Round Trip

A round trip refers to the process of buying and selling, or short selling and buying to cover, the same security, futures contract, or options contract within a single trading session. Essentially, a round trip is the complete action of opening and closing a trade.

For example, if a trader purchases 100 shares of a company's stock in the morning and then sells those 100 shares in the afternoon, that constitutes a round trip. Similarly, if a trader shorts (i.e., borrows and sells) a stock expecting its price to decrease and then later buys it back (covering the short) when the price has dropped, this is also a round trip.

At its core, a round trip in trading refers to the completion of a trade cycle – the buying and selling 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.

The first leg is when a trader opens a position, either by buying a security with the expectation that its price will rise (going long) or selling a security they don’t own, anticipating its price will fall (going short). The second leg is when the trader closes the position, selling the security if they’ve gone long or buying it back if they’ve gone short.

Round trips are a common practice in several trading strategies, particularly those that rely on short-term price fluctuations. Day traders, for instance, who aim to profit from intra-day movements in the market, routinely execute round trips. They start a trading session with a flat portfolio, make their round trips, and aim to end the session with a flat portfolio again, pocketing any profits made from the trades.

However, it’s important to note that executing numerous round trips might flag a trader as a ‘Pattern Day Trader’ in certain jurisdictions, like the United States. Under Financial Industry Regulatory Authority (FINRA) rules, a pattern 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 is more than six percent of the customer’s total trading activity for that same five-day period. Such traders are subject to certain regulations, including maintaining a minimum account balance.

Let’s consider an example of a round trip in the forex market, which operates 24 hours a day. Suppose you believe that the Euro will appreciate against the U.S. Dollar based on your analysis of economic indicators. You decide to buy €100,000 against the Dollar at an exchange rate of 1.1000. This is the first leg of the round trip where you have gone ‘long’ on the EUR/USD pair.

Later in the day, suppose your prediction proves correct, and the exchange rate moves up to 1.1050. You decide to sell your position. This constitutes the second leg of the round trip, where you have closed your position. You end up with a profit of $500.