Wednesday, April 17, 2024

Round Trip

A Round Trip is the process of buying and selling the same security, futures contract, or options contract within a single trading session.

Essentially, the round trip is the complete action of opening and closing a position .

For example, if a trader buys 100 shares of a company’s stock in the morning and then sells those 100 shares in the afternoon, this constitutes a round trip.

Similarly, if a trader shorts (i.e., borrows and sells) a stock in anticipation that its price will fall, and then buys it back (covering the short) when the price falls, this is also a round trip.

What is a round trip?

Essentially, a round trip in trading refers to the completion of a trading cycle—the purchase or sale of a security, futures contract, or options contract within the same trading session.

If we break it down, a round trip consists of two legs .

  1. The first stage is when traders take a position, either buying a security in the expectation that its price will rise (long) or selling a security they do not own in the expectation that its price will fall (short) .
  2. The second phase is when traders close their positions, selling the security if they are long and buying back the security if they are short.

Effects of round trip

Round tripping is a common practice among many trading strategies, especially those that rely on short-term price fluctuations.

For example, day traders who aim to profit from intraday moves in the market will often perform round-trip trading. They start the trading session with a flat portfolio, go round and round, and aim to end the trade with a flat portfolio again, pocketing any profits made on the trade.

However, it is important to note that executing multiple round trips in some jurisdictions (e.g. the United States) may label the trader as a “Classic Day Trader”.

According to the Financial Industry Regulatory Authority (FINRA), a typical day trader is one who makes four or more day trades (round trips) within five business days in a margin account, provided the number of day trades exceeds 6 % of a customer’s total trading activity over the same five-day period. Such traders are subject to certain regulations, including maintaining a minimum account balance.

Round Trips in Forex Trading: Example

Let’s consider an example of a round trip to the Forex market, which operates 24 hours a day.

Suppose you believe that the EURUSD will appreciate based on their analysis of economic indicators.

You decide to buy 100,000 EUR/USD at an exchange rate of 1.1000.

This is the first leg of the round trip, where you go “long” on the EUR/USD currency pair.

Later in the day, assuming your prediction turns out to be correct, the exchange rate rises to 1.1050.

You decide to sell your position. This is the second leg of the round trip and you have closed your position.

You end up with a profit of $500.

If you want to learn more foreign exchange trading knowledge, please click: Trading Education.

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