The Risks of Currency Day Trading
Currency day trading is becoming popular with individual investors as more FOREX brokerages come online each year. However, day trading currencies is risky and investors can lose every penny they invest and more. Like most segments of the market, the currency market is subject to occurrences outside of any investor's control. Governments can suddenly change interest rates, natural disasters can wipe out significant portions of a country's economy and aggressive trade policies by rival nations are all factors that conspire to make the currency market largely unpredictable.
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Function
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Day trading by its very nature is a disciplined approach to investing, and currency day trading is no different. Day trading implies short-term investing in the hope of capturing small moves in the underlying currency for profit. Currency day traders go long and short, depending on the technical analysis available for a given currency. Typically, a currency day trader will observe a short-term trend in the pricing of a currency (either rising or falling), will wait for increased volume and momentum in the indicated direction, will then open a position with a buy or a sell, and when the movement of the currency changes or the volume dissipates, the day trader will close the position.
Types
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The most common currencies monitored by currency day traders are the currencies of industrialized nations. These include the Euro (the currency of the European Union), the Japanese Yen, the U.S. dollar and the Swiss Franc. There are many other currencies traded on a daily basis, but for a currency day trader to be successful, he can only invest in the most volatile and liquid (high volume) currencies.
Time Frame
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The golden rule of currency day trading is never hold a position overnight. Emotional decisions defeat the purpose of technical analysis and the currency day trading system a trader has in place. All trades must be opened and closed during the same trading session. Too much can happen when the market is closed that can have a severely negative impact on a position held overnight.
Warning
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The greatest risk in currency day trading is that a position will move against the currency day trader so quickly that he will not be able to close the position before losing the entire investment. Also, because currency trades are leveraged, it is possible to lose even more than the entire investment. The only way to avoid a maintenance margin call is to close a position at a loss before the market closes. Even then, the day trader may have to add funds to his account just to bring the position back to a zero balance.
Potential
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Many investors make a good living by day trading currencies. If an investor is skilled at technical analysis and has the emotional wherewithal to commit to a system and stick with it in both good and bad times, the potential for profit in currency day trading is unlimited.
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