Strategies to Use in Forex Day Trading

Forex attracts more traders with its ever-growing popularity. One of the reasons that many traders like to trade in the Forex market is because it requires the least amount of capital to trade. Trading happens 24 hours a day, five days a week and offers huge probable profits due to leverage provided by trading platforms. However, Forex is also extremely volatile. Rates fluctuate all the time, and it is likely to lose substantial sums, especially for the inexperienced trader.

Forex Day Trading Risk Management

Every successful Forex trader knows that the market is risky. And so, they know that the most crucial element of trading is a precaution, to keep profits going.

To begin with, you must keep the maximum percentage of risk. Mark it as low as 1% of your trading capital. This means that if you have a $1,000 account, mark your losses to no more than 1% of it, which is $10. This applies to every single trade, as losses do add up and it’s not impossible to lose more than the money you began with. This risk can be managed by setting a Stop Loss Limit, which will be discussed further below.

Forex Day Trading Strategy

A strategy is often assessed by its win-rate and risk/reward ratio. This helps traders determine which Day Trading Strategy works best for them.

Strategies to use in forex day trading

Win Rate

This represents the number of trades you win out of all the trades you place. For example, if you placed 100 trades and won 60 of this, it means that you have a win rate of 60%. Most Day traders aim to reach at least a 50%-win rate, which is attainable if the right trading strategies are employed.

Risk/Reward Ratio

This is the capital you risk to your probable profit ratio. If you lose five pips (point in percentage) on your losing trades but gain ten pips on your winning trades, that means that you are still profiting from your trades.

Hypothetical Scenario

When you trade a forex pair for two hours during the market’s busy time, it’s possible to make five round turn trades. Considering that there are 22 trading days in a month, the trader is making roughly 110 trades monthly.

To gain profits in your trades, you must be well-familiar with the different strategies that successful day traders use. These strategies will be discussed further below.

Trading Leverage

Leverage is the opportunity to trade a large amount of money with small capital. Some trading platforms offer a leverage of up to 1:200. This means that if you have a $1,000 trading capital, you can trade up to $200,000. However, your risk must still be based on your deposited trading capital to minimize your losses. 

Trading Currency Pairs

As a trader, you must know the types of currency pairs and which of these will likely earn you profit. The three types of currency pairs are major pairs, cross pairs, and exotic pairs. Major pairs are major currencies paired with the US dollar; Cross pairs are major currencies paired with other major currencies but not with the US dollar, and Exotic pairs are minor currencies paired with the US dollar.

Major pairs have the fastest and most active movement in the market as many traders prefer to trade in these currency pairs. Cross pairs move in medium flow while Exotic pairs are the least productive of the three. Most traders choose to trade in major currency pairs, as it is fast-moving and guarantees quick profits. However, you must also note that losses are more probable as well due to the market being fast-moving. 

Slippage, Gap, and the Stop Loss Limit

The market won’t always move in your favor, and you won’t ever find yourself having a good day trade. This is even more possible when the market moves too slowly for extended periods.

Slippage is when the buy or sell rate quickly and successively falls in a short time. It is inevitable in trading. Often traders set a Stop Loss Limit to avoid ending up with significant losses. 

A gap, on the other hand, is the sudden drop or “jump” of a buy or sell rate. The fall could range from 20 or more pips. This is an unexpected and crucial part of trading, as even a Stop Loss limit cannot control a trader’s losses. For example, if you set a Stop Loss limit of 20 pips but the price suddenly dropped to 30 pips, missing the Stop Loss limit you set, your trade does not automatically close. Hence, in this position, you must close the deal yourself.

The Final Word

Employing this risk-controlled strategy and with a 55%-win rate, it’s possible to attain a 20% profit every month with forex day trading. However, you must not merely rely on this number as Forex is still a complicated trade. These strategies are only employed to make selling more straightforward and more comfortable to understand for both novice and professionals. 

With a decent win rate, risk/reward ratio, and an effective strategy, you can earn 5 to 15 percent of profit every month. This is with a massive help of leverage. Many trading platforms offer up to 1:200 leverage, and so you do not need a huge capital to be able to trade.