Making Money Day Trading Forex

Forex Day Trading is the choice of many because it requires the least amount of capital to start day trading. Forex trades 24 hours a day during the week and offers a lot of profit potential due to the leverage provided by forex brokers.  Forex trading is often volatile and can lead to big losses if not handled properly.

The following scenario shows the potential, using a risk-controlled forex day trading strategy.

Forex Day Trading Risk Management
Every successful forex day trader manages their risk; it is one of, if not the most, crucial elements of ongoing profitability.

To start, you must keep your risk on each trade very small, and 1% or less is typical.3 This means if you have a $3,000 account, you shouldn't lose more than $30 on a single trade. That may seem small, but losses do add up, and even a good day-trading strategy will see strings of losses. Risk is managed using a stop-loss order, which will be discussed in the Scenario sections below.

Forex Day Trading Strategy
While a strategy can potentially have many components and can be analyzed for profitability in various ways, a strategy is often ranked based on its win-rate and risk/reward ratio.

Win Well
Your win rate represents the number of trades you win out a given total number of trades. If you win 7 out of 10 trades then your win ratio is 70%, the win ratio will not determine your success, your profit will.

Stop Greater Than Target
Risk/reward signifies how much capital is being risked to attain a certain profit. If you are a trader and you risk 20 pips on a trade to make 10 then obviously this strategy will not work to receive stellar results in the long run and will mean you will be a losing trader.

A higher win rate for trades means more flexibility with your risk/reward, and a high risk/reward means your win rate can be lower and you'd still be profitable.

Trading Example
If a trader has $3,000 in their account, and they have a good win rate of 60% on their trades. If the trader risks 5% of their capital, and their stop is 1/2 that of their target then they will be in good shape.

This means that the potential reward for each trade is 2 times greater than the risk. Keep in mind you want the winners to be bigger than the losers.

While trading a forex pair for two hours during an active time of day it's usually possible to make about five round turn trades (round turn includes entry and exit) using the above parameters. If there are 20 trading days in a month, the trader is making 100 trades, on average, in a month.

Forex Leverage
In the U.S., forex brokers provide leverage up to 50:1 on major currency pairs.4 For this example, assume the trader is using 50:1 leverage, as usually, that is more than enough leverage for forex day traders. Since the trader has $3,000, and leverage is 50:1, the trader is able to take positions worth up to $150,000. Risk is still based on the original $3,000.

Forex brokers often don't charge a commission, but rather increase the spread between the bid and ask, thus making it more difficult to day trade profitably. ECN brokers offer a very small spread, however, they typically charge a commission.

Trading Currency Pairs
If you're day trading a currency pair like the EUR/USD you can risk $100 on each trade, and each pip of movement is worth $20 with a Therefore you can take a position of one standard lot with a 10-pip stop-loss order, which will keep the risk of loss to $100 on the trade. That also means a winning trade is worth $200 (since your stop is 1/2 the target)

This estimate can show how much a forex day trader could make in a month by executing 100 trades:

10 trades were profitable: 10 x $200 = $2,000
10  trades were losers: 10 x $100 = $1,000
Total profit is $1,000

Losses
It won't always be possible to find five good day trades each day, especially when the market is moving very slowly for extended periods.

Slippage is an inevitable part of trading. It results in a larger loss than expected, even when using a stop-loss order. Slippage is common when markets move fast, they are also part of dealing with certain brokers, be sure you trust your broker and they have a good reputation.

Conclusion
This simple strategy we outlined above seems very easy, however in reality it is not, good trading skills take a long time to develop and learn. The information we discussed today, especially about the risk-reward ratio is very important to consider when day trading forex.