Forex is the least capital-intensive market to trade. Leverage up to 50:1 (higher in some countries) means you can open an account for as little as $100. I don’t recommend this. If you want to make money, start with at least $3000. Only risk 1% of your capital.
Each pip of movement in the forex market results in a$10 gain/loss if you trade a standard lot (100,000 in currency). Each pip with a mini lot (10,000 in currency) is worth $1. Each pip with a micro lot (1,000 in currency) is worth $0.10. “Pip value” varies based on the currency pair you are trading, but the above figures apply to the EUR/USD, which is the recommended currency pair for day trading.
Assume your strategy limits risk to 6 pips, you attempt to make 9 pips on winners (on average) and you have a $5,000 account.
With 6 pips of risk you can trade 8.3 mini lots–which equals $49.8 of risk per trade. This is less than your maximum risk of $50 (1% of $5,000). Notice how highly leveraged this position is. The account has $5,000 in it, and the position taken is $83,000…that close to 17:1 leverage. If uncomfortable with this amount of leverage, reduce the position size.
A 9 pip win is $9 for each mini lot.
A 6 pip loss is $6 for each mini lot.
A good trading system will win 50% of the time. You averaged 5 trades per day, so if you have 20 trading days in a month, you make 100 trades.
50 of them were profitable: 50 x $9 x 8.3 mini lots= $3735
50 of them were unprofitable: 50 x $6 x 8.3 mini lots= ($2490)
You net $1245.
If day trading forex, use an ECN broker. ECN brokers offer the tightest spreads, which in turn makes it easier for your targets to be reached. Commissions with a good ECN broker will run between $0.2 and $0.5 for each round trip trade per mini lot. Therefore, commission costs are 100 trades x 8.3 micro lots x $0.5 = $415.
Therefore, with a decent forex day trading strategy, and a $5,000 account, you can make roughly:
$1245 – $415= $830/month or 17% monthly return.
Your position size is 8.3 mini lots, which is $83,000. Therefore, to attain that return requires at least 17:1 leverage. Your return on your own capital is very high, but your return on buying power (83,000) is a more modest 1% monthly return. Leverage is very powerful, and makes all the difference here.
This is simply a mathematical formula, and would require finding five trades a day that offer this reward:risk. That could prove difficult. Also, you are highly leveraged, and there is a chance of catastrophic loss if a market where to move aggressively against you and your stop loss became ineffective.