Day trading differs from swing trading or position trading in that whatever position the trader puts on he takes off during the same trading session. The trading day is divided into three trading sessions, and nobody can trade all three, therefore; a big advantage with respect to risk management is inherently built into any day trading system. That advantage is the freedom from having to worry about large losses brought about by unexpected market moves that happen “after hours”.
Those who engage in position trading operate under disadvantageous conditions which include having to take into account the possibility of being needlessly stopped out of the market during a relatively slow off-hours trading session. Because of this, the position trader has to take into account several addition factors when calculating where to place a protective stop loss order. The Forex day trader avoids this totally.
It is not uncommon for large position traders to employ market hedging strategies that involve the purchase of option contracts as a form of insurance against adverse price movements that might take place after trading hours. Because the Forex markets are open 24 hours a day, just about anything can happen after any one Forex session has closed, therefore; protection against a major adverse price move is needed.
Large institutional position traders often satisfy that need by purchasing puts or calls to tide them over until the next trading day. The purchase of option contracts for hedging purposes costs money and has to be taken into account during profit and loss (P&L) calculations. Those market participants that employ a Forex day trading strategy do not have this kind of exposure, and do not have to concern themselves with hedging after-hours risk.
Forex day trading professionals learn across time to become very artful with respect to understanding market momentum, and riding short-term market trends. They have to because it is their “bread and butter” so to speak. Most very large market moves occur during the opening or change of trading sessions long before the day traders have any chance of getting in.
The position traders tend to feast on these moves, and the day traders tend to miss out, but they do make up for this by skillfully trading the retracement market action which so commonly follows a vigorous early-session market spike. Even better is the knowledge that more often than not this is a much less volatile and less risky proposition.