What are the Rules of Day Trading?

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A forex day trader’s objective is to take advantage of the random price movements of a liquid currency pair before the market closes for the day. The more volatile the market is, the more opportunities arise for day traders, regardless of the direction in which the market moves in the longer term.

A shorter time horizon means that day traders look at the markets with a different perspective than long-term traders. Call them strategies or rules, here are some of the methods usually followed by day traders to stay in the race.

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1.     Start with a Demo Account

A demo account or a virtual trading account is provided by most retail brokers these days. With some virtual money, which traders don’t spend from their pockets, they get to test their trading skills and familiarise themselves with the markets in a simulated environment. They get to understand the workings of different technical indicators on their platform and learn how to execute orders, like stop-loss, take profit and limit orders. This strategy helps, as day trading requires quick trade execution skills, which only comes with practice.

2.     Risk Only 1% of the Capital on Forex Trades

A common rule that many day traders follow is to not risk more than 1% of their trade capital on any particular trade. This is to ensure that no single trade or no specific day has any significant impact on their account balance. It also keeps losses to a minimum in tough market conditions.

3.     Don’t Trade Immediately After Important News Releases

High impact scheduled economic releases can cause volatility in the forex market. While it may seem lucrative to grab some extra pips in a reactionary market, doing so without proper trading plans in place only means the risk of losses. Instead, day traders wait out this period of volatility. Some markets even tend not to trade the first 15-minutes after the market opens. That is the time when pending orders of the previous night get filled, and prices adjust according to news releases that occurred while the market was closed.

4.     Never Add to Trading Losses

Despite the best measures and strategies, losses do occur. Day traders are cautious about “averaging down,” the practice of adding extra trades to a position, when the market is moving against you. Prices can go in unexpected directions for a much more extended period than expected. Adding to losing positions often results in losses being magnified. That is why day traders use stop-losses in every single forex trade.

5.     Avoid the Temptation to Go All In

Trade psychology plays an essential part in a day trader’s career. It is very easy to fall prey to temptation, fear or some other emotions. If the entire day turns out to be unfavorable, traders could get desperate and put all their money in. On the other hand, consecutive wins can make a trader overconfident. In both scenarios, traders have to resist the urge to cancel their stop-loss orders, in the hopes of gains.

6.     Don’t Place Multiple Correlated Trades

Multiple trades mean diversifying your risk. However, a balance is needed here. Similar trade setups and chart patterns in different forex pairs indicate a strong correlation. Pairs that tend to show high correlation will move in tandem in the market. So, contrary to the goal of diversification, placing trades for highly correlated pairs would actually increase risks. To avoid this, study the markets in detail.

 

Different traders have different rules and principles they swear by. Only experience will help you find what works for you. In the meantime, don’t forget to take adequate risk management measures and always use stop-losses, irrespective of the strategy.

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