The internet is full of stories about supposedly brilliant forex traders making millions by day-trading the markets, making it seem easy, glamorous and the road to instant riches.
The vast majority of such tales are highly dubious however and are normally accompanied by efforts to sell you expensive trading courses or complex software – which then turn out to be duds of course.
So being realistic about it – how much money can you really expect to make trading forex?
The unpopular but undeniably accurate answer – much like to the question “how long is a piece of string” – is it depends. How much you make depends on how often you trade, in what volumes and how successful you are. Indeed, the cold hard truth of the matter is: there’s no guarantee you’re going to make anything at all. In fact, around 70-80% of traders actually lose money overall.
Even so, with reasonable volumes and good advice it is possible to realise some healthy returns. Understanding all the different factors that go into making a successful trader are crucial though. Let’s take a look at these now.
Beyond the Headlines
Reading the headlines it is easy to get roped in by tales of vast fortunes being made from trading. Famous traders like Lawrie Inman and Paul Redmond supposedly make millions from their trading and reading their stories makes trading the markets sound like a path to overnight riches and the kind of exotic lifestyle most people can only dream of.
At the very top end, it is possible to make significant amounts of money from trading. However, top traders like Inman and Redmond are able to make such huge sums because they work for investment banks and have massive kitties to play with. If they were starting out on their own with just a few grand in the bank, the story would be very different. They would probably be happy to scratch out a few grand of profit per year, just like most other non-professional traders who don’t have millions of dollars to play with.
So it’s important to look beyond the headlines when considering how much money you might make from forex trading. How much capital you have to start with is crucial and will ultimately determine the bounds of what’s possible for you.
It’s also important not to compare apples with pears and to not measure yourself against the City and Wall Street big boys who have the backing of investment banks. Pick a target that’s achievable and be happy with any profit generated over a year. Remember, the vast majority of traders lose money overall.
Requirement #1 – Having a Winning Strategy
OK, so now we’ve established the importance of setting some realistic goals and not getting carried away with the headlines, it’s time to look at what factors will affect how much money you can make trading the forex markets.
Obviously the first requirement to making money from your forex trading is to have a strategy that works and can consistently beat the market. Without that you are just relying on pot luck, which is never a good strategy in any form of investing!
The good news though is that we are here to assist you in your efforts to find a winning strategy, with our reviews of forex trading services, establishing which ones can make a profit under a live trial and which ones can’t.
If you can find a profitable strategy that’s a good start, but is by no means the end of the story however. There are a number of other factors which will determine how much money you make from your forex trading.
Establishing the Baseline – Win Rates and Profit/Loss Ratios
There is no way to be certain about how much you will make from forex trading, but there are factors which can help you establish a baseline for how much you could expect to make with your strategies. These factors include your win rate and profit/loss ratio:
- Win rate: Your win rate will be the number of successful trades you make. For example, if you win 60 out of 100 trades, your win rate will be 60%. In an ideal world, a win rate of more than 50% will mean you’re earning money, although this will depend on the size of the wins and losses. Most people would view a rate of 55% as being both realistic and sufficient to generate a reasonable return.
- Profit/versus loss: What that win rate translates to in terms of money will depend on your profit versus loss ratio. For example, if you’re making more on your wins than you’re losing on your losses, you’ll have more leeway when it comes to performance. Someone whose wins are considerably bigger than their losses could be making money even if their win ratio is lower than 50%. Likewise, it’s no good having a high win rate if your wins are small, but your losses big.
So having a good idea of your winning trade percentage and profit/loss ratio should give you a rough guide to the kind of returns you might expect from your trading.
One of the other crucial factors that will influence how much profit your trading generates is how you manage your risk.
You can limit your downside risk by using a stop loss order. This gets you out of a position if things start to go against you and limits the scale of your losses – if using a guaranteed stop loss that is. This will set a low point which exits a trade once a certain point is reached.
For example, if you buy the EUR/USD pair at 1.1015, with the expectation that the market is going to rise, you can put a stop loss order at 1.1005, ten pips below the start price to limit your losses. This is a safeguard in case the market moves against you and you’re unable to execute a trade in time.
You can combine your risk/reward figure to set an expectancy for how much you might earn. For example, let’s say you make ten trades and win six. If your six wins earned $3,000, your average win rate is 3,000/6 which amounts to $500. Alternatively, if your losses are only $1,200 then your loss rate can be calculated as 1,200/4 which comes to $300.
By combining these numbers, you can identify how much you should expect to earn for every dollar invested. Ideally, this rate should be above zero which should mean you would expect to see a positive return.
For example, if you have an expectancy of 0.35, that means that for every dollar invested you might expect to see a return of 35 cents. This is also known as “return on investment” or ROI – usually expressed as a percentage, in this case it would be an ROI of 35%.
If your expectancy is relatively stable, using your preferred strategies, it stands to reason that a higher volume of trades will lead to higher returns – presuming of course your strategy stands up to a higher volume of trading.
Even the most effective trading strategy can suffer a string of losses however and it is almost inevitable at some stage. Being able to handle these losing streaks and not trying to chase your losses or over-trade is an important part of being a successful trader.
This then leads us on to another key factor in determining how much money you might make trading – how you manage your money. Making sure you have a sufficient bank to cover the inevitable losing streaks is crucial and not risking more than you can afford to lose on any trade is a key part of successful trading.
For example, a sensible rule of thumb would be to only risk 1-2% of your starting bank on each trade. So if your starting bank was $10,000, you would only risk $100-$200 per trade. You could set your stop losses to this amount, thus giving clear parameters for each trade and not over-exposing yourself.
The biggest mistake most traders make is risking too much on trades, blowing their bank and not being able to recover. Let’s be honest, we’ve probably all done it at one stage or another! Having the right approach to money management though will make a big difference to how much money you end up making from your trading.
As discussed earlier, ultimately the capital available to you will determine the bounds of what’s possible to achieve with your trading. In turn, the amount of capital you have available to trade with will also be affected by the leverage offered by your broker.
When trading on a cash basis you will only trade what you can actually afford to buy. In other words, if you want to trade $15,000 worth of stocks, you must have $15,000 on hand. However, forex brokers usually offer leverage which means you only need to have a small percentage of the amount you want to trade.
A common rate in the UK is 30:1 which means that a $5,000 allows you to take $150,000 worth of positions. In other countries this can be much higher though – up to 100:1 or in some cases even a massive 500:1.
This sounds great in theory but bear in mind if a position moves sharply against you, your broker will ask you to cover it. If you don’t have enough money in your account then the broker will close out your position, potentially leaving you with a hefty loss. Or in extreme circumstances, you may owe the broker a considerable amount of money – see the Swiss Franc/Euro debacle of January 2015 for example, which bankrupted both traders and forex brokers alike.
A factor to keep in mind in these scenarios is slippage, which refers to losses which are greater than expected even with stop losses in place, thanks to fast moving markets. On such occasions the stop losses will not cover the move of the market (unless you have utilised guaranteed stop losses), leaving you to cover the full amount the market has moved by.
So ultimately the lesson here is on the one hand to recognise that leverage provides you with more capital to trade with (and potentially more profit), whilst on the other understanding it can go the other way and leave you with bigger losses.
It’s best to be cautious with leverage and think “how much could I actually lose if there was a really big market move against me?” Using guaranteed stop losses can help to mitigate these risks (although you have to pay a premium for these and it’s important to check your broker’s T&Cs to be sure they actually provide the security you want).
Conclusion – How Much Money Can You Make Trading Forex?
Whilst there are widespread claims of people amassing huge fortunes from forex trading, the stark reality is that the vast majority of forex traders lose money – around 70-80% in fact. Even some of those paid to do it on Wall Street and in the City lose money!
Making any money at all from forex trading is actually a considerable achievement. How much you make will depend on a range of factors including your win rate, profit/loss ratio, money management, initial capital and leverage amount.
Here’s a hypothetical example taking these factors into account:
- Having $10,000 to start with;
- A win ratio of 55%;
- An even profit/loss ratio (i.e. $100 won per trade versus $100 lost);
- Making one trade per day;
- Risking 1% on each trade;
- Using stop losses;
- Using sensible money management and leverage;
- Returns could be approximately: $2,600 profit.
So this fairly simple example would provide a return of around $2,600 from a starting capital of $10,000. That would be a very respectable return and any aspiring trader should be happy with this kind of result.
Ultimately of course whether you are able to make any money at all will depend on whether you have a successful strategy to start with. Here at Trade Stocks & Forex we aim to help you do that by providing in-depth reviews of forex products and identifying the systems that work and those that don’t. Check out our Winning Systems page for an up-to-date list.
Good luck with your trading whether you use one of the systems on our list or your own!
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