Forex day trading with $1000 (or less) is possible, and even profitable, because you can control your position size down to such precise levels, and also utilize leverage. In the stock market you can’t do that as effectively; you need to trade at least 100 shares, and to have a day trading account in the US you need to have a minimum of $25,000. In forex you can start trading with less $1000–that doesn’t mean you’ll be able 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 2 to 6 quick day trades in the span of a few hours. Here’s the blueprint for doing it.
Getting Setup – Account Type and Broker
If you’re trading less than $1000–and want to build your account quickly–I recommend trading through an ECN broker which offers a near zero spread, as well as trading on a short time-frame (such as a 1-minute chart) with a trend following strategy.
I like using an ECN broker because I can capitalize on short-term opportunities and still manage my risk. Using a normal broker with a 2 pip spread on the EURUSD means you’re paying 4 pips to get in and out. If trading a mini lot, each pip is worth $1, so a trade is really costing you $4. It’s an opportunity cost, because it eliminates the possibility of you making those four pips. On the other hand, my ECN broker charges me about $2.5/100K, so a mini lot (10K) only costs me about $0.25 to get in and $0.25 to get out ($0.50 total). A micro lot (1K) only costs about $0.05 to get in and out.
So my ECN broker is way cheaper (they have normal accounts as well, which have very low spreads for those not looking to make the transition to ECN just yet). During active times, such as during the US and London session the spread is typically around 0.1 pips (and quite often 0 pips); if you open a demo account and take a few trades you’ll see what a massive advantage it is not having to be concerned about the spread.
When dealing with an account less than $10,000 (and especially $1000 and under) always make sure you have the ability to trade micro lots, also referred to as “0.01 lots”. Micro lots give you the ability to really fine-tune your position size and risk.
I also recommend using 40:1 or 50:1 leverage. The reason for this will be explained later.
Why the 1-Minute Chart?
With no spread, I can actively trade price waves which are usually about 8 to 15 pips from start to finish. I set a profit target of 6 to 9 pips (potential more on certain trades), and a stop loss of 3.5 pips (maximum, but can be reduced once the price moves in my favor) and am able to trade those price waves you see on the 1-minute chart during the London or early US session. If paying a 1 or 2 pip spread, this is virtually impossible, because just by getting in and out half the price move is eaten up.
I believe in never risking more than 1% of capital on a single trade, which means if I trade off 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 risk-to-reward ratio). Now 4% is a great daily return, but that is best case scenario. Now, check out a 1-minute chart in the EURUSD and you’ll often notice these nice rhythmic trends during the London and early US session (don’t trade around news). When you don’t have to worry about the spread you can get about 4 to 6 trades in within a few hours. Now assume you win all those, your looking at a 12% gain in a matter of a couple hours (assuming all wins and a 2:1 reward to risk).
It’s ridiculous to assume you’ll win all your trades and make 12% per day. You won’t; but your upside potential is greater by taking a few more trades (which are still high probability though), confining your trading to a few hours and being able to capitalize on the 8 to 15 pip waves that occur regularly during the London and early US session.
Also, by trading the smaller time frame you can still risk 1% of your account and try to make 1.5% or 2% on the trade (1.5 or 2:1 reward-to-risk), which means you potentially make a 1.5% to 2% profit (on your account) in 10 or 15 minutes instead of a couple hours trading a longer-term chart. The small time frame and well controlled risk also allows leverage to be utilized effectively to produce an income.
Forex Day Trading with $1000 (or less) – Expectations
If you really put in some work on a demo account practicing strategy implementation, and stick to not risking more than 1% of your account, you can steady grow a $1000 account day trading forex, and hopefully make an income from it.
Assume a win percentage of 55% (with strategy implementation refinements, this can be increased over time), 4 trades a day, and using a stop of 3.5 pips and a target of 6 pips. I actually find 7 to 9 pips to be quite realistic using a trend following strategy on the 1-minute EURUSD chart, but to be conservative we’ll use 6 pips.
If you trade your $1000 account for 20 days out of the month, and use a fixed position size of 27 micro lots (which keeps risk below $10 or 1% of the account), here’s what you can potentially make in a month:
20 days X 4 trades = 80 trades
55% of 80 trades are profitable = 44 winning trades and 36 losing trades
A winning trade is 6 pips ($0.60 per micro lot) X 27 micro lots = $16.2
A losing trade is 3.5 pips ($0.35 per micro lot) x 27 micro lots = $9.45
Winning trade total is 44 trades X $16.20 = $712.80
Losing trade total is 36 trades X $9.45 = $340.2
Monthly profit (excluding commissions) is $712.80 – $340.20 = $372.60
Total commissions are 80 trades X 27 mirco lots X $0.05 (round trip) = $108
Monthly profit (including commissions) is $372.60 – $108 = $264.60
Forex Day Trading with Less than $1000 - 26% per month!
That is 26% per month. That seems very high, and for most traders it is. Take a step back though and realize leverage is being used extensively. The account is only $1000, but we are taking positions of $27,000 (the 27 micro lots). In other words we are leveraged 27:1 to make these returns. Therefore, the account should be leverage about 40:1 or 50:1, although there is no need for more leverage than this. Without leverage you’d be making less than 1% a month because you couldn’t take the larger position size, but with leverage you make 27%. Trading this way allows leverage to be utilized effectively to increase returns.
I have no problem with leverage because each trade has a stop loss on it and I never trade within about 5 minutes of news releases. Therefore, while I may get some small slippage on the odd trade, it is very unlikely the slippage is even enough to hurt my trading day, let alone the account (but yes, it could happen). I also generally only trade the EURUSD (or other very popular pairs) during the late London session or early US session when liquidity is at its peak.
My broker also provides a MetaTrader plugin which automatically places stops and targets. I set what I want the stop and target be (in pips) and when I enter a trade the stop and target are automatically set. If I want to adjust the target slightly once in a trade I can just drag the order to the price I want, right on the chart. I strongly encourage this type of plugin so risk is controlled as soon as the order goes out, and trades can be made very quickly.
Forex Day Trading with Less than $1000 – Final Word
It is unlikely most traders will ever reach a level where they can make 26% per month (even with leverage), even though the simple math here makes it look very easy. The point is, it’s possible to make a great return even with a $1000 account.
I firmly believe you actually need to control your risk and keep it small–risking 1% of capital or less per trade– in order to make good profits. By using an ECN broker (here’s the one I use: ECN Accounts (and normal accounts)) and trading on a small time frame, you can get 4 to 6 trades in within a few hours. Since the risk is kept quite small (say 3 to 5 pips) you can increase your positions size with leverage which allows for good returns overall, assuming of course you’re profitable to begin with.
Cory Mitchell, CMT