Forex Day Trading
3 Factors You Should Take Into Account while Day Trading
The most common way to earn money with Forex day trading is trading the Foreign exchange news. That is, opening short term trades according to the upcoming forex trading news. Still, as most forex traders know, this is a very risky trading system and it is easy to get trapped into a losing situation. In this article we look at 3 very important things that you have to take into account if you like to benefit from day forex trading based around currency trading news.
1. Market Expectations
Failing to consider market expectations into account is a very common fault in news based day trading. We will explain this with an example. Let’s say there is an forthcoming broadcast of US trade information. As per your prediction this announcement to be good for US dollar, so you open a trade just before the declaration is due.
But you forgot to take into account the fact that the foreign exchange market in general was expecting this report to strengthen the dollar, hence in fact, the price movement was already happening slowly in the days or even weeks before the announcement. When the report is made, there will only be a big price movement if the broadcast is considerably changed from expectations. (Also see fundamental analysis)
That means that your trade will only pay you well if the report is much more encouraging than everyone anticipated. If the report figures are good but not as beneficial as expected, the US dollar might plunge because the market outlook in advance of the announcement was exceedingly high. So you possibly will actually lose out.
2. Spread
When there is an important financial news release the spread is likely to increase. The reason behind this is, during such fiscal news reports the trading volume will go down and as a result brokers will have less profits. Spread can be anywhere from 2 to 5 times higher than standard rates. Make sure that you take this into account while going for day trading during the release of a major financial news or else you will end up with losing traders which in normal situation would have been winners.
You might have noticed that some forex brokers will not even carry out trades during that time. To overcome this you can pick a broker who guarantees execution of your trades. However you will most probably not find a broker who will promise to keep the spread at usual levels.
3. Slippage
Slippage is the difference between the price you clicked on for the trade and the price that your order gets filled at. Of course slippage depends on the broker to certain extent, but at the time of an announcement all can be affected simply because the price varies so frequently.
For example if you are not sure of how an announcement will go but you are doing in currency day trading and you are hoping a breakout one way or the other, you might place an order to start a long trade if the price goes up to a certain point, say 1.2010, along with an direction for a short trade if the price falls.
In spite of this, you could be in trouble if the price all of a sudden jumps beyond your trigger. Say it shoots up to 1.2040 . In that situation you will possibly notice that your order has been filled at a higher price than you planned, say 1.2025. In case the price then drops, as it regularly does after a run through, it may settle back at 1.2020. If your order had been placed at 1.2010 that would be fine, but at 1.2030 it is not. Thus slippage is an extra factor that can can cause losses in day trading if you are not watchful.
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