How Much Money Can I Make Forex Day Trading?

Many people enjoy trading foreign currencies on the forex market because it requires the least amount of capital to get started. Forex trades 24 hours a day, seven days a week, and has a high profit potential due to the leverage offered by forex brokers. Forex trading can be extremely volatile, and an inexperienced trader can lose a significant amount of money.

Forex Day Trading Risk Management

Every successful forex day trader manages risk; it is one of, if not the most, important components of long-term profitability.

To begin, keep your risk on each trade very low, 1% or less is typical.

That means that if your account is $3,000, you should not lose more than $30 on a single trade. That may seem insignificant, but losses accumulate, and even a good day trading strategy will experience a string of losses. A stop-loss order is used to manage risk, as discussed in the Scenario section below.

Forex Day Trading Strategy

While a strategy may have many components and can be evaluated for profitability in a variety of ways, it is frequently ranked based on its win rate and risk/reward ratio.

Win Rate

Your win rate is the percentage of trades you win out of a given total. Assume you win 55 out of 100 trades; your win rate is 55%. A win rate of more than 50% is ideal for most day traders, and 55% is achievable.

Risk/Reward

The risk/reward ratio indicates how much capital is at stake in order to make a certain profit. If a trader loses 10 pips on losing trades but makes 15 on winning trades, he or she is profiting more on winners than on losers. That means the trader will be profitable even if they only win 50% of their trades. Making more money on winning trades is thus a strategic component that many forex day traders strive for.

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

Hypothetical Scenario

Assume a trader has $5,000 in capital and a decent win rate of 55% on their trades. They only put 1% of their capital, or $50, at risk per trade. A stop-loss order is used to accomplish this. A stop-loss order is placed five pip away from the trade entry price, and a target order is placed eight pip away. That is, the potential reward for each trade is 1.6 times the potential risk (8 pips divided by 5 pips). Remember, you want winners to outnumber losers.

Using the above parameters, it is usually possible to make about five "round turn" trades (round turn includes entry and exit) while trading a forex pair for two hours during an active time of day. If a month has 20 trading days, the trader will complete 100 trades on average.

Trading Leverage

Forex brokers in the United States offer leverage of up to 50 to 1 on major currency pairs. In this example, assume the trader is using 30 to 1 leverage, which is usually more than enough for forex day traders. The trader can take positions worth up to $150,000 because he has $5,000 and leverage of 30 to 1. The risk remains based on the original $5,000, limiting the risk to a small portion of the deposited capital.

Forex brokers frequently do not charge a commission, but instead increase the spread between the bid and ask, making day trading more difficult. ECN brokers have a very narrow spread, which makes it easier to trade profitably, but they typically charge about $2.50 for every $100,000 traded ($5 round turn).

Trading Currency Pairs

When day trading a currency pair like the USD/CAD, you can risk $50 per trade, and each pip of movement is worth $10 with a standard lot (100,000 units worth of currency). As a result, you can enter a position of one standard lot with a five-pip stop-loss order, limiting your risk of loss to $50 on the trade. This also implies that a profitable trade is worth $80 (8 pips x $10).

This calculation shows how much a forex day trader could earn in a month if they executed 100 trades:

There were 55 profitable trades : 55 x $80 = $4,400

45 of the trades were losers : 45 x ($50) = ($2,250)

If there are no commissions, the gross profit is $4,400 - $2,250 = $2,150. (win rate would likely be lower)

If you use a commission broker, your net profit is $2,150 - $500 = $1,650. (win rate would likely be higher)

Assuming a net profit of $1,650, the monthly return on the account is 33% ($1,650 divided by $5,000). That may appear to be a very high rate of return. See below for more information on how this return may be impacted.

Slippage Larger Than Expected Loss

It is not always possible to find five good day trades every day, especially when the market moves slowly for extended periods of time.

Slippage is an unavoidable component of trading. Even with a stop-loss order, it results in a larger loss than expected. It's common in fast-moving markets.

Reduce your net profit by 10% to account for slippage in the calculation of your potential profit. (If you avoid holding through major economic data releases, this is a high estimate for slippage.) This reduces the net profit potential of your $5,000 trading capital to $1,485 per month.

You can modify the above scenario to reflect your typical stop-loss and target, capital, slippage, win rate, position size, and commission parameters.

The Bottom Line

This simple risk-controlled strategy indicates that with a 55% win rate and making more on winners than you lose on losers, you can achieve monthly returns of more than 20% with forex day trading. Most traders shouldn't expect to make that much money; while it sounds easy, it's actually more difficult.

Nonetheless, thanks to leverage, a dedicated forex day trader with a good strategy and a good win rate and risk/reward ratio can make between 5% and 15% per month. Remember that you don't need much money to get started; $500 to $1,000 is usually sufficient.

Frequently Asked Questions (FAQs)

How many hours of trading per day do you need to make money on forex?

Most day traders can be reasonably successful trading forex for a few hours each day. Of course, the more time you devote to it, the greater the potential profits.

What time does the trading day start on the forex charts?

Because forex markets are global, you can trade forex 24 hours a day from Sunday evening to Friday afternoon. You can start trading in the United States when the Australian and Asian markets open on Sunday at 5 p.m. ET and continue trading as other markets open and close until Friday at 4 p.m. ET.

What is better for day trading—forex or stocks?

Stocks provide a wider range of options and risk levels than forex trading, but they require significantly more capital to get started. Forex trading is also available 24 hours a day, whereas stock trading hours are more limited. You can make (or lose) money in any market, so the most important thing is to understand your specific market and how to trade effectively.

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