Many people like trading in forex market just because of a simple reason that it requires less amount of capital to start forex trading. Forex Market operates 24 hours a day during the week and offers a lot of profit potential due to the leverage provided by forex brokers. Forex trading can be extremely volatile and an inexperienced trader can lose his whole invested principal also.
Following scenario shows the potential, using a limited risk forex trading strategy
Risk Management in Forex Trading
Every successful forex trader manages their risk; it is one of the most crucial elements for long term profitability.
To begin, you must keep risk involved on each trade very small, and 1% or less is typical. This means if you have a $5,000 account, you shouldn't lose more than $50 on a single trade. That may look small, but losses do add up, and even a good trading strategy will see strings of losses. Risk is managed using a stop-loss order, which will be discussed in the scenario below.
Forex Day Trading Strategy
Day 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.
Profit Rate
Your Profit rate represents the number of trades you made profit out a given total number of trades. Say you made profit on 55 out of 100 trades; your win rate is 55 percent. While it isn't required, having a win rate above 50 percent is ideal for most day traders, and 55 percent is acceptable and attainable.
Risk/Reward
Risk/reward signifies how much capital is being risked to achieve a certain profit. If a trader loses 10 pips on losing trades but makes 15 on winning trades, he is making more on the winners than he's losing on losers. This means that even if the trader only wins 50% of his trades, he will be profitable. Therefore, making more on winning trades is also a strategic component over which many forex day traders strive.
Trading Leverage
Most of the Forex brokers provide leverage up to 500:1 (more/less in some countries). For this example, assume the trader is using 100:1 leverage, as usually that is more than enough leverage for forex day traders. Since the trader has $10,000, and leverage is 100:1, the trader is able to take positions worth up to $1,000,000. Risk is still based on the original $10,000; this keeps the risk limited to a small portion of the deposited capital.
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 with commission charges, making it easier to trade profitably, but they typically charge about $2.50 for every $100,000 traded ($5 round turn).
Trading Forex Currency Pairs
If you're trading a currency pair like the GBP/USD, you can risk $50 on each trade, and each pip of movement is worth $10 with a standard lot (100,000 units worth of currency). Therefore you can take a position of one standard lot with a 5-pip stop-loss order, which will keep the risk of loss to $50 on the trade. That also means a winning trade is worth $80 (8 pips x $10).
This estimate can show how much a forex day trader could make in a month by executing 100 trades:
• 60 trades were profitable: 60 x $80 = $4,800
• 40 trades were losers: 40 x ($50) = ($2,000)
Gross profit is $4,800 - $2,000 = $2,800 if no commissions (win rate would likely be lower though)
Net profit is $2,800 - $500 = $2,300 if using a commission broker (win rate would be like be higher though)
Assuming a net profit of $2,300, the return on the account for the month is 46 percent ($2,300/$5,000). This may seem very high, and it is a very good return. See Refinements below to see how this return may be affected.
Slippage in Forex Trading
It’s not always possible to find five good day trades each day, especially when the market is moving slow 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. It's quite common in very fast-moving markets.
To account for slippage in the calculation of your potential profit, reduce the net profit by 10% (this is a high estimate for slippage, assuming you avoid holding through major economic data releases). This would reduce the net profit potential generated by your $5,000 trading capital to $2,070 per month.
You can adjust the scenario above based on your typical stop loss and target, capital, slippage, win rate, position size, and commission parameters.
Final Word
Simple risk-controlled strategy indicates that with a 55% win rate, and making more on winners than you lose on losing trades, it's possible to attain returns north of 20% per month with forex day trading. Most traders shouldn't expect to make this much; while it sounds simple, in reality, it's very much difficult.
Even so, with a decent win rate and risk/reward ratio, a dedicated forex day trader with a decent strategy can make between 5% and 15% a month thanks to leverage. Also remember you don't need much capital to get started; $1000 to $2,000 is usually enough. Only thing which need to be kept in mind is you have to give your time to understand, analyze and trade in forex market otherwise you may lose all your invested capital in fraction of seconds also when you are away from active market session.
If you are still unsure about your capabilities to make money in forex trading and giving that much time to analyze the market trends then also you may surely opt for getting your fund managed by any professionals and you would end up with some good profits after settling the performance fee for your Fund Manager.
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