Trading in foreign currencies requires a little amount of capital, and this is the reason why many people try forex trading. As forex trading offers a lot of leverage, traders can magnify their profits and losses as well. Not all the traders are able to get gains from forex trading. The profit mainly depends on the account size, risk management, risk appetite, and trading strategy. How much money a person can earn from forex trading is directly related to his potential for controlling risks.
Risk management in Forex Day Trading
The most crucial element of Forex trading is risk management. As a trader, you should keep your risk small or at least keep it 1 percent or less. For example, if you have $ 1,000 in your account, you should not lose more than $ 3 on trade. Initially, it may seem less, but losses add up pretty quick.
A well-curated trading strategy can have many components, but it is mostly analyzed on the basis of risk/reward ratio and win-rate. Win rate is the number of trades that you win out of a total number of trades you conduct. Risk reward refers to the invested capital, which is being risked to attain a profit. If a trader is losing few pips on trades but is gaining more pips on winning trades, he is making more on winning trades. This is a great strategy on which many traders strive.
Let’s assume that a trader has $1,000 in the capital and his win rate is decent 55 percent. He risks only 1% of his capital, i.e. $10 per trade. He places a stop- loss at five pips away and targets eight pips away. This means that the reward for each trade is 1.6 times higher than the risk, so he can have bigger winning trades than losing trades.
Forex brokers offer leverage up to 50:1. Suppose a trader is using 30:1 leverage which means that he is able to take positions worth of $30,000. Risk is still limited to the small fraction of the capital invested.
Forex brokers don’t charge commission but have high spread between the bid and ask. This reduces the profit of traders. AAATrade.com, a well established European investment firm, offers small spread making the day trade profitable for traders.
Slippage gets inevitable sometimes even after using a stop-loss order. It’s mostly common in very fast moving markets. With a slow-moving market, it is not always possible to find five good day trades every day.
This is a simple risk controlling strategy, which will let you have more profit with reduced chances of risk of losing money. With good knowledge and experience in trading, a trader can maximum make 20 percent per month, but most of the traders don’t make this much. Even with the decent win rate and risk/reward ratio, a day trader can make somewhere between 5 percent and 15 percent a month.