Many traders prefer trading foreign currencies through Forex, or the forex (forex) market since it needs the minimum amount of capital to get started the day-to-day trading. Forex trading is available all hours of the week and can provide the potential for large profits due to the leverage offered to forex traders. Forex trading is very volatile and even a novice trader could risk substantial amounts.
The following scenario illustrates the possibilities, with the risk-controlled daily trading forex strategy.
Forex Day Trading Risk Management
Every successful day trader on the forex market is able to manage their risk. It is among the many, if not the most important elements of sustaining success.
In the beginning, you should ensure that your risk for every trade to a minimum, and 1percent or less is the norm. 3 That means that , if you have an account with a value of $3,000 it is unlikely that you will lose more than $30 on one trade. It may seem like a small amount but the losses increase as well, and even a great day trading strategy can result in several losses. Risk is controlled by using the use of a Stop-loss Order that will be explained in the section on scenarios.
Forex Day Trading Strategy
Although a strategy could comprise a number of elements and be evaluated for profit through a variety of methods however, strategies are usually evaluated by its winning rate and the risk-to-reward ratio.
Your win rate is the amount of trades that you are able to win from the total. If you are able to win 55 of 100 trades, your winning rate is 55 percent. If you have a winning rate that is higher than 50% is perfect for the majority of day traders while 55% could be possible.
Risk/reward refers to the amount of capital is at risk to achieve the desired profit. If a trader is losing 10 pip in losing trades, but earns 15 pips on winning trades, they’re making more money winnings than losing money on losing trades. This means that even if a trader only achieves 50% wins on their trades, they’ll profit. So, earning more from profitable trades is also an important aspect that many forex day traders work.
A higher rate of winning in trades gives you more flexibility in your risk/reward. A high risk/reward can mean that your rate of winning could be lower, but you’ll still earn.
Let’s say a trader owns $5,000 of capital funds and they can boast a chance of winning 55% in their trades. They only risk 1percent of their capital, which is $50 per trade. This is achieved with a stop-loss option. In this instance the stop-loss order is placed at a distance of five pips from the entry price of the trade while the target is set eight pip away. The potential profit for every trade will be 1.6 per cent of the risk (8 pips divided by five pips). Remember that you want winners to be greater than losers.
When trading a currency couple for two hours at an activity time of the day, it’s generally possible to execute 5 ”round turn” trades (round turn is a combination of the entry and exit) by using the above parameters. In the event that there’s 20 days of trading in a month trader makes 100 trades per month. the course of a month.
Within the U.S., forex brokers offer leverage of up to 50-1 on most foreign exchange pairs. 4 For this scenario, let’s say the trader has 30 to 1 leverage because that’s sufficient leverage for day traders in forex. The trader’s capital is $5,000 in capital and leverage is set at 30:1 that means the trader could accept positions that are worth as high as $150,000. The risk remains dependent on the initial $5,000 amount; this means that the risk limit to a limited percentage of the deposit capital.
The majority of brokers do not charge commissions and instead raise rates by increasing spread between bid and ask which makes it harder to trade profitably. ECN brokers provide a low spread, which makes it simpler to trade profitably however they generally cost around $2.50 for every $100,000 that is traded ($5 per round).
Trading Currency Pairs
If you’re trading day-to-day with a currency pair like the USD/CAD, you could be liable for $50 per trade and every pip is worth $10 when you have an average lot (100,000 units of currencies). So, you could make a trade of one standard lot using an order for a stop-loss of five pip and limit the possibility of losing to $50 per trade. This means that a profitable trade will be worth the sum of $80 (8 pip multiplied by $10).
Check out the following article for more details on strategies for part time forex trading.
Slippage Larger Than Expected Loss
It’s unlikely to find five profitable trading opportunities every day particularly when markets are moving slow for long periods of time.
The slippage is a common occurrence of trading. It causes a greater loss than anticipated regardless of whether you use an order to stop losses. It’s commonplace in extremely fast changing markets.
To take into account slippage when calculating your possible profit, decrease the total net income by 10 10%. (This is an estimate to account for the slippage, as long as you do not plan on keeping your money in reserve for major economic release of data.) This would lower the profit potential from your trading capital of $5,000 to $1,485 a month.
You are able to alter the situation according to your normal stop-loss, target capital, slippage size of your position, win rate and commissions the parameters.
The Bottom Line
This simple risk-controlled strategy shows that, with 55% of the time you win and a higher percentage of winning trades than you lose in losing trades, you can earn more 20 percent per month using Forex day trading. Many traders should not expect to achieve that amount; although it sounds easy but in reality, it’s more complicated.
With a decent win percentage and risk/reward ratio, a committed day trader in forex with an effective strategy could earn between 5 or 15 percent per month due to leverage. Keep in mind that you don’t require an enormous amount of money to start and $500-$1,000 is typically sufficient.