Forex trading is more accessible than other types of investment. The global currency exchange is open 24 hours a day 5 full days a week. Traders in India work using laptops, tablets, and even smartphones. Entry is also affordable — you may begin with only $10. But how much can you expect to gain, and what are the secrets of lucrative decisions?
Risk Always Matters
Even the most experienced traders lose money from time to time. The fundamental market drivers are beyond any person’s control. Interest rates set by central banks, oil prices, geopolitical tensions are all uncontrollable variables. Therefore, even the most meticulous strategy may be undermined by force majeure events.
Some currency pairs are more volatile than others. Traders can make more money on short-term trends, but their risks are also magnified. In comparison, the most stable choices like Majors require higher volumes to generate high returns. Thus, there is a constant trade-off between risk and profit potential. Fortunately, trading platforms have automatic triggers that help you limit losses for each position (Stop Loss).
How much you reap depends on how much capital you put at stake. Popular FX trading accounts allow you to start with $10, but you need to ramp up the volume for decent returns. The rule of thumb is limiting exposure to 1% per trade. Therefore, someone with $4,000 in their account should not lose more than $40 at once. Strings of losses may be devastating.
Risk vs. Reward
Forex strategies are complex systems, but key comparison criteria are win/rate and risk/reward. The first one shows how many trades you win out of a certain number. For example, someone with 45 successful trades of 100 has a win rate of 55%. In general, 50% is the lowest acceptable level.
Risk/Reward shows how much capital is risked to attain a particular profit. For example, suppose you lose 10 pips on failed trades and make 15 on the successful ones. And in this situation, it is only necessary to win half of the time to be profitable. As a result, many traders focus on maximizing profits.
Example of Profit Calculation
Some experts will tell you that a trader may achieve a 10% monthly return after half a year of practice. Sadly, this is only a generalization. It is necessary to consider the details of each individual case. For example, let’s look at the following scenario for someone trading through Forextime:
- $5,000 in capital funds,
- 55% win rate,
- 1% of capital ($50) risked per trade,
- Stop Loss at 5 pips from entry,
- profit target at 8 pips from entry.
If you divide 8 pips by 5 pips, you will calculate the potential reward level. Here, it is 1.6 bigger than the accepted risk. Now, let’s suppose the trader opens and closes 5 trades based on these parameters daily for a month. The total is 100 trades.
With leverage, the calculation is more complex. In this example, we use the 30:1 ratio. No, the trader may open positions worth $150,000. However, the risk must be limited to the initial amount.
Our hypothetical trader follows a day trading strategy with the US dollar valued against the Canadian dollar. They risk up to $50 per trade, and a single pip equals $10 because a standard lot is 100,000 units worth of currency. Meanwhile, a winning trade should bring 8 pips, or $80. Here is how much could be made in a month:
- 55 winners: 55 x $80 = $4,400
- 45 losers: 45 x ($50) = $2,250
- Gross profit is $2,150 minus commissions if applicable.
If the broker charges $500 in commissions, your net profit will fall to $1,650. When divided by the size of the initial capital ($5000), it provides a 33% rate of return per month. It is a very good result, but the reality is often less spectacular due to slippage. It may eat as much as 10% of your net profit.
This hypothetical scenario may be adjusted based on different stop loss strategies and target profit. The size of the capital, depth of slippage, win rate, position size and commissions all influence the total. It is also important to remember that while market makers do not charge a commission, they make the spreads wider.
The Final Word
Making profits on Forex may sound simple. However, it is a complicated process with many variables. Successful traders who follow reasonable strategies may expect to make as much as 20% monthly. This requires a win rate of at least 55%. However, a more common case is 5-15% with leverage.
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Last modified: March 26, 2021