Forex Day Trading Rules – Forex day trading system, Sonic wave forex day trading strategy, What is the pattern day trading rule?, Pivot points in forex trading, The myth of day trading the forex and futures market, Top 10 big mistakes forex day traders
Cory Mitchell, Chartered Market Technician, is a day trading expert with over 10 years of experience writing about investing, trading and day trading for publications such as Investopedia, Forbes and others.
Julius Mansa is a CFO consultant, professor of finance and accounting, investor and US State Department Fulbright Scholar in the field of financial technology. He teaches accounting and corporate finance to business students. Outside of academia, Julius is a CFO consultant and financial business partner for companies that require strategic and higher-level consulting services to help companies grow and become more profitable.
Forex Day Trading Rules
Emily Ernsberger is a fact-checker and award-winning former newspaper reporter with experience in local government and litigation. She also worked as an editor for a weekly print publication. Working as a lawyer in a law firm helped her find legal, political and financial information.
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It is easy to start day trading currencies because the foreign exchange market (Forex) is one of the most accessible financial markets. Some forex brokers require a minimum deposit of only $50 to open an account, while others allow you to open accounts without a deposit.
One can take a fixed amount of capital and start trading. However, there are several factors to consider when determining how much you need to start day trading the forex market.
If you need to start trading right away, you can start with $100. With a little more flexibility, $500 might yield a little more income or return. However, $5,000 might be the best because it can help you get a reasonable amount of income that will compensate for the time you spend trading.
The specified amounts do not help you understand the minimum amount required for your trading desires, life circumstances or risk tolerance. You should understand the risks involved in Forex trading and know how to minimize them.
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It is also important to know how Forex trades are made and what they consist of so that you can better assess your ability to withstand losses on the way to profits.
Since day trading is all about trading price movements, the biggest risk comes from the fact that prices won’t move the way you thought they would. This happens often, so day traders should not risk more than 1% of their forex account on a single trade.
Leverage trades and margin trades occur when you use forms of debt to finance your trades. Both of these activities significantly increase the risk you are taking on and increase the likelihood that you will end up owing much more than you originally did.
Trade risk refers to the amount of capital you risk on a single trade, not the risk mentioned earlier. It is determined by determining the difference between your entry price and the price at which the stop-loss order takes effect, multiplied by the position size and the point price (discussed below).
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While you can use leverage to fund your trades and be successful, the risks are so high that the best way to manage the risks involved is to avoid leveraged trading.
The 1% rule is one of the best ways to reduce trading risk. If you have $1,000 in your account, the most you’ll want to risk on a trade is $10. If you have $10,000 in your account, you shouldn’t be risking more than $100 per trade.
Even great traders experience a lot of losses. If you reduce the risk on each trade, a losing streak won’t deplete your capital too much.
When you buy or sell Forex, prices move in “dice” and amounts are traded in lots. The relationship between the two is important in determining the minimum amount.
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Forex pairs are traded in units of 1,000 (micro), 10,000 (mini) or 100,000 (standard) lots. When USD is in a second pair like EUR/USD and you fund your account in US dollars (USD), the pip value of a lot type is set in USD.
If you have a very small lot of 1000 units, each point move is worth $0.10. If you have a lot of 10,000 minis, each dot move is $1. If you have a standard lot of 100,000, each dot move is $10.
Percentage in pips or interest price pips.” Pips are the smallest amount that a currency can change. For example, in most currency pairs, a pips is 0.0001, which equals 1/100 of a percent.
If EUR/USD moves from 1.3025 to 1.3026, it is a one unit move. If it changes to 1.3125, it is a 100 pips move.
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An exception to the pip price “rule” is the Japanese yen. For currency pairs where the yen is the second currency (called the “reference currency”), the unit is 0.01, which corresponds to 1%.
When trading currencies, it is necessary to enter a stop-loss order. Stop-loss orders automatically prevent large losses if the underlying currency moves in the opposite direction of your bet. A simple stop-loss order can be 10 pips below the current price when you expect the price to rise or 10 pips above the current price when you expect it to fall.
This method depends on the amount you are limited to trade. A stop loss of less than 10 pips can be a significant amount of money – if a EUR/USD pip costs $10, a 10 pips down move can cost $100 per standard lot.
This helps you see how different trade amounts can affect your minimum daily trade. The previous examples of $100, $500, and $5,000 are great for seeing the differences and doing the math to set a limit.
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Let’s say you open a $100 account. You’ll want to limit your risk per trade to $1 (1% of $100).
If you are trading EUR/USD, buying or selling a micro-lot, the stop loss order should be 10 pips from the entry price. Since each point is worth $0.10, if the stop loss was 11 points, the risk would be $1.10 ($11 x $0.10 x 1), which is more risk than your strategy allows for .
Now let’s say you open a $500 account. You can risk up to $5 per trade and buy multiple lots. For example, you can set a stop-loss of 10 pips from the entry price and buy five micro lots. You still don’t exceed the risk limit as 10 points x $0.10 x 5 microlots = $5.
If you chose a stop-loss of 25 pips from the opening price, you could buy two microlots so that the risk of the trade is less than 1% of the account. You will only buy two microlots because 25 dice x $0.10 x 2 microlots = $5.
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Starting at $500 will allow more trading flexibility and a larger daily income than $100, but most day traders will only be able to make $5-15 a day from that amount with any regularity.
Starting at $5,000 gives you even more flexibility and allows you to trade both mini lots and micro lots. If you buy EUR/USD at 1.3025 and set your stop loss at 1.3017 (eight risk points), you can buy six mini lots and two micro lots.
Your maximum risk would be $50 (1% of $5,000) and you could trade mini lots because each pip is worth $1 and you would have chosen an eight point stop-loss. Divide the risk ($50) by (8 units x $1) to get 6.25 for the number of small lots you could buy without exceeding the risk. You would split the 6.25 mini-lottos into six mini-lottos (6 x $1 x 8 points = $48) and 2 mini-lottos (2 x $0.10 x 8 points = $1.60) for a total just USD 49.60.
With this amount of capital and the ability to risk $50 per trade, the profit potential increases and traders can earn $50 or more per day depending on their forex strategy and price movements.
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Some days traders may only spend a few hours actually trading Forex, while others will spend four hours or more. However, this does not include time spent researching, reviewing trades and creating trading plans.
More than $6 trillion changes hands every day in the foreign exchange market. This is the sum of all currencies, not just the US dollar.
Each trader must find his own “edge”, paying special attention to other traders. The only way to know if you have a better edge in stocks or forex is to try them both. Certain barriers to daily stock trading may make forex trading more accessible to traders, such as a minimum equity requirement, but that does not make one market “better” than another.
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