How Much Money Can I Make Forex Day Trading?

See the profit a simple risk controlled forex day trading strategy can produce.

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Learn how much you can make forex day trading from home. Getty Images/Sawayasu Tsuji

The forex market requires the least amount of capital to start day trading, trades 24 hours a day (during the week) and offers a lot of potential due to the leverage provided by forex brokers. The key question is "How much money can I make forex day trading?" The following scenario shows the potential, using a risk controlled forex day trading strategy. 

Forex Day Trading Risk Management

Every successful forex day trader manages their risk; it is one of, if not the, most crucial elements of profitability.

Keep risk on each trade very small, 1% or less is typical. This means if you have a $3,000 account you shouldn't lose more than $30 on a single trade (see ​Forex Position Sizing). That may seem small, but losses occur, and even a good day trading strategy will see strings of losses. Risk is managed using a stop loss order, which will be discussed in the Scenario sections below.

Forex Day Trading Strategy

While a strategy has potentially many components and can be analyzed for profitability in various ways, a strategy is often ranked based on its win-rate and reward/risk ratio. 

Win-rate is how many trades are won out a given number of trades. Say you win 55 out of 100 trades, your win rate is 55%. While it isn't required, having a win rate above 50% is ideal for most day traders. 55% is acceptable and attainable.

Reward/risk determines how much capital is being risked attain a certain profit.

If a trader loses 10 pips on losing trades but makes 15 on winning trades, they are making more on winners than they are losing on losers. Even if they only win 50% of their trades, they will be profitable. Therefore, making more on winners is also a strategy component many forex day traders strive for.

 

A higher win-rate means more flexibility with your reward/risk, and a high reward/risk means your win-rate can be lower and you'd still be profitable. For a more thorough discussion on win-rate and reward/risk (also discussed in terms of risk/reward) see: Day Trade Better Using Win Rate and Risk-Reward Ratios.

Scenario: How Much Money Can I Make Forex Day Trading?

Assume a trader has $5,000 in capital, and they have a decent win-rate of 55% on their trades. They risk only 1% of their capital or $50 per trade. This is accomplished by using a stop loss. For this scenario, a stop loss order is placed 5 pips away from the entry price, and a target is placed 8 pips away.

This means that the potential reward on each trade is 1.6 times great than the risk (8/5) -- we want winners to be bigger than losers.

While trading a forex pair for two hours during an active time of day (see: Best Time of Day to Day Trade Forex) it's usually possible to make about five round turn trades (round turn includes an entry and exit) using the above parameters. If there are 20 trading days in a month, the trader is making 100 trades, on average, in a month.

Forex brokers provide leverage up to 50:1 (more in some countries).

For this example, assume the trader is using 30:1 leverage, as usually that is more than enough leverage for forex day traders. Since the trader has $5,000, and leverage is 30:1, the trader is able to take positions worth up to $150,000. Risk is still based on the original $5,000; this keeps risked 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 offer, thus making it more difficult to day trade profitably. ECN brokers offer a very small spread, making it easier to trade profitably, but they typically charge about $2.5 for every $100,000 traded ($5 round turn).

If day trading a pair like the GBP/USD, we can risk $50 on each trade, and each pip of movement is worth $10 with a standard lot (100,000 worth of currency).

Therefore we can take a position of one standard lot with a 5 pip stop, which will keep the risk to $50 on the trade. That also means a winning trade is worth $80 (8 pips x $10).

With all that out of the way, letès see how much a forex day trader can make in a month (100 trades)...

  • 55 trades were profitable: 55 x $80 = $4,400
  • 45 trades were losers: 45 x ($50) = ($2,250)

Gross profit is $4,400 - $2,250 = $2,150 if no commissions (win rate would likely be lower though)

Net profit is $2,150 - $500 = $1, 650 if using a commission broker (win rate would be like be higher though)

Assuming a net profit of $1,650, the return on the account for the month is 33% ($1,650/$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.

Refinements

It won't always be possible to find five good day trades a day, especially when the market is moving very slowly for extended periods of time.

Slippage is an inevitable part of trading. It results in a larger loss than expected, even when using a stop loss order. It's common in very fast moving markets. To account for slippage, 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 to $1,485 per month.

Adjust scenario above based on your typical stop loss and target, capital, slippage, win rate, position size, and commissions. 

How Much Money Can I Make Forex Day Trading? - Final Word

This simple risk-controlled strategy indicates that with a 55% win rate, and making more on winners than is lost on losers, it's possible to attain returns north of 20% per month forex day trading. Most traders shouldn't expect to make this much; while it sounds easy, in reality, it's more difficult. Even so, with a decent win rate and reward/risk 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, $500 to $1,000 is usually enough.