Forex day trading strategy – While a strategy may have many elements and can be analyzed for profit in several ways, the strategy is usually classified according to profit rate and risk/return ratio.
Forex day trading strategy
Your win rate represents the number of trades you win out of the total number of trades you make. Let’s say you win 55 out of 100 trades, then your win rate is 55%. While it is not required to have a win rate above 50%, it is ideal for the majority of day traders, and 55% is acceptable and achievable.
The risk/reward ratio indicates the amount of capital that is being risked in order to achieve a certain profit. If a trader loses 10 pips on a losing trade, but gains 15 pips on a winning trade, she makes more on winning trades than she loses on losing trades.
Forex day trading
This means that even if the trader wins only 50% of her trades, she will still be profitable. Therefore, earning more on winning trades is also an element of the strategy that Forex day traders seek.
A higher win rate for trades means more flexibility with your risk/reward ratio, and a higher risk/reward ratio means your win rate may be lower and you can still win. For more detailed discussion on profit rate and risk/return ratio.
Assuming a trader forex has $5,000 in capital, and has a good winning rate of 55% on his trades. He only risks 1% of his capital, i.e. $50 per trade. This is achieved through the use of stop-loss orders. For this scenario, the stop loss order is placed 5 pips away from the trade entry price, and the target is placed 8 pips away.
This means that the potential rewards per trade are 1.6 times more than the risks (5/8). Remember, your goal is to make more winning trades than losing trades.
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Forex trading strategy
While trading a forex pair for 2 hours during the active time of the day is usually possible to achieve about 5 full trades (one full trade including entry and exit) using the above parameters. If there are 20 trading days in a month, and the trader makes 100 trades per month.
Forex day trading strategy forex brokers offer leverage of up to 50:1 (more in some countries). For this example, suppose the trader uses a leverage of 30:1, as this is usually more than enough for a forex day trader.
Since the trader in Forex day trading strategy has $5000 and leverage is 30:1, the trader is able to make trades worth $150,000. The risks are still based on the original value: $5,000, and this keeps the risk limited to a certain part of the deposited capital.
Forex brokers usually do not charge commissions, but they increase the spread between the bid price and the ask price, thus making it more difficult to achieve profitability from day trading. ECN brokers offer very small spreads, and make it easier to trade profitably, but they usually charge a fee of around $2.5 for every $100,000 traded ($5 for a full trade).
If in Forex day trading strategy you day trade a currency pair such as British Pound/USD, you can risk $50 on each trade, and each pip of movement is worth $10 with a standard lot (100,000 currency units). Therefore, you can take a position of 1 standard lot with a stop loss of 5 pips, Forex day trading strategy which will keep the risk of losses at $50 per trade. This also means that the winning trade is worth $80 (8 pips x $10).