The foreign exchange market (forex) has a low barrier to entry, which makes it one of the most accessible day trading markets. If you have a computer, an internet connection, and a few hundred dollars, you can start day trading.
Easy entry is not a promise of a quick profit, however. Before you take the plunge, take some time to learn your True ECN from your day trading, and the common mistakes that you should be careful to avoid.
If You Keep Losing, Don’t Keep Trading
There are two trading statistics that you need to keep a close eye on. You need to watch your win rate and your risk-reward ratio.
Your win rate is how many trades that you win, expressed as a percentage. For example, if you win 55 trades out of 100, your win rate is 55%. As a day trader, you should be working to maintain a win rate of above 50%.
Your reward-risk ratio is how much you win relative to how much you lose on an average trade. If your average losing trades are $50 and your winning trades are $75, then your reward-risk ratio is $75/$50=1.5. A ratio of 1 indicates that you are losing as much as you are winning.
Day traders should aim to keep their reward-risk above 1, and ideally above 1.25. You can still be profitable if your win rate is a little lower and your reward-risk is a bit higher, or vice versa. However, you should try to keep it simple and develop strategies that help you to win more than half of the time and offer a better than 1.25 reward-risk ratio.
Trading Without A Stop Loss
You should have a stop-loss in place for every forex day trade that you make. A stop-loss is an offsetting order that gets you out of a trade if the price movies against you by an amount that you decide.
When you have a stop-loss order on your trades, you have taken a large portion of the risk out of that investment. If you start taking losses on a trade, the stop-loss prevents you from losing more than you can safely do so.
Adding To A Losing Day Trade
Averaging down is adding to your position (the price you purchased the trade at) as the price moves against you, in the belief that the trend will go the other way. This is a mistake. Adding to a losing trade is a dangerous practice. The price can move against you for a much longer time than you expect, as your loss just gets exponentially larger.
Instead of doing this, take a trade with the proper position size and set a clear stop-loss on the trade. If the price falls, and hits this stop-loss then the trade will be closed at a smaller loss than it would have without this stop in place. There is no reason to risk more than that.
(Disclaimer: This content is a partnered post. This material is provided as news and general information. It should not be construed as an endorsement of any investment service. The opinions expressed are the personal views and experience of the author, and no recommendation is made.)