Scenarios for Much Money Forex Day Traders Can Make
Cory Mitchell, CMT
In forums and in emails I receive, a common question is "How much money can I make day trading forex?" The questions vary, such as "How long to double my forex account?" or "I have $X, how much can I make in a day/month on that?"
Before getting into how much forex day traders can make, day trading is about process. If we have a good process that we follow, then money will come. If we don't have a good process, our money will go to other traders who do.
While many people coming to trading are just looking to make a buck, the reality is that almost all these people will lose their money because they want the money without developing a process.
Developing a process involves creating and testing a strategy that produces a profit over many trades, and then creating rules and risk management around that strategy to keep ourselves from losing the money we make.
Once a process is developed, often called a trading plan, then the money starts to flow. How much depends on several factors:
- The win-rate of the strategy over many trades.
- The average reward:risk over many trades.
- How many trades are taken.
- Position Size
- Which is a function of capital in the account, and
- Capital risked on each trade (including leverage).
Scenarios for How Much Forex Day Traders Make
Assume a trader develops a strategy that produces on average 3 trades per day, or about 60 per month.
The average reward:risk is 2:1, meaning they tend to make twice as much on winners as they lose on losers.
They win 50% of their trades.
They risk 1% of their account on each trade (see position size article mentioned above). This means if a trade is lost, the account drops by 1%. If a trade is won, the account increases by 2%. Check out the Technical Turnaround EURSUD Day Trading Strategy.
Using this data, we can calculate how much this strategy will make.
Winning trades: (60 x 0.5) x 2% = 60%
Losing trades: (60 x 0.5) x 1% = 30%
Net profit: 60% - 30% = 30%
Using this strategy, a trader could make 30% in a month on the capital they have in their account. This is a monthly result because the total trades for the month were used in the calculation. This is possible because leverage is being used extensively. This is discussed in the section below.
This can easily be tweaked to accommodate other results.
Assume a strategy produces 4 trades per day (80 per month), the risk:reward is 1.5:1, and the win rate is 45%. The trader risks 1% of their account on each trade.
Winning trades: (80 x 0.45) x 1.5% = 54%
Losing trades: (80 x 0.55) x 1% = 44%
Net profit: 10%.
This may make it seem very easy to trade and make a good return each month. It isn't. Most traders lose money, so making these types of returns consistently, while theoretically possible, is not in the cards for most people.
Playing with the Numbers
If the reward:risk is the same, about 1:1, the strategy will need to have a win rate above 50% in order to make a profit. If a strategy has a high reward:risk, such as 3:1, the strategy could win 30% of the time and still be profitable.
If a strategy is profitable, then, assuming the other statistics can remain the same, taking more trades will result in a larger profit. Taking more trades that are low quality, or not part of a tested strategy, will likely result in worse performance.
There are multiple ways to improve results then. Problems can typically be isolated by looking at win-rate and reward:risk and finding ways to tweak these statistics more in our favor.
One of the key takeaways is that you don't need to be super fancy to make a lot of money. Focus on maintaining a decent reward:risk, and then find ways to keep that win-rate at a level that produces a nice profit (filters, waiting for the correct setup, awaiting for a trade trigger, etc.).
Forex Day Trading Results When Including Commissions
With forex day trading, brokers will typically charge a commission. While a commission may seem like a cost, whereas the spread doesn't, paying a commission for a smaller spread will typically result in better day trading results. Therefore, I opt to use an ECN account with very low spreads—such as 0.00001 (1/10 of a pip) on the EURUSD—and pay a commission, instead of paying a 1 pip spread.
Commissions typically cost between $1.5 and $8 per 100,000 traded. The smaller the account, typically the higher the commission cost. Commissions are charged to buy and sell, while the last trader had 80 trades (in and out) they would actually pay commissions 160 times.
Let's use actual dollars and use the first scenario above.
- 3 trades per day, or about 60 per month.
- Average reward:risk is 2:1
- Win 50% of their trades.
- They have a $5,000 forex trading account
- Risk 1% of their account on each trade
- 1% of $5,000 is $50 (losing trade), and a winning trade is $100
Winning trades: (60 x 0.5) x $100 = $3,000
Losing trades: (60x 0.5) x $50 = $1,500
Profit: $1,500 on a $5,000 account, or 30%.
But we haven't factored in commissions. Commissions are typically based on position size, and for that we need to make some assumptions.
Assume that the average stop loss on each trade is 5 pips away from the entry. The trader has a US account and is day trading the EURUSD. They are risking $50 per trade. This means they can purchase 1 standard lot on each trade. A pip of movement will result in a $10 gain or loss with a standard lot, so losing 5 pips would mean a $50 loss, which is our set maximum.
Now that we have estimated the position size is 1 standard lot for each trade, we can estimate the commission costs. On the low end, 120 x $1.5 = $180 or 120 x 8 = 960 on the high-priced broker end.
Net Profit with low-cost broker: $1,500 - $180 = $1,320 or 26.4% on $5,000 account.
Net Profit with high-cost broker: $1,500 - $960 = $540 or 10.8% on $5,000 account.
Also notice, this trader is trading a standard lot, which is 100,000 in currency. They only have $5,000 in their account, so they are utilizing 20:1 leverage. This is what makes the high percentage returns possible.
Without 20:1 leverage, the trader would be limited to buying 5,000 worth of currency at a time, and their profit would drop to 1.5% for the month, less commissions.
Expectations For How Much Can be Made Forex Day Trading
Expect to lose money at first, then be a little bit profitable. Then, if still in the game after a few years, maybe you will get to achieving 10% or more per month.
The strategy we come up with determines our win-rate, reward:risk, number of trades, and all that. Once you have developed a strategy, you can plug in your own numbers, using the template above, to give yourself an idea of your monthly profit (or loss).
Winning 50% of trades with a 2:1 reward to risk on three trades a day may make it seem pretty easy to grab 30% per month (before commissions), but very few traders ever achieve this. There are loads of trading mistakes we can make that erode the profitability of a strategy:
- They can't sustain the win-rate the reward:risk over many trades.
- The leverage kills, because getting caught in one big move could wipe you out.
- Leverage could be reduced by half by risking 0.5% on a trade, for example, instead of 1%.
- The strategy works, but the trader doesn't have the discipline to follow it.
- They miss trades, take extra ones, don't place stop losses, don't take profits when they should, exit trades early, make position size errors, and the list goes on.
- Slippage—the difference between where orders are expected to execute and where they actually execute— erodes their profit potential.
The most important thing for successful forex day trading is to build a process that works. Then, we just need to follow the process. If we do, money will follow. Our goal isn't the money, our goal is always to follow the process. That's how consistency is developed.
Also, because of leverage, always get out of day trades a couple of minutes before major economic news announcements. You don't want to be holding a leverage position when important news hits, as it could do a lot of damage to your account if the price goes the wrong way.
Cory Mitchell, CMT
Disclaimer: These scenarios are possible to achieve due to leverage, but are far from typical, as discussed. Nothing in this article is personal investment advice, or advice to buy or sell anything. Trading is risky and can result in substantial losses, even more than deposited if using leverage.