The Forex market is full of opportunities. Being the world’s largest financial market, a humongous amount of money, estimated at $5 trillion, is traded on it every day. The surprising fact; it does not require much to get started in it nevertheless.
Even though currency pairs, the financial instruments traded in this market, are highly volatile, the profit — and losses — that Forex traders incur are magnified by leverage made available by brokers.
Besides, the kind of trading style that a trader uses can also influence their profitability in some ways. Hence, here, we will first discuss the different trading styles available so that you can choose the one that suits you best.
Styles for Trading Forex
Forex traders use different styles for participating in the market. These styles are the popular five:
- Day Trading
- Swing Trading
- Position Trading
Scalping is the quickest of them. Scalpers, for so are traders who use this style are called, open and close their positions within a few seconds or minutes. Since their aim is to lock in on few pips at a time, they tend to take many trades during the trading session.
Swing traders hold their positions for a few days. Position traders, on the other hand, keep trades for several months up to years. Investing is the longest of them all.
Day trading, the style we will be preoccupied with here, is conducted within a few seconds to a couple of hours. The whole notion of day trading is that positions are entered and exited on the same day.
Day Trading Forex
The earning potential of a day trader is limitless. However, the risk can be high. As a result, a day trader should know how to define his risk and rewards and how to manage them, while also keeping his expectations reasonable enough.
In that regard, the following tactics could help;
The use of leverage is not exclusive only to day traders. Leverage is available to the generality of Forex traders to use to boost their chances for gains. However, it can also lead them to their ruins.
For day traders, this is especially important. For them, the market is already fast, decision-making prowess has to be sharp, and so, leverage too must be adequately managed. Else, disaster strikes.
Many Forex brokers provide leverage up to 250:1 (this is high!). This type of leverage is too high for day traders. Instead, day Forex traders are advised to restrict themselves to leverage of 30:1 or even lesser.
With this alone itself, an account in $3,000 of trading capital will afford the trader to control up to $90,000. Using this, in cases of wrong trading decisions, it will be easy for the trader to manage his loss.
Modest Win Rate, Reasonable Reward/Risk Ratio
As a day trader, your goal should be a modest win rate. Even though this is still hard, it is, however, not impossible. You can seek to ensure that at least 50-55 of every 100 trades you take will be winning trades.
If you are able to do that, your win rate will be 50-55%. Then, importantly, you should also work out an optimum risk/reward ratio. How many pips are you willing to lose compared to the number you seek to clinch on each trade?
For example, if your reward/risk ratio is 2:1, that means that you are willing to lose 5 pips on each trade, while seeking to win 10 pips. On a standard lot account, with a major currency pair, a change of 1 pip is equivalent to $10.
Consequently, given a 55% win rate, 55 out of 100 trades on an account with a capital of say $3,000, will fetch you a profit of at least $5500. This will give a net profit of $2250 ($5500 – $2250) after the deduction of the loss incurred on the remaining 45 trades.
Having established the fact that you can make money day trading Forex, we find it compelling to state that it is only possible if you optimally manage the attendant risk.
First, you should develop a sound, well-tested strategy. Second, the trader that will stay in the game will be one who ensures that his wins are more than his losses. Just over 55% win rate should be enough.
Besides, do not be greedy. Aim for modest gains. 5% to 15% is okay. Even though you could aim for more, doing so would only put unnecessary pressure on you.