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Forex Day Trader Salary & Determining Factors
You have heard of rumors that forex day traders can earn substantial sums per day. You then begin to suspect and hesitate to jump into this intense financial competition.
The global forex market is valued at $2.409 quadrillion in 2021 and becomes the most traded financial market with high liquidity and trading volume. Compared to other markets like futures or equities, the forex market is the only one that opens 24 hours and on all five working days. Those factors attract an annually increasing number of participants. Among a variety of forex strategies that investors can choose from, day trading appears more appealing with the vague promise of giving traders a high rate of return.
So, how much do forex day traders make? Is it a buck or just a tremendous loss? This is actually affected by various factors.
Overview on Forex Day Trading
Before finding the answer related to day trader salary, you should first look through several facts about day trading and the reasons behind its growing popularity in recent years.
Forex day trading is the process of selling one currency and simultaneously buying another on a single trading day.
Today, there are a total of seven major currency pairs on the global forex market. They constitute almost 70% of forex transactions.
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Many people like forex intraday trading because they first believe that this short-time trading style will allow them to earn “fast cash” within minutes, while the risk level is seemingly kept down compared to long-term strategies. Secondly, day trading requires a low capital of investment. More particularly, traders only need to deposit at least $50 to open an account in some online forex brokers, let alone the lower transaction cost than trading other assets. Markus Heitkoetter, the author of The Complete Guide To Day Trading also had the same point and said that traders did not need customers, invoices or accounts receivable to day trade.
However, you should not let yourself be engrossed in those weasel words. Being wealthy is one of the lifetime purposes that many people would like to achieve. However, not all billionaires in the world initially started their career with day trading. A shortage of trading goals, profitable trading plans and decent preparations will undoubtedly pose your dollars at risk.
Even the U.S. Securities and Exchange Commission (SEC) also states that day trading is nothing short of gambling and you cannot name it “investment” if you are less experienced in this industry. Despite allowing you to conduct transactions in a very short time, day trading is still “an extremely stressful and expensive full-time job” (SEC, 2015). This work requires you to constantly glue their eyes on screens, follow the market and price movements, and have an excellent analysis skill; otherwise, you will sustain serious monetary losses. So it is not an easy game for novice investors.
How Much do Forex Day Traders Make?
Many beginners often worry about whether they possibly consider day trading as a means of livelihood, which leads to the curiosity of a day trader’s monthly wage. This relies much on how they define a living – in other words, quantify the wealth. To illustrate, the monthly $5,000 salary is seemingly excessively large for musicians who only earn half of that amount, whereas successful business leaders need the minimum $50,000 amount for their living.
However, “how much does your job pay monthly?” is always an overly sensitive and private question to all people. Therefore, when being asked about real salaries, most forex day traders can refuse to reveal their trading outcomes to outsiders, except for tax authorities. Moreover, the answer depends much on various factors such as your initial capitals, trading strategies and risk management techniques.
To clarify how much forex day traders can make, you should consider something below:
Successful trades require investors to determine their trading goals first. According to Markus Heitkoetter, day traders should follow the SMART rule which implies whether their goals are Specific, Measurable, Attractive, Realistic and have a Timeframe.
However, forex day traders are advised against setting up daily objectives because of unexpected events such as holidays, sickness or emotional stress. Accordingly, in low-volume days (e.g. Thanksgiving or New Year’s days), the forex market may be very unpredictable, so traders should avoid trading on those days. Or when you can spend no time trading due to an emergency, your daily goal is not met, which places greater pressure.
Additionally, newcomers should establish a low goal so that they can easily reach it. Until they get accustomed to trading strategies and this “gambling”, they can jump to higher goals. Starting with some small achievements will motivate you better.
The recent research of Forex School Online surveys 400 traders from nearly 50 different nations and 97% of them are now trading forex. The investigation concludes that 63% of respondents have unprofitable trades with only 2.5-year trading experience. Meanwhile, those who break even or earn profit have traded for averagely 5.4 years. Having said that, successful traders still plan to improve their trading rules and strategies whilst unprofitable investors are only looking for sporadic issues like better entry points, but don’t find solutions to change their inefficient plans. Such findings prove the importance of designing a proper trading strategy.
Normally, a day trading strategy can be evaluated on different factors, most noticeably win rate and risk-to-reward ratio.
Win rate, also known as winning percentage, refers to how many profitable trades you have. When you say that your devised trading plan has a winning percentage of 60%, this means you win 60 trades out of the total 100 trades. So, forex day traders often follow the rule: a system with a small win rate (or under 50%) should not be chosen if you prefer gaining a handsome net profit.
Markus Heitkoetter suggests that a strong trading system needs to have a winning percentage of 60-80%, especially to trading beginners. So how can you calculate the win rate of the plan? The only answer is testing it. Less-experienced investors are encouraged to test their trading strategy on a demo account which will be given free of charge when they open an account with an online broker. They should do the test with at least 200 trades or within 3 months to guarantee the credibility of the strategy.
The more your strategy is tested, the better. Heitkoetter proves it with statistics from the following table:
|Number of Trades||50||100||200||300||500|
|Margin of Error||14%||10%||7%||6%||4%|
(Source: Markus Heitkoetter, “The Complete Guide To Day Trading”)
Average Reward-to-Risk Ratio
Reward-to-Risk ratio (commonly known as reward:risk or R:R) is an important determinant of day trading salary. It represents how much traders win on winning transactions compared to how much they lose on losing transactions.
Before clarifying this concept, let’s talk about pip (also called pipettes) first. As an abbreviation of Price Interest Point, pip means the price change of a currency pair and traders will calculate it by using the last decimal place. Looking at the below picture, you can see the exchange rate of EUR/USD change from 1.17119 to 1.17135. This means this pair has the bid-ask spread of 16 pips.
Accordingly, imagine that you lose 10 pips on a losing trade, but attain 12 on a winning trade. In case the winning percentage is 50% or more, you still gain profits. If you are willing to risk 50 pips and aim at a 100-pip profit, the reward-to-risk ratio will be 2:1. Normally, experts advise investors to use at least the 1:1 ratio.
When trading, investors are sometimes putting too many emotions in transactions and fail to follow the initial plan. Therefore, they should use stop-loss orders in case the price goes against what they speculate on.
Coming back to the given example, you see the current value of EUR/USD be 1.17119. Supposing that you think the price of the base currency will go up, leading to an increase in the exchange rate, then you can place a simple stop loss at 1.17109. This means that you are risking 10 pips. When the value decreases and hits 1.17109, the stop-loss order will be implemented to limit the loss.
According to the SEC, no legal minimum investment is required for forex day traders. However, how much you initially deposit to your trading account affects your income as well. For example, if you invest only the minimum $50 as required in your trading account, you cannot expect to generate higher profits than those with the $1,000 capital. Having said that, the situation can be reversed when fortune smiles on you.
Having said that, it does not mean a larger sum is better. Normally, less-experienced day traders are advised to start small. Investing $50 or $500 still depends on your trading goals and plans.
A Number of Trades
Day trading salary also depends on how many trades forex investors can do. The rumour that the more transactions you conduct, the larger you earn is not always right. This is because it is closely related to win rate, reward-to-risk ratio and other factors.
Slippage occurs when the order is placed at the fill price that differs your expected price. To illustrate, you plan to buy 100,000 euros and expect the value of EUR/USD is 1.17. However, no sellers are willing to sell at that price, which forces you to find another best available price, for example, 1.19, and to pay more for the order. The 0.02 difference is called a negative slippage. In case the supply for euros is higher than the demand, you can buy the currency at a lower price, for example, 1.16. So the 0.01 difference is called a positive slippage.
Slippage is an unavoidable part of trading and sometimes can make you lose substantial sums. To curb the probability of this problem, forex day traders should use limit orders rather than market orders, trade more liquid currency pairs (e.g. USD/JPY or EUR/USD) and use a guaranteed stop-loss order.
Forex day traders should not risk more than 1% of their initial deposit per trade. Particularly, if their trading account has $10,000, they should risk the maximum $100 on a single trade – that is to say, they are willing to lose $100 as the most. Even professionals also opt for this principle.
Margin Trading (Leverage)
When forex day traders open a margin account with an online broker, they can trade on margin which is simply a required amount of deposit on the account. Margin trading or leverage means borrowing money from the broker to buy more base currency units. When investors decide to trade without leverage, it means if they deposit $1,000 to an account, they only control a position of $1,000 worth. However, when they choose to trade with the maximum 20:1 leverage ratio (or 5% margin), they can have the buying power of $20,000 worth (= $1,000 x 20 times).
Leverage can be a two-edged sword to traders because it can give investors either huge profits or considerable losses.
In short, forex day trading income is significantly affected by various factors. Unattainable goals and poorly designed trading strategies can mislead less-experienced investors to the path of failure. In addition, leveraging your initial deposit can either become a tremendous tactic to make bigger gains or make your account balance drop to zero.
As day trading can help you earn money faster than many other jobs, you always have to confront risks in every trading. So proper risk management techniques can prevent you from substantial losses induced by margin trading or slippage. Finally, investing too much of your capital or conducting as many transactions as possible does not always help make more money. More importantly, any successful traders have proper trading goals, plans and use appropriate techniques for different trades.
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