Many forex traders focus on day trading. It is simple and requires little investment. Also, since the forex market is normally open 24 hours for 5 days a week, traders find more rewarding and promising since they are guaranteed that they can trade at any time.
However, the main question in the hearts of the trader is how much you actually make in forex day trading. Below is a scenario showing how much one can expect following forex day trading using risk management strategies.
Risk Management in Forex day trading
Managing the risks involved in forex trading is one of the most important aspects of any successful trading.
For a start, you should ensure that you keep the risk as small as possible for every trade that you place. You should target risk of less than 1% for every trade. This means that if your account has $1000, you should only risk $10 or less in a single trade. This may seem small but it will ensure that in case you make several losing trades in a day, the total loss in a day will be kept low.
Forex Day trading strategy profitability
The profitability of any trading strategy is measured in terms of its win-rate and risk/reward ratio.
The win rate refers to the number of trades that the strategy wins out of the total trades placed in a certain period of time; for this case in a day. For instance, if the strategy wins 15 trades out of 20 trades, then its win rate is 75%.
On the other hand, the risk-reward ratio refers to the amount of capital that is risked in every trade so as to get profit. For example, a trader could make a total loss of 20 pips and make a total profit of 35 pips. Therefore the risk-reward ratio is 4:7. This means that even if the trader only wins 5o% of his/her trades the trading strategy will still be profitable.
Therefore, it is not only having profitable trades but you should consider how much each of the winning trade is making compared to the amount being lost through the losing trades.
Example showing how much a trader can make day trading
Let us assume a trader has a capital of $10000 in his/her account and has a 60% win rate. Also, let us assume they only risk 1% in every trade that they open by the help of stop loss and take profit levels. For this example, let us assume the trader places a stop loss 5 pips away from the entry level and a take profit at 9 pips.
This means that the winning trades would make more than the losing trades by 1.8 times.
The trader could, for instance, make about 4 trades per day. Since there are 20 trading days in a month, the trader will end up making 80 trades in a month.
Let also assume that the trader uses a leverage of 50:1 for this scenario. This means that the trader can make trades of up to $50,000. However, you should keep in mind that the risk is still based on the original $1000.
Depending on the broker, if the trader is an ECN broker, the trader will be able to make more profits since ECN brokers have very small spread but charge commissions on every trade. But if the broker is not an ECN broker, they will have a large spread and it could be hard to make large profits when day trading.
If the trader chooses to trade the EURUSD and risks $100 (1% of $10000) in every trade and uses a standard account where each pip movement translates to $10. With a stop loss at 5 pips away, the maximum loss the trader can make is $50 while the maximum profit the trader can make in one trade is $80 with a take profit at 8 pips away.
If the trader makes 4 trades in a day with a win rate of 75%, it means that 3 of the 4 trades will be win trades and one of the trade will be a losing trade. In a month out of the 20 trading days, the trader will have made 60 winning trades and 20 losing trades.
Therefore the trader will have made:
- 60 X $80 =$4800 and,
- 20 X $50 = $1000
So, the total profit is $4800-$1000 = $3800 per month. This translates to a profit of 38% per month.
Due to some unavoidable circumstances, it could be difficult to make 4 trades in a day. It could also be hard to get 3 of the trades being profitable. All of this will reduce the net profit.
At times there would also be slippage especially when the markets become too volatile and this reduces the profits and at times result in larger losses even when using take profit and stop loss levels.
With a good win-rate and a risk-reward ratio, you do not need too much to start trading. You only have to ensure that you employ the right risk management strategies.
You don’t have to make as much as the 38% indicated in the above example. A return of 5% would be a good start.