Many people enjoy trading foreign currencies in the foreign exchange market (forex) because it requires a minimal amount of capital to start day trading. Forex is traded 24 hours a day throughout the week and offers many profit opportunities due to the leverage provided by forex brokers. Forex trading can be highly volatile, and an inexperienced trader can lose substantial amounts.
Day Trading Forex Risk Management
Every successful forex trader manages their risks; it is one of the most important elements, if not the most important, for sustained profitability.
To start, your risk on each trade should be very small, with 1% or less being the norm. This means that if you have an account worth $3,000, you should not lose more than $30 on a single trade. This may seem small, but losses add up, and even a good trading strategy will experience a series of losses. Risk is managed using a stop-loss order, which will be discussed in the scenario section below.
Day Trading Forex Strategy
Although the strategy can contain many elements and can be analyzed for profitability in various ways, it is often classified based on the win rate and risk/reward ratio.
The win rate reflects the number of trades you win out of the total trades given. Suppose you win 55 trades out of 100; your win rate would be 55%. A win rate above 50% is ideal for most day traders, and a win rate of 55% can be achieved.
The risk/reward ratio means how much capital is at risk to achieve a certain profit. If a trader loses 10 pips on losing trades but makes 15 pips on winning trades, it means they are making more profit on winning trades compared to losing ones. This means that even if the trader only wins 50% of their trades, they will still be profitable. Therefore, achieving more profit on winning trades is also a strategic element that many day forex traders strive for.
A higher win rate for trades means greater flexibility in the risk/reward ratio, and a high risk/reward ratio means that the win rate can be lower and still remain profitable.
Hypothetical Scenario
Suppose a trader has $5,000 as capital and a good win rate of 55% on their trades. They only risk 1% of their capital, or $50, on each trade. This is done using a stop-loss order. In this scenario, a stop-loss order is placed five pips away from the entry price of the trade, and a target is set eight pips away. This means the potential reward for each trade is 1.6 times the risk (8 pips divided by 5 pips). Remember, you want the winning trades to be bigger than the losing ones.
While trading a forex currency pair for two hours during an active time of the day, it is usually possible to execute about five “full cycle” trades (including entry and exit) using the parameters mentioned above. If there are 20 trading days in a month, the trader will execute an average of 100 trades in a month.
Trading Leverage
In the United States, forex brokers offer leverage of up to 50 to 1 on major currency pairs. In this example, suppose the trader uses leverage of up to 30 to 1, as that is usually more than enough for day forex traders. Since the trader has $5,000 and the leverage is 30 to 1, the trader can take positions worth up to $150,000. The risk is still based on the original $5,000; this keeps the risk limited to a small fraction of the deposited capital.
Often
does not charge commissions, but they widen the spread between bid and ask, making it difficult to trade profitably during the day. ECN brokers offer very small spreads, which makes trading more profitable, but they usually charge a fee of about $2.50 for every $100,000 traded ($5 for a full round).
Trading Currency Pairs
If you are trading a currency pair such as USD/CAD during the day, you can risk $50 in each trade, and each point movement is worth $10 with the standard lot size (100,000 units of currency). Therefore, you can take a position of a standard lot size and place a stop-loss order five pips away, which will keep the risk at $50 for the trade. This also means that a winning trade is worth $80 (8 pips × $10).
These estimates show how much a forex trader could earn in a month by executing 100 trades: 55 trades were profitable: 55 × $80 = $4,400, 45 trades were losing: 45 × (-$50) = -$2,250.
Total profit: $4,400 – $2,250 = $2,150 if there are no commissions (the win rate will likely be lower).
Net profit: $2,150 – $500 = $1,650 if you are using a broker that charges a commission (the win rate will likely be higher).
Assuming a net profit of $1,650, the account return for the month is 33% ($1,650 ÷ $5,000). This may seem very high, and it is a very good return. See below for more information on how this return affects.
Slippage Greater Than Expected Loss
It will not always be possible to find five good trades in a day, especially when the market is moving very slowly for extended periods.
Slippage is an unavoidable part of trading. It leads to losses greater than expected, even when using a stop-loss order. It is common in markets that move very quickly.
To account for slippage in the potential profit calculation, reduce the net profit by 10%. (This is a high estimate for slippage, assuming avoidance of holding through major economic data releases). This will reduce the potential net profit generated by the trading capital of $5,000 to $1,485 per month.
You can adjust the above scenario based on your typical stop-loss and target, capital, slippage, win rate, position size, and commission parameters.
Conclusion
This simple risk-managed strategy suggests that with a 55% win rate, and making more profit on winning trades than on losing ones, it is possible to achieve returns exceeding 20% monthly in day trading forex. Most traders should not expect to achieve such levels of profit; although it seems simple, it is actually much more difficult.
In any case, with a good win rate and a reasonable risk/reward ratio, a forex trader committed to a good strategy could achieve between 5% and 15% monthly, thanks to leverage. Remember, you do not need a large capital to start; $500 to $1,000 is usually enough.
Frequently Asked Questions (FAQs)
How many hours of trading in a day do you need to do to make money in forex?
Most day traders can achieve a reasonable level of success in forex trading for a few hours a day. Of course, the more time you dedicate, the greater the potential profits you can achieve.
When does the trading day start on forex charts?
Since the forex markets cover the entire world, it is possible to trade forex 24 hours a day from Sunday evening until Friday afternoon. In the U.S., you can start trading when the Australian and Asian markets open on Sunday at 5 PM EST, and continue trading as other markets open and close until Friday at 4 PM EST.
What
Which is better for day trading – forex or stocks?
Stocks offer a wider range of options and risk levels compared to forex trading, but they require a larger capital to start. Forex also allows you to trade 24 hours a day, whereas stock trading hours are more limited. You can make money (or lose it) in any market, so what matters most is knowing your specific market and how to trade effectively.
Source: https://www.thebalancemoney.com/how-much-money-can-i-make-forex-day-trading-1031013
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