of Forex rules is wise to scrutinize technical analysis. You must remember, however, that over a day, chart patterns may be highly volatile. You are unlikely to witness the patterns that you would find if you studied analytical charts depicting traits over several months.

You must also understand that the economic calendar has a strong impact on day trading. Watch these events carefully and take note of market reactions. Some day traders study world news and make trades based on current events. Others prefer the "wait and see" strategy. They enter into no positions throughout the life of a major news event.

And finally, you must understand "spreads" and be sure to deal with a Forex broker who offers a tight spread. A spread is the difference between the price you pay and the price at which you sell, quoted in pips. A tight spread indicates a lower ask price and a higher bid price - meaning it is easier for you to make a profit.

If a broker's spreads are too wide (meaning too high), your profits will be less.

Most Forex brokers claim to have tight spreads, so you will have to do your homework and learn how to analyze the data carefully.

Many Forex tutorials and guides are available to help you with this task.

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