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The Lowdown On Day Trading On The Forex

Aug 17, 2007
First what is Forex: The FOREX or Foreign Exchange market is the largest financial market in the world, with an volume of more than $1.5 trillion daily, dealing in currencies. Unlike other financial markets, the Forex market has no physical location, no central exchange. It operates through an electronic network of banks, corporations and individuals trading one currency for another.

The Forex, or foreign currency exchange, is all about money. Money from all over the world is bought, sold and traded. On the Forex, anyone can buy and sell currency and with possibly come out ahead in the end. When dealing with the foreign currency exchange, it is possible to buy the currency of one country, sell it and make a profit. For example, a broker might buy a Japanese yen when the yen to dollar ratio increases, then sell the yens and buy back American dollars for a profit.

Day trading is a style of trading on the foreign currency exchange market in which a trader completes all his trades within a single day. In other words, he may make a few dozen - or more - trades in a day with the objective of buying and selling quickly and making a profit from the fluctuations in a currency exchange rate over the course of the day.

The idea behind day trading is that currency exchange rates are subject to fluctuations over the course of the day - they go up and down depending on who's buying, who's selling and what rumors are floating around. In fact, day trading in the foreign currency market is probably the single segment of any type of stocks, currency or futures trading market most affected by rumors and real-time, real-world happenings. A well-informed, quick thinking trader can roll up the profits by paying attention to what the current news is doing to the currency exchange rates.

The currency market, also known as the Forex market (Foreign Exchange market), is the most liquid market in the world. Daily trading on Forex is estimated to be in excess of $1.3 trillion U.S. dollars. That makes Forex the world's largest, most efficient market. A major part of the reason for the liquidity and volume of trade is the practice of day trading. The difference between day trading and other types of trading is in how long you hold your stocks (or in this case, your currency). In day trading, you hold nothing beyond the close of the day's market.

As the currency market is a 24-hour market, there is really no market closing which changes the rules slightly. Trading is going on all of the time, from Sunday afternoon to Friday afternoon, so you can pick your times to trade rather than being locked into the Stock Exchange timetable.

Making Money in Day Trading

The difference between a day trader and an investor is the length of time that each holds onto their stocks. That difference is just on the surface. The real difference is in the mindset of short-term vs. long-term and liquidity. An investor buys something that he believes will steadily increase in value, and holds onto it for the long haul. A day trader rides the minute fluctuations in the currency market minute by minute. Since you're trading in lots of 100,000, just a little fluctuation can mean a big profit - or a huge loss.

Limit Your Loss in Day Trading

A difficult concept for new traders to grasp is limiting loss. If you make a trade for a currency that is heading down because you believe that it's near its support point - the point where it will rebound and start heading back up - and find instead that it breaks the point and keeps heading down, you'll find yourself losing money instead of making it. You have two choices - hold onto it because you're sure that it will start heading back up soon, or get rid of it and limit the amount of money you're going to lose. In day trading, the name of the game is limiting your losses and maximizing your wins - decide ahead of time just how much you'll allow each trade to lose before you sell it, and then stick to your limit. By the same token, decide how much profit you want to make, set a sell order for when the currency reaches that point - and sell when it hits the mark.

Be Informed

People who make money day trading on the Forex are the ones who take the time to learn the market and understand the ins and outs of the trades that they make. If you jump in feet first without learning the terms, rules and trends of the Forex market you're setting yourself up to lose and potentially lose big.

There's no such thing as high profit potential without equivalent risk. So before you jump in, take a course in trading, learn and read all that you can. The more informed you are the better your success will be.
About the Author
David Mclauchlan has a great variety of Forex related articles for you at his Forex Directory. Visit it now at href="http://www.forex-article-directory.com.com">www.Forex-Article-Directory.com
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