Here’s the bad news: there is not 100 percent accurate forex trading system. You probably knew that, but it’s human nature to try to find a perfect solution even when our commonsense tells us that it doesn’t exist.

The good news is that there is a short list of “best practices” when beginning to trade the forex that will help you decrease your losses and increase your profits. Here they are.

Easy Does It

Easing, rather than rushing into the forex is probably the single most important thing you can do to better your odds.

The forex is a highly leveraged market, with typical leverage ratios of 50:1 and 100:1. In some circumstances, a 200:1 leverage is available. This means that with as little as a $25 investment you can — in theory at least — make a profit of almost $500. It also means that if you use the maximum available leverage, you can be wiped out in a matter of seconds when the market moves against you.

Another aspect of the forex market that differs from stock trading is that after filling out a short questionnaire about trading goals, anyone who who can present a debit card and some means of identification is qualified to trade — and on margin ratios unavailable in the stock market –without depositing a cent in their forex account.

These forex trading characteristics can attract dreamers hoping for a quick cure for financial ills. In this sense, it has an attraction similar to state lotteries. Abundant research about lottery participants concludes that the average lottery ticket holder is poor and that 21 percent of participants believe it’s the surest and best path to wealth. In reality, the odds of winning a state lottery are about one hundred million to one.

So far as the forex is concerned, the hazards are particularly abundant for new traders because the reality is that unlike the lottery, because the trading on the forex not a game of chance: it’s a game of skill, too often a skill that new traders don’t bother to acquire before placing their first trades.

The best practice when you’re beginning trading is: take it easy. Set limits on losses beforehand and then stick to them. One practice that’s almost always disastrous is to follow a big losing trade with another one in hopes of recovering what you’ve lost. That’s not trading; it’s compulsive gambling.

Be Prepared

American songwriter and humorist Tom Lehrer’s most popular song, “The Boy Scout’s Marching Song,” advises: “Be prepared as through life you march along…” Lehrer was kidding, but for traders the point should be taken very seriously. In fact, the phrase can even become your motto. Unless you’re well prepared before (not after) you begin trading, your results will probably be about average. Average in the forex is:

• About two-thirds of forex traders lose money, many losing what they never had to begin with and ending up with whopping high interest credit card debt.
• The average forex investor gives up and stops trading in about four months.

There are two great ways to prepare for a successful entry into forex trading. One is is simply to read the forex trading literature. There’s a lot of it and it’s all widely available on Amazon and elsewhere. Reading Amazon’s customer ratings will give you a very good idea which books are useful and which are not.

The other great way to prepare is to open a practice trading account. Almost all major US forex brokerages offer them without charge. Be serious about practice trading and keep track of your results. in all cases, the practice software will do the record-keeping for you, but it won’t help you unless you look at it and try to understand why some trades worked and why others failed. Your early practice trades will probably be unsuccessful. Don’t let that discourage you: it’s normal. Keep practice trading until over some extended period — for at least a month of daily trading — your trading results are positive.

At that point, you’re ready to ease in.

Be Disciplined

Being disciplined has a few essential components. First, there’s the matter of deciding how much loss you can tolerate before you begin trading. Once you’ve decided, don’t change it in response to a bad trade. That happens. Second is using your successful practice trading methods (and only those methods!) when you begin actual trading. Always stick with your plan. Without it, you’re just another clueless novice, forced out of the forex after a few expensive, largely miserable weeks.

Avoid Scams

This best practice is easy. Be wary of anyone proposing to sell you some method or system that will “guarantee” results or produce some fixed percentage of profits over some period of time. Only trade through well-known and well-established U.S. traders. Investigating your potential broker is easy: go online to the National Futures Association, the U.S. self-regulatory body for forex that’s similar to FINRA for stock brokerages. Once there, use BASIC, their broker-checking service. If your potential broker isn’t listed or has a record of complaints, drop it like a hot rock.

How Much Money Can I Make Forex Day Trading?

Many people like trading foreign currencies on the foreign exchange (forex) market because it requires the least amount of capital to start day trading. Forex trades 24 hours a day during the week and offers a lot of profit potential due to the leverage provided by forex brokers.¹ Forex trading can be extremely volatile and an inexperienced trader can lose substantial sums.²

The following scenario shows the potential, using a risk-controlled forex day trading strategy.

Forex Day Trading Risk Management

Every successful forex day trader manages their risk; it is one of, if not the most, crucial elements of ongoing profitability.

To start, you must keep your risk on each trade very small, and 1% or less is typical.³ This means if you have a $3,000 account, you shouldn’t lose more than $30 on a single trade. That may seem small, but losses do add up, and even a good day-trading strategy will see strings of losses. Risk is managed using a stop-loss order, which will be discussed in the Scenario sections below.

Forex Day Trading Strategy

While a strategy can potentially have many components and can be analyzed for profitability in various ways, a strategy is often ranked based on its win-rate and risk/reward ratio.

Win Rate

Your win rate represents the number of trades you win out a given total number of trades. Say you win 55 out of 100 trades, your win rate is 55 percent. While it isn’t required, having a win rate above 50 percent is ideal for most day traders, and 55 percent is acceptable and attainable.

Risk/Reward

Risk/reward signifies how much capital is being risked to attain a certain profit. If a trader loses 10 pips on losing trades but makes 15 on winning trades, she is making more on the winners than she’s losing on losers. This means that even if the trader only wins 50% of her trades, she will be profitable. Therefore, making more on winning trades is also a strategic component for which many forex day traders strive.

A higher win rate for trades means more flexibility with your risk/reward, and a high risk/reward means your win rate can be lower and you’d still be profitable.

Hypothetical Scenario

Assume a trader has $5,000 in capital funds, and they have a decent win rate of 55% on their trades. They risk only 1% of their capital or $50 per trade. This is accomplished by using a stop-loss order. For this scenario, a stop-loss order is placed 5 pips away from the trade entry price, and a target is placed 8 pips away.

This means that the potential reward for each trade is 1.6 times greater than the risk (8 pips divided by 5 pips). Remember, you want winners to be bigger than losers.

While trading a forex pair for two hours during an active time of day it’s usually possible to make about five round turn trades (round turn includes entry and exit) using the above parameters. If there are 20 trading days in a month, the trader is making 100 trades, on average, in a month.

Trading Leverage

In the U.S., forex brokers provide leverage up to 50:1 on major currency pairs.⁴ For this example, assume the trader is using 30:1 leverage, as usually that is more than enough leverage for forex day traders. Since the trader has $5,000, and leverage is 30:1, the trader is able to take positions worth up to $150,000. Risk is still based on the original $5,000; this keeps the risk limited to a small portion of the deposited capital.

Forex brokers often don’t charge a commission, but rather increase the spread between the bid and ask, thus making it more difficult to day trade profitably. ECN brokers offer a very small spread, making it easier to trade profitably, but they typically charge about $2.50 for every $100,000 traded ($5 round turn).

Trading Currency Pairs

If you’re day trading a currency pair like the USD/CAD, you can risk $50 on each trade, and each pip of movement is worth $10 with a standard lot (100,000 units worth of currency).⁵ Therefore you can take a position of one standard lot with a 5-pip stop-loss order, which will keep the risk of loss to $50 on the trade. That also means a winning trade is worth $80 (8 pips x $10).

This estimate can show how much a forex day trader could make in a month by executing 100 trades:

• 55 trades were profitable: 55 x $80 = $4,400
• 45 trades were losers: 45 x ($50) = ($2,250)

Gross profit is $4,400 – $2,250 = $2,150 if no commissions (win rate would likely be lower though)

Net profit is $2,150 – $500 = $1, 650 if using a commission broker (win rate would be like be higher though)

Assuming a net profit of $1,650, the return on the account for the month is 33 percent ($1,650 divided by $5,000). This may seem very high, and it is a very good return. See Refinements below to see how this return may be affected.

Slippage Larger Than Expected Loss

It won’t always be possible to find five good day trades each day, especially when the market is moving very slowly for extended periods.

Slippage is an inevitable part of trading. It results in a larger loss than expected, even when using a stop-loss order. It’s common in very fast-moving markets.

To account for slippage in the calculation of your potential profit, reduce the net profit by 10% (this is a high estimate for slippage, assuming you avoid holding through major economic data releases). This would reduce the net profit potential generated by your $5,000 trading capital to $1,485 per month.

You can adjust the scenario above based on your typical stop loss and target, capital, slippage, win rate, position size, and commission parameters.

The Final Word

This simple risk-controlled strategy indicates that with a 55% win rate, and making more on winners than you lose on losing trades, it’s possible to attain returns north of 20% per month with forex day trading. Most traders shouldn’t expect to make this much; while it sounds simple, in reality, it’s more difficult.

Even so, with a decent win rate and risk/reward ratio, a dedicated forex day trader with a decent strategy can make between 5% and 15% a month thanks to leverage. Also remember, you don’t need much capital to get started; $500 to $1,000 is usually enough.

The Balance does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal.