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The global economy facilitates the fluid movement of products and services around the globe, a trend that has continued virtually uninterrupted since the end of World War II. It is unlikely that the architects of this system could have envisioned what it would become when they met in the New Hampshire resort of Bretton Woods in July 1944, but much of the infrastructure they brought into existence continues to be relevant in today's global market. Even the name "Bretton Woods" lives on in a modern guise, characterized by the economic relationship the U.S. has with China and other rapidly developing economies.

Read on as we cover the modern history of global trade and capital flows, their key underlying economic principles, and why these developments still matter today.

In the Beginning

The delegates from the 44 allied powers who attended the Bretton Woods conference in 1944 were determined to ensure that the second half of the 20th century would look nothing like the first half, which consisted mostly of devastating wars and a worldwide economic depression. The World Bank and the International Monetary Fund would ensure global economic stability. 

In order to facilitate a fair and orderly market for cross-border trade, the conference produced the Bretton Woods exchange rate system. This was a gold exchange system that was part gold standard and part reserve currency system. It established the U.S. dollar as a de facto global reserve currency. Foreign central banks could exchange dollars for gold at the fixed rate of $35 per ounce.1 At the time, the U.S. held more than 65% of the world's monetary gold reserves and was thus at the center of the system, with the recovering countries of Europe and Japan at the periphery. 

The Rise and Impacts of Global Trade Imbalances

For a time, this seemed like a win-win opportunity. Countries like Germany and Japan, in ruins after the war, rebuilt their economies on the backs of their growing export markets. In the U.S., growing affluence increased the demand for an ever-growing array of products from overseas markets. Volkswagen, Sony, and Philips became household names. Predictably, U.S. imports grew and so did the U.S. trade deficit. A trade deficit increases when the value of imports exceeds that of exports, and vice versa.

In textbook economic theory, market forces of supply and demand act as a natural correction for trade deficits and surpluses. In the real world of the Bretton Woods system, however, natural market forces ran into the non-market exchange rate mechanism. One would expect the value of a currency to appreciate as demand for goods denominated in those currencies increased; however, the exchange rate system required the foreign central banks to intervene in order to keep their currencies from exceeding the Bretton Woods target levels. They did this through foreign exchange (forex) market purchases of dollars and sales of British pounds, German marks, and Japanese yen. This kept the prices of exports from these countries lower than what market forces would predict, making them still more attractive for U.S. consumers, thus perpetuating the cycle.

A system like Bretton Woods relies on the willingness of the participants to actively support it. For the countries that had accumulated large holdings of U.S. dollar reserves, however, that willingness decreased as the dollar's implied market value eroded. If you are holding a large quantity of an asset and think the value of that asset is going to decline, you are not likely to go right back out and buy more of the asset - but that is precisely what the system mandated they do.

The Fall of the Bretton Woods System and Its Aftermath

The system finally collapsed in August 1971, when U.S. President Nixon announced that foreign central banks would no longer be able to exchange dollars for gold at the fixed $35 per ounce level.1 Within two years, the fixed-rate system had been phased out entirely, and the currencies of Europe and Japan floated, changing daily in response to actual supply and demand. The dollar underwent a sharp devaluation, and the foreign currency market grew and came to be dominated overwhelmingly by private traders rather than central banks. 

However, fixed-rate systems never died out completely. The bureaucrats of Japan's Ministry of Finance and the Bank of Japan saw a weak yen as a critical element of the country's export-oriented economic policy. In the early 1980s, Deng Xiaoping, then leader of the Communist Party of China, exhorted his countrymen that "to get rich is glorious," and China emerged onto the world stage.

At the end of the same decade, Eastern Europe and Russia, which were never a part of the old Bretton Woods system, joined the globalization party. Suddenly, it was 1944 all over again, with the so-called "emerging markets" taking the place of Germany and Japan with a desire to sell their goods to the developed markets of the U.S. and Europe. Just like their predecessors, many of these countries, particularly China and other Asian economies, believed that maintaining undervalued currencies was a key to growing and sustainable export markets and thus to increasing domestic wealth. Observers call this arrangement "Bretton Woods II". In fact, it works in a very similar way to the original, but without an explicit mechanism like a gold exchange. Like the original, it requires that all of its participants—the U.S. and the developing economies—have the incentives to actively support the system.

The U.S. Trade Deficit and Its Global Economic Impact

The U.S. trade deficit continued to grow throughout Bretton Woods II, supported by strong U.S. consumer demand and the rapid industrialization of China and other emerging economies. The U.S. dollar has also continued to be the de facto reserve currency, and the form in which the People's Bank of China, Reserve Bank of India, and others hold a majority of these reserves is in U.S. Treasury obligations. China alone holds foreign reserves in excess of $3 trillion.2 Clearly, any dramatic moves on the part of the Chinese authorities to change the status quo arrangement would have the potential to create turbulence in international capital markets. The political relationship between the U.S. and China is also a significant part of this equation. Global trade has always been a sensitive political topic, and protectionism is a strong populist instinct in the U.S. It is conceivable that at some point, one or another party to this arrangement will conclude that its self-interest lies in abandoning the system.

The Bottom Line

The similarities between the original Bretton Woods system and its more recent counterpart are interesting and instructive. Over the very long term, economies move in cycles, and what were yesterday's emerging economies, like Japan or Germany, become today's stable, mature markets while other countries step into the role of the emerging tigers. Therefore, what made economic sense for the emerging markets of yesterday continues to make sense for those of today and likely for those of tomorrow. Despite the dramatic changes brought about by the forces of technology, globalization, and market innovation, economic systems are still profoundly human. That is, they exist at the behest of those who profit by them and last for as long as these interested parties perceive that the value outweighs the cost - or at least that the cost of dismantling the system would be too great to bear. Sometimes, this happens gradually and rationally, other times, the landing is much harder.

Forex hedging is a protective strategy traders use to guard against unfavourable shifts in currency exchange rates, especially when they expect volatility from news or events. It's often a short-term approach that reduces risk by adding positions meant to offset potential losses.

Forex traders do this either by taking the opposite position in the same currency pair or by using forex options.

Utilizing a Perfect Hedge in Forex Trading

A forex trader can create a hedge to fully protect an existing position from an undesirable move in the currency pair by holding both a short and a long position simultaneously on the same currency pair.

This version of a hedging strategy is referred to as a “perfect hedge” because it eliminates all of the risk (but therefore all of the potential profit) associated with the trade while the hedge is active.

Although selling a currency pair that you hold long may sound bizarre because the two opposing positions offset each other, it is more common than you might think. Often, this kind of hedge arises when a trader is holding a long or short position as a long-term trade and, rather than liquidating it, opens a contrary trade to create the short-term hedge in front of important news or a major event.

Interestingly, forex dealers in the United States do not allow this type of hedging. Instead, firms are required to net out the two positions—by treating the contradictory trade as a “close” order. However, the result of a “netted out” trade and a hedged trade is essentially the same.

Implementing an Imperfect Hedge With Forex Options

A forex trader can create a hedge to partially protect an existing position from an undesirable move in the currency pair using forex options. The strategy is referred to as an “imperfect hedge” because the resulting position usually eliminates only some of the risk (and therefore only some of the potential profit) associated with the trade.

To create an imperfect hedge, a trader who is long a currency pair can buy put option contracts to reduce downside risk, while a trader who is short a currency pair can buy call option contracts to reduce the risk stemming from a move to the upside.

Mitigating Downside Risk With Imperfect Hedges

Put options contracts give the buyer the right, but not the obligation, to sell a currency pair at a specified price (strike price) on, or before, a specific date (expiration date) to the options seller in exchange for the payment of an upfront premium.

For instance, imagine a forex trader is long EUR/USD at 1.2575, anticipating the pair is going to move higher, but is also concerned the currency pair may move lower if an upcoming economic announcement turns out to be bearish.

The trader could hedge risk by purchasing a put option contract with a strike price somewhere below the current exchange rate, like 1.2550, and an expiration date sometime after the economic announcement.

If the announcement comes and goes, and EUR/USD doesn’t move lower, the trader can hold onto the long EUR/USD trade, potentially making additional profits the higher it goes. Bear in mind that the short-term hedge did cost the premium paid for the put option contract.

If the announcement comes and goes, and EUR/USD starts moving lower, the trader does not need to worry as much about the bearish move because it limits some of the risks.

After the long put is opened, the risk is equal to the distance between the value of the pair at the time of purchase of the options contract and the strike price of the option, or 25 pips in this instance (1.2575 – 1.2550 = 0.0025), plus the premium paid for the options contract.

Even if EUR/USD dropped to 1.2450, the maximum loss is 25 pips, plus the premium, because the put can be exercised at the 1.2550 price regardless of what the market price for the pair is at the time.

Imperfect Upside Risk Hedges

Call option contracts give the buyer the right, but not the obligation, to buy a currency pair at a strike price, or before the expiration date, in exchange for the payment of an upfront premium.

For instance, imagine a forex trader is short GBP/USD at 1.4225, anticipating the pair is going to move lower, but is also concerned the currency pair may move higher if the upcoming Parliamentary vote turns out to be bullish.

The trader could hedge a portion of the risk by buying a call option contract with a strike price somewhere above the current exchange rate, like 1.4275, and an expiration date sometime after the scheduled vote.

If the vote comes and goes, and the GBP/USD doesn’t move higher, the trader can hold onto the short GBP/USD trade, making profits the lower it goes. The costs for the short-term hedge equal the premium paid for the call option contract, which is lost if GBP/USD stays above the strike and the call expires.

If the vote comes and goes, and GBP/USD starts moving higher, the trader does not need to worry about the bullish move because, thanks to the call option, the risk is limited to the distance between the value of the pair when the options were bought and the strike price of the option, or 50 pips in this instance (1.4275 – 1.4225 = 0.0050), plus the premium paid for the options contract.

Even if the GBP/USD climbs to 1.4375, the maximum risk is not more than 50 pips, plus the premium, because the call can be exercised to buy the pair at the 1.4275 strike price and then cover the short GBP/USD position, regardless of what the market price for the pair is at the time.

The Bottom Line

Hedging focuses on reducing risk by taking an offsetting position that softens the impact if the primary trade moves the wrong way. When the market shifts unexpectedly, the hedge limits how much the trader can lose.

Although discussed here in the context of forex, this approach applies across asset classes, offering a way to manage uncertainty in many types of markets.

 Day trading is a strategy that involves buying and selling financial instruments at least once within the same day, attempting to profit from small price fluctuations. While recent records in major indexes like the S&P 500 make it seem easy to find profits, day trading is not without significant risks, especially since today’s markets can be quite volatile as rapid economic changes, shifting interest rates, and geopolitical developments lead to sudden price swings.

To succeed as a day trader in this climate, it’s crucial to adopt a reflective strategy that emphasizes flexibility, risk management, and awareness of what's behind recent market shifts. The best day trading platforms help traders improve their strategies and minimize their costs, offering apps that make it easy to analyze indicators and execute trades. Interactive Brokers and Webull, for example, offer real-time streaming quotes, charting tools, and the ability to enter and modify complex orders in quick succession.12

But for those who are just beginning their day trading journey, this article will explain the key steps to getting started and explore 10-day trading tips for beginners—from setting aside funds and starting small to avoiding penny stocks and limiting losses.

How To Start Day Trading

Getting underway in day trading involves putting your financial resources together, setting up with a broker who can handle day trading volume, and engaging in self-education and strategic planning. Here's how to start in five steps:

Step 1: Research trading strategies and principles.

Unlike professional day traders, retail day traders don't necessarily need a special undergraduate degree. However, you still need to educate yourself. Before you start trading, it's crucial to understand the trading principles and specific strategies used in day trading. Read books, take courses, and study financial markets. The major topic to study is technical analysis, which should include reading up on trading psychology and (this is a must) risk management.3

Step 2: Build your trading plan: entries, exits & risk rules.

Outline your investment goals, risk tolerance, and specific trading strategies you've picked up from Step 1. Your plan should specify your entry and exit criteria, how much capital you will risk on each trade, and your overall risk management strategy. Before investing real money, put your plan into practice with a real-time trading simulator. This helps you familiarize yourself with market behavior and the trading platform without financial risk.

Step 3: Select the best day trading platform and fund your account.

You'll want a reputable broker that caters to retail day traders and has low transaction fees, quick order execution, and a reliable trading platform. Once you're ready, fund your account. It's advisable to begin with a relatively small amount in your trading account and only put in money you can afford to lose.

Step 4: Start small: how to begin day trading with low capital

Day trading with low capital reduces the risks of losing all your money on one or a series of bad trades while you're still learning. This helps reinforce the importance of risk management in day trading and can help build confidence as you learn how to start day trading safely. As you do so, continuously review your trades and check them against your learning resources to adjust your strategy. Day trading requires constantly adapting to changing situations.

Step 5: Day trading discipline: stick to your plan and control emotions.

Adjusting to changing circumstances does not mean shifting your stop-loss and stop-limit settings or other trading criteria as you take on more risk. Successful day trading relies very much on discipline and emotional control. Stick to your trading plan; don't let emotions drive your decisions. That's the way to quick ruin.

10 Day Trading Tips for Beginners

1. Knowledge Is Power

In addition to knowledge of procedures, day traders need to keep up with the latest stock market news and events that affect stocks. This includes the Federal Reserve System's interest rate plans, leading indicator announcements, and other economic, business, and financial news.

So, do your homework. Make a wish list of stocks you'd like to trade. Be informed about the selected companies, their stocks, and general markets. Scan business news and bookmark reliable online news outlets.

2. Set Aside Funds

Assess and commit to the amount of capital you're willing to risk on each trade. Many successful day traders risk less than 1% to 2% of their accounts per trade. If you have a $40,000 trading account and are willing to risk 0.5% of your capital on each trade, your maximum loss per trade is $200 (0.5% x $40,000). Moreover, only trade with suitable online brokers and trading platforms.

Earmark funds you can trade with and are prepared to lose.

3. Set Aside Time

Day trading requires your time and attention. In fact, you'll need to give up most of your day. Don’t consider it if you have limited time to spare.

Day trading requires a trader to track the markets and spot opportunities that can arise at any time during trading hours. Being aware and moving quickly are key.

4. Start Small

As a beginner, focus on a maximum of one to two stocks during a session. Tracking and finding prospects is easier with just a few stocks. It's now common to trade fractional shares. That lets you specify smaller dollar amounts that you wish to invest.

This means that if Amazon.com (AMZN) shares are trading at $170, many brokers will now let you buy a fractional share for as low as $5.

5. Avoid Penny Stocks

You're probably looking for deals and low prices, but avoid penny stocks. These stocks are often illiquid, and the chances of hitting the jackpot with them are often bleak.

Many stocks trading under $5 a share become delisted from major stock exchanges and are only tradable over-the-counter (OTC). Unless you see a real opportunity and have done your research, steer clear of these. Finding real undervalued stocks can be demanding.

6. Time Those Trades

Many orders placed by investors and traders begin to execute as soon as the markets open in the morning, contributing to price volatility. A seasoned player may be able to recognize patterns at the open and time orders to make profits. For beginners, it may be better to read the market without making any moves for the first 15 to 20 minutes.

The middle hours are usually less volatile. Then, the movement begins to pick up again toward the closing bell. Though rush hours offer opportunities, it’s safer for beginners to avoid them at first.

7. Cut Losses With Limit Orders

Decide what type of orders you'll use to enter and exit trades. Will you use market orders or limit orders? A market order is executed at the best price available, with no price guarantee. It's useful when you want to enter or exit the market and don't care about getting filled at a specific price.

A limit order guarantees the price but not the execution.4 Limit orders can help you trade more precisely and confidently because you set the price at which your order should be executed. A limit order can cut your losses on reversals. However, if the market doesn't reach your price, your order won't be filled, and you'll maintain your position.

More sophisticated and experienced day traders may also employ options strategies to hedge their positions.5

8. Be Realistic About Profits

A strategy doesn't need to succeed all the time to be profitable. Traders can be successful by only profiting from 50% to 60% of their trades. However, they need to profit more from their winners than they lose on their losers. Ensure the financial risk on each trade is limited to a specific percentage of your account and that entry and exit methods are clearly defined.

9. Reflect on Investment Behavior

For day traders, frequent reflection on investment behavior is crucial. It helps them identify patterns, learn from past mistakes, and fine-tune their strategies. This fosters continuous learning and adapting to ever-changing market conditions. In addition, it encourages discipline and emotional control, which are key to successful trading.

10. Stick to the Plan

Successful traders have to move fast, but they don't have to think fast. Why? Because they've developed a trading strategy in advance, along with the discipline to stick to it. It is important to follow your formula and methodology closely rather than try to chase profits. Don't let your emotions get the best of you and make you abandon your strategy. Bear in mind a mantra of day traders: plan your trade and trade your plan.

Day Trading For Beginners

Now that you know some of the ins and outs of day trading, let's review some of the key techniques new day traders can use.

When you've mastered these techniques, developed your own trading styles, and determined your end goals, you can use a series of strategies to help you in your quest for profits:

Following the trend: Anyone who follows the trend will buy when prices are rising or short sell when they drop. This is done on the assumption that prices that have been rising or falling steadily will continue to do so.

Contrarian investing: This strategy assumes a rise in prices will reverse and drop. The contrarian buys during a fall or short sells during a rise, with the express expectation that the trend will change.

Scalping: This is a style by which a speculator exploits small price gaps created by the bid-ask spread. This technique normally involves entering and exiting a position quickly—within minutes or even seconds.

Trading the news: Investors using this strategy will buy when good news is announced or short sell when there's bad news. This can lead to greater volatility, which can lead to higher profits or losses.

What Makes Day Trading Difficult?

Day trading takes a lot of practice and know-how, and several factors can make it challenging.

First, know that you're competing against professionals whose careers revolve around trading. These people have access to the best technology and connections in the industry, which means they're set up to succeed. Jumping on the bandwagon usually means more profits for them.

Next, understand that Uncle Sam will want a cut of your profits, no matter how slim. You'll have to pay taxes on any short-term gains—investments you hold for one year or less—at the marginal rate. The upside is that your losses will offset any gains.6

Also, as a beginning day trader, you may be prone to emotional and psychological biases that affect your trading—for instance, when your capital is involved and you're losing money on a trade. Instead of being disciplined in limiting and accepting losses, it can be tempting to try to keep trading with the hopes of getting back to even. Experienced, skilled professional traders with deep pockets can usually surmount these challenges.

Deciding What and When To Buy

What To Buy

Day traders try to make money by exploiting minute price movements in individual assets (stocks, currencies, futures, and options). They usually leverage large amounts of capital to do so. In deciding what to buy—a stock, say—a typical day trader looks for three things:

1. Liquidity. A security with this allows you to buy and sell it easily and, hopefully, at a reasonable price. Liquidity is an advantage with tight spreads, or the difference between the bid and ask price of a stock, and for low slippage, or the difference between the expected price of a trade and the actual price.
2. Volatility. This measures the daily price range—the range in which a day trader operates. More volatility means greater potential for profit or loss.
3. Trading volume measures the number of times a stock is bought and sold in a given period. It's commonly known as the average daily trading volume. High volume indicates a lot of interest in a stock. An increase in a stock's volume is often a harbinger of a price jump, either up or down.

When To Buy

Once you know the stocks (or other assets) you want to trade, you need to identify entry points for your trades. Tools that can help you do this include:

• Real-time news services: News moves stocks, so it's important to subscribe to services that alert you when potentially market-moving news breaks.
• ECN/Level 2 quotes: Electronic communication networks (ECNs) are computer-based systems that display the best available bid and ask quotes from market participants and then automatically match and execute orders. Level 2 is a subscription-based service that provides real-time access to the Nasdaq order book, which has price quotes from market makers in every Nasdaq-listed and OTC Bulletin Board security.8 Together, they can give you a sense of orders executed in real-time.
• Intraday candlestick charts: Candlesticks provide a raw analysis of price action. More on these later.

Define and write down the specific conditions under which you'll enter a position. For instance, buying during an uptrend isn't specific enough. Instead, put down something more specific and testable: buy when the price breaks above the upper trendline of a triangle pattern, where the triangle is preceded by an uptrend (at least one higher swing high and higher swing low before the triangle formed) on the two-minute chart in the first two hours of the trading day.

Once you have specific entry rules, scan more charts to see if your conditions are generated each day. For instance, determine whether a candlestick chart pattern signals price moves in the direction you anticipate. If so, you have a potential entry point for a strategy.

Next, you'll need to determine how to exit your trades.

Deciding When To Sell

There are several ways to exit a winning position, including trailing stops and profit targets. Profit targets are the most common exit method. They refer to taking a profit at a predetermined price level. Here, we review some common profit target strategies:

Often, you will want to sell an asset when there is decreased interest in the stock as indicated by the ECN/Level 2 and volume. The profit target should also allow for more money to be made on winning trades than is lost on losing trades. If your stop loss is $0.05 away from your entry price, your target should be more than $0.05 away.

Just as with your entry point, define exactly how you will exit your trades before you enter them. The exit criteria must be specific enough to be repeatable and testable.

Day Trading Charts and Patterns

Here are three common tools day traders use to help them determine opportune buying points:

• Price charts using depictions such as candlesticks. Also, various chart patterns, including engulfing candles, dojis, and many others.
• Other technical analysis, including trend lines and various indicators such as the relative strength index, moving average convergence divergence, and many others.
• Volume

There are many candlestick setups a day trader can look for to find an entry point. If followed correctly, the doji reversal pattern (highlighted in yellow in the chart below) is one of the most reliable.

Also, look for signs that confirm the pattern:

• A volume spike on the doji candle or the candles immediately following it, which can indicate that traders are supporting the price at this level
• Prior support at this price level, such as the prior low of day or high of day Level 2 activity, which will show all the open orders and order sizes

If you use these three confirmation steps, you may determine whether the doji is signaling an actual turnaround and a potential entry point.

Chart patterns also provide profit targets for exits. For example, the height of a triangle at the widest part is added to the breakout point of the triangle (for an upside breakout), providing a price at which to take profits.9

How To Limit Losses When Day Trading 

Stop-Loss Orders

It's important to define exactly how you'll limit your trade risk. A stop-loss order is designed to limit losses on a position in a security.10 For long positions, a stop-loss can be placed below a recent low, and for short positions, above a recent high. It can also be based on volatility.

For example, if a stock price is moving about $0.05 a minute, then you might place a stop-loss order $0.15 away from your entry to give the price some space to fluctuate before it moves in your anticipated direction.

For a triangle pattern, a stop-loss order can be placed $0.02 below a recent swing low if buying a breakout, or $0.02 below the pattern.

You could also set two stop-loss orders:

1. Place an actual stop-loss order at a price level that suits your risk tolerance. This level represents the most money that you can stand to lose.
2. Set a mental stop-loss order at the point where your entry criteria would be violated. If the trade takes an unexpected turn, you'll immediately exit your position.

However you decide to exit your trades, the exit criteria must be specific enough to be testable and repeatable.11

Set a Financial Loss Limit

It's smart to set a maximum loss per day that you can afford. Whenever you hit this point, exit your trade and take the rest of the day off. Stick to your plan. After all, tomorrow is another (trading) day.

Test Your Strategy

You've defined how you enter trades and where you'll place a stop-loss order. Now, you can assess whether the potential strategy fits within your risk limit. If the strategy exposes you to too much risk, you need to alter it in some way to reduce the risk.

If the strategy is within your risk limit, then testing begins. Manually go through historical charts to find entry points that match yours. Note whether your stop-loss order or price target would have been hit. Paper trade in this way for at least 50 to 100 trades. Determine whether the strategy would have been profitable and if the results meet your expectations.

If your strategy works, proceed to trading in a demo account in real time. If you take profits over the course of two months or more in a simulated environment, proceed with day trading with real capital. If the strategy isn't profitable, start over.

Finally, keep in mind that if you trade on margin, you can be far more vulnerable to sudden price movements. Trading on margin means borrowing your investment funds from a brokerage firm. It requires you to add funds to your account at the end of the day if your trade goes against you. Therefore, using stop-loss orders is crucial when day trading on margin.12

The Bottom Line

Day trading is difficult to master. It requires time, skill, and discipline. Many who try it lose money, but the strategies and techniques described above may help you create a potentially profitable strategy.

Day traders, both institutional and individual, play an important role in the marketplace by keeping the markets efficient and liquid. With enough experience, skill-building, and consistent performance evaluation, you may be able to beat the odds and improve your chances of trading profitably.