Blueprint for Forex Day Trading with $1,000 (or less)
Here’s how to start building a small forex account using day trading, including what type of account to open, what time frame to focus on, strategies, and expectations.
Forex day trading with $1,000 (or less) is possible and even profitable. Forex trading allows you to control your position size precisely, and utilize leverage, both which aid a small trading account. We will discuss both these concepts a bit later on.
How can you Day Trade for a living?
For the US stock market, you need a minimum of $25,000 to day trade. In the forex market, you can start trading with less than $1,000. That doesn’t mean you’ll be able to make a living off trading right away, but you can build your account by following proper risk management, using a low spread broker, and placing about 3 to 6 day trades in the span of a few hours. In this article we will cover how to start day trading, what type of broker to use and a few important tips to keep in mind. Here’s the blueprint for doing it.
To keep the article to a reasonable length, links are provided to articles or resources with more information on a given topic. Please read those as well to get a full grasp of the concepts.
Getting Setup in Forex- Account Type and Broker
If you’re trading with $1000 or less, trade through an ECN broker that offers a near-zero spread and low commissions.
Using an ECN broker means you can capitalize on short-term opportunities and still manage risk. An ECN broker allows you to buy and sell directly with the market (other traders and institutions). That translates to lower spreads, and you can instantly buy and sell whenever you like.
Non-ECN brokers typically charge larger spreads and are acting like a middle-man between you and the market. Orders may be slow to fill, and there may be limitations on where you’re allowed to place orders. For example, they may not let you place limit or stop orders within a few pips of the current price…because they want you to use market orders which give them discretion on which price to give you.
Limit, stop, and market orders are our three main order types as day traders. All three order types are fine when day trading (with a non-ECN broker), although we prefer using limit and stop orders as much as possible, and market orders only when we need to get in or out quickly and don’t have time to put out a limit or stop.
As a day trader, one of the most crucial factors is the spread you pay. It has to be low if you expect to succeed. During active times, such the US and London session, the spread is typically around 0.1 to 0.5 pips (less than half a pip) with an ECN broker.
Another crucial element is order speed. When you hit buy or sell you want to know that you will get into or out of that position instantly. If there is a time lag, that is a big concern because lags can cost us a lot of money in fast-moving markets.
When dealing with an account less than $10,000, and less than$1,000, make sure the broker offers micro lot trading, also referred to as “0.01 lots”. Micro lots give you the ability to really fine-tune your position size and risk on a small account. Currencies are traded in different unit sizes, and micro lots are the smallest one. If trading a $1,000 account, make sure the broker offer micro lots. For a more thorough introduction to forex, how prices move, lots sizes, and all that basic info you need to know before getting started, see Introduction to Forex.
Also, when setting up an account, request 30:1 leverage. You won’t need that much, but if you don’t need it you don’t have to use it. A little extra is ok. Leverage will be discussed more later on.
Day Trade Using the One-Minute Chart
Never risk more than 1% of capital on a single trade.
With a near zero spread, I can actively trade price moves that are about 8 to 25 pips from start to finish. I set a profit target of 6 to 10 pips (potential more on certain trades), and a stop loss of 4 pips (this may vary slightly by trade) and am able to trade those price waves you see on the 1-minute chart during the London or early US session (see How to Day Trade Forex in 2 Hours or Less for the strategy).
Volatility is always changing, which means how many pips are risked and captured also changes. Where stop losses and targets should be on a particular day/trade is addressed in the comprehensive forex article linked above.
If I trade on a 15-minute chart I may only get a couple trades in each day, and I need to spend most of my day watching to make 4% maximum (if I win two trades with a 2:1 reward:risk ratio). Now 4% is a great daily return, but that is the best case scenario (because you are risking 1% of your account per trade, if you make 2:1 on those trades, you are up 2% on each x 2 trades).
Now, check out a 1-minute chart in the EURUSD and you’ll notice multiple small trending moves during the London and early US session we can capitalize on (don’t trade around news, so ignore crazy big price bars which are typically news related).
Here’s a chart of the London session from April 27, 2018. While the pair only moved 30 pips during the entire session, there were multiple waves to trade. With stop losses of 3 to 5 pips on most of these trades–placed on the opposite side of the consolidation or engulfing pattern–all these trades would have hit a 1.5: or 1.6:1 target, and in several cases a 2:1 target.
Losing trades have an “x” with them, like the one on the far right where it is likely a short would have been taken, there was a bit of a pop higher stopping out the trade, and then the short trade would have been re-entered when the signal emerged again. Even with following the strategies and guidelines provided in the various articles that have been linked to in this article, it is likely most traders would no take all the exact same trades, as there is subjectivity involved in analyzing markets and determining which trades to take. The actual strategy is one thing, determining which trades to take is another, and for that velocity and magnitude is key. If you study the trades above and consider the velocity and magnitude of the price moves prior to the trade, why that trade was selected will start to make sense.
On a 1-minute chart you can make about 3 to 6 trades within a two to three hour period. Now assume you win all those, you’re looking at a 6% to 12% gain in a couple hours (assuming all winning trades, and a 2:1 reward:risk ratio).
It’s ridiculous to assume you’ll win all your trades and make 6% to 12% per day! You won’t, but your upside potential is greater by taking more trades on a shorter time frame.
Let’s quickly review what you need to do:
- ECN broker for day trading; the smaller the spread and the lower the commission the better.
- Broker must allow micro lot trading if you are using a $1,000 (or smaller) account. A micro lot is worth $0.10 per pip of movement, multiplied by how many micro lots you have in your position.
- Day trade the EURUSD, or possibly the GBPUSD if the EURUSD is too quiet.
- Day trade during the London or early US session.
- Trade the price waves on the one-minute chart.
- Only trade for two to three hours. That is more than enough and will typically produce about 4 to 6 trades.
- The most we lose on a trade is 1% of our account.
- For our 1% risk on a trade, we should be trying to make 1.5% to 2%
Forex Day Trading with 1000 dollars (or less) – Expectations
If you put in hard work on a demo account practicing the strategy, and risk less than 1% of your account on each trade, you can steadily grow a $1000 account day trading currencies.
The learning curve is steep. While trading sounds very easy, it isn’t. Even once you know a strategy, it typically takes most people at least six months to a year to get good enough at implementing it in all sorts of market conditions (conditions are different every day, as no two days are ever alike) where they start to develop some consistency.
Assume a winning percentage of 50% (you are winning 50 trades out of a 100), 4 trades a day, an average stop loss of 5 pips and an average target of 8 pips.
If you are forex day trading with $1000 for 20 days out of the month, and use a fixed position size of 20 micro lots, here’s what you can potentially make in a month:
[20 micro lots keeps risk below $10, which is 1% of a $1,000 account. 20 x $0.10 x 5 pips = $10 being risk per trade. Adjust position size according to account size and stop loss level. If a particular trade has an 8 pip stop loss, plug that into the formula and your position size will drop. If your account is only $500, then you can only risk $5 per trade. Plug that into the formula and as long as you know your stop loss you can always calculate your position size.]
- 20 days X 4 trades = 80 trades
- 50% of 80 trades are profitable = 40 winning trades and 40 losing trades
- A winning trade is 8 pips (which is $0.80 per micro lot) X 20 micro lots = $16
- A losing trade is 5 pips (which is $0.50 per micro lot) x 20 micro lots = $10
- Winning trade total is 40 trades X $16 = $640
- Losing trade total is 40 trades X $10 = -$400
- Monthly profit (excluding commissions) is $640 – $400= $240
- Total commissions are 80 trades X 20 mirco lots X $0.05 (round trip) = $80
- Monthly profit (including commissions) is $240 – $80= $160, uncompounded.
That’s about 16% on the $1,000 account. Don’t expect to make that return right away. These numbers are meant to show the potential of a profitable system. Unfortunately, most traders end up losing.
As long as your risk is 1% per trade, you trade about 4 times a day, have a win rate of 50%+, and a reward to risk of 1.5:1 or greater (this example uses a 1.6: ratio), then it is possible to make returns like this. Even though each trade may be slightly different, as long as these types of stats are maintained, the profits will come.
Forex Day Trading with 1000 dollars: 16% per month?
16% per month may seem very high, and for most traders it is. Leverage is used extensively though. The account is only $1,000, but we are taking positions of $20,000 (the 20 micro lots). In other words, we are leveraged 20:1 to make these returns. If you think of it another way, leverage magnifies returns and losses. If we didn’t use leverage we would only make about 1%, but because of 20:1 leverage we make closer to 20%. So it is not magic, it is just leverage.
I have no problem with leverage because each trade has a stop loss on it and I never trade within 5 minutes of news releases. Therefore, while I may get some small slippage on the odd trade, it’s very unlikely the slippage is enough to hurt my trading day or account (but yes, it could happen). I also only day trade the EURUSD during the late London session or early US session when liquidity is at its peak. This helps reduce the risk of catastrophe.
Slippage is when the price changes so quickly that even if you have an order to get out of the trade you end with a bigger loss than expected…sometimes much bigger.
When you use leverage, you can lose everything, and even more money than you deposited, resulting in a debt to your broker. When you trade on leverage you are borrowing money to trade. If a big move happens, you may not be able to get out of your position. Examples of such events, that could have wiped out a leveraged day trader, include the GBP flash crash (one reason we don’t trade outside of high volume times) in October 2016, and the January 2015 CHF surge.
Quick review of this section:
- We trade during the London or US session for about two hours on the one-minute chart.
- Volatility doesn’t really matter; when it is high our stop loss will be a bit bigger, but so will our target (our position size will be smaller). When volatility is low, our stop loss will be a bit smaller, but so will our target (our position size will be bigger).
- If you can make 4 to 6 trades a day, win 50% of the trades, and on average have wins about 1.5+ times bigger than the losses, then you will be building a solid forex income. Play with these numbers to see how different scenarios and strategies could play out.
- It seems easy; it isn’t. It takes a lot of practice and time to get to this level.
- With leverage, it is possible you could experience a catastrophic loss.
Forex Day Trading with 1000 dollars (Or Less) – Final Word
It is unlikely most traders will ever reach a level where they can make 20% per month (even with leverage), even though the simple math here makes it look easy. Yet it is possible to start building a forex income, even on $1,000. Try to work up to those statistics. Even if you get close, you can start building your account up.
These types of returns require leverage, and leverage has its own dangers and rewards. It is possible to lose more than you deposited when using leverage, so don’t hold positions right around news, trade only during active hours, use stop loss orders, stick to the EURUSD or GBPUSD, and keep risk to less than 1% of the account on each trade.
That’s the way to grow an account and see good monthly returns.