What’s My Profit Potential as a Forex Day Trader?
The least amount of capital is what is needed to start day trading in the forex market which trades 24 hours a day (every weekday) and offers plenty potential as a result of the leverage provided by forex brokers. And so now you ask “How much money can I make forex day trading?” I will show you the potential, using a risk-controlled forex day trading strategy.
Risk Management of Forex Day Trading
All successful forex day traders manage their risk which is the most crucial elements of profitability.
Keeping risk on each trade very little, 1 percent or less is typical. You can manage risk using a stop loss order, which will be discussed below.
Strategy for Forex Day Trading
A day trading strategy is often ranked based on its win-rate and reward/risk ratio.
Win-rate means how many trades are won out of a given number of trades. For instance, if a trader wins 55 out of 100 trades, his win rate is 55%. Though not required, having a win rate above 50 percent is ideal for most day traders.
Reward/risk is how much capital is being risked to attain a guaranteed profit.
If 20 pips are lost on losing trades, but the trader makes 30 on winning trades, they are making more on winners than they are on losers. Even if they only win 50 percent of their trades, they will be profitable. Consequently, making more on winners is also a strategy component lot of forex day trader’s target.
Example: How Much Money Can I Make Forex Day Trading?
Assume a trader has $10,000 capital, and they have a decent win-rate of 55% on their trades. They risk only 1 percent of their money or $100 per trade. That is accomplished by using a stop loss.
That means that the potential return for each trade is 3.2 times significant than the risk (16/10) — we want winners to be bigger than losers.
While trading a forex pair for two hours during an active time of day, it is possible to make about five round turn trades including entry and exit using the above parameters.
Forex brokers provide up to 50:1 leverage (it could be more in other countries).
In this scenario, suppose the trader is using 30:1 leverage, as usually, that is more than sufficient advantage for forex day traders. Since the trader has $5,000, and leverage is 30:1, the trader can take positions worth up to $150,000. The risk is still based on the original $5,000; this keeps risk limited to a small portion of the deposited capital.
Forex brokers often do not charge a commission, but instead increase the spread between the bid and offer, therefore making it hard to day trade profitably. ECN brokers provide a minimal range, making it simpler to trade successfully, but they usually charge about $2.5 for every $100,000 traded ($5 round turn).
If you are day trading a pair like the GBP/USD, we can risk $50 on each trade, and each pip of movement is worth $10 with a standard lot (100,000 worth of currency).
So we can take a position on one standard lot with a five pip stop, which will put the risk at $50 on the trade.
Now, let’s see how much a forex day trader could make in a month (100 trades):
- 55 trades were lucrative: 55 x $80 = $4,400
- 45 trades were losers: 45 x ($50) = ($2,250)
Gross profit is $4,400 – $2,250 = $2,150 if no commissions (win rate would probably be lower though)
Net profit is $2,150 – $500 = $1, 650 if using a commission broker (win rate would be higher though)
Assuming a net profit of $1,650, the return on the account for the month is 33 percent ($1,650/$5,000). That may appear very high, and it is an excellent return. See Refinements below to see how this return could be affected.
It’s not always possible to find five good day trades a day, especially when the market is moving at a snail’s pace for extended periods of time.
Slippage is an unavoidable part of trading. It results in a more significant loss than anticipated, even when using a stop loss order. To account for slippage, reduce the net profit by 10 percent. That would reduce the net profit to $1,485 per month.
Conclusion – How Much Money Can I Make Forex Day Trading?
This simple risk-controlled strategy shows that with a 55 percent win rate, it’s possible to make returns north of 20 percent per month forex day trading. While it sounds easy, most traders shouldn’t expect to make this much because, in reality, it’s more difficult. Nonetheless, with a decent win rate and reward/risk ratio, a devoted forex day trader with a proper strategy can earn between 5 and 15 percent a month, thanks to leverage.