Forex (Currency Trading) | Jun 17, 2010 | 3 Comments

How Day Trading Forex Can Kill Your Account

Let me cut to the chase. If you’re newer to Forex trading or have been trading the currency market, but aren’t seeing month-to-month increases, don’t day trade. For most people, including you, the more trades you do, the higher the probability of loss.

Many amateur traders think they need to make lots of trades to profit. Hey, we’ve all done it. Actually, I think it’s the way we all start off. Got to be in the action, right? Unfortunately, this is a path to ruin.

The truth is, you don’t need to trade often to profit in the Forex market. It’s possible to put in one trade and make hundreds of pips. That’s one spread dealt with instead of hundreds. And that’s one point in time and currency pair to focus on.

I think one of the problems newer traders have is knowing when to walk away. For example, let’s say you short the EUR/USD to start the London session and it immediately drops. After an hour you exit your position up 50 pips. Now what? Here’s where new traders go wrong. Rather than walking away, you feel you have to get back in the action. You’re on an emotional high and greed starts to kick in. So, you put on another trade. It goes wrong and costs you 30 pips. Even though you’re still up 20 pips and should walk away, you start to focus on the 30 pips you used to have. Maybe you even get upset about it. And that’s why you put on yet another trade.

See where this is going? Sure, you have good days where the extra trade(s) work out, but, for many, the bad days will tend to outnumber the good ones and the losses can be very bad.

Recently, I talked to a Forex trader who was depressed because his account was about to be blown up. He had a great ride up and started being more aggressive, taking more chances and promptly came back to reality. You see, he really didn’t know what he was doing. So every trade he did was already going against him. He was just solidifying his eventual failure by trading many times per day. And he didn’t know how to stop and how to pull the profits in.

As a side note, he said that the USD/CHF couldn’t possibly go down anymore and was due to bounce back up. It had pulled back a few hundred pips off previous gains due to huge SNB intervention and was at 1.330. I told him what I thought of the current situation (near term), why I thought it was going down even more and that I was shorting it. A day later, the USD/CHF dipped a shade below 1.100.

This trade could of easily went against me. The point I’m making is to know why you’re making a trade and it can’t just be something like “well, it can’t go up/down anymore” because it will go up/down some more.

Here’s what you need to do. If you’re either newer to Forex or treading water, do yourself a favor and trade more for the longer term. Learn to spot trends and go with them. Get experience and success under your belt, learn what you’re doing and why your trades are working, and then you can evolve into day trading if that’s what you really want.

You don’t need to trade often to make money in Forex. Think about that. It’s completely opposite of what a lot of would-be Forex participants think. You can hold one position in one currency pair for weeks, profiting the whole way. And if you need to generate 100s of pips to see what you consider to be a decent profit, then you’re undercapitalized.

Author: Jason A. Martin

My name is Jason A. Martin. I'm an investor/trader, financial writer and entrepreneur. This is my blog. I also run a social media integration & cross-media design company. If you'd like to follow me on twitter, here's the link: Jason A. Martin