I’m really sure that you guys want to know how much money you can make from the Forex trading, is it right?
After all you must what heard that traders are making millions from the financial markets. But the actual thing is that you can’t compare yourself to them.
Why? Because of the fact that everyone has got different account size, risk appetite, risk management, trading strategy etc. but if one does so, then it’s like comparing an apple with an orange i.e., it’s really silly.
That’s the only reason why this post has been written in order to explain how much money one can make from the Forex trading- with proper objective measures.
There will be no more second guesses, no more ridiculous projections, no more illusions. This article just contains statistics, numbers and the cold hard truth.
Are you guys ready for it?
Then let’s begin…
In your trading career, the most important metric is…
One can only have 1 to 2 risk to reward on their trades and if you only win 20% of the time, then you will be consistent loser. Ah obviously the risk to reward is not the definite answer. Then what is? Your win rate?
Let’s see that…
Perhaps one have a 90% of the win rate. But you will be a consistent loser if you will lose $0.95 for every dollar you risk.
So what’s the solution to this thing?
Clearly, your risk to rewards and your win rate are meaningless on its own.
Well here’s the simple secret to this…
In order to determine your profitability in the long run, then you must combine both your win rate and the risk to reward and this is known as your expectancy. Your expectancy will give you an expected return on every dollar you risk in the trading.
Mathematically it can be expresses as:
E = [1 + (W/L)] x P – 1
W means the size of your average wins
L means your average loss
P means your winning rate
This can be better understood by an example:
You have made 10 trades. 6 were winning trades and 4 were losing trades. That means your percentage win ratio is 6/10 or 60%. If your six trades brought you a profit of $3,000, then your average win is $3,000/6 = $500. If your losses were only $1,600, then your average loss is $1,600/4 = $400.
Next, apply these figures to the expectancy formula:
E= [1+ (500/400)] x 0.6 – 1 = 0.35 or 35%.
In this example, the expectancy of your trading strategy is 35% (a positive expectancy). This means your trading strategy will return 35 cents for every dollar traded over the long term.
Let’s move on further…
Why you must play more in order to win more???
Have you even realised this?
The most of the casinos operate for 24 hours a day and 365 days a year. There’s a reason for this. As the more they play, the more they will make and this same thing applies in the trading too.
You might wonder, “how does this relates with trading?”
This means that the number of times i.e., frequency of trades matters. This means more you trade, more you will earn (albeit having a positive expectancy).
Imagine: You have a Forex trading strategy that wins 70% of the time, with an average of 1 to 3 risk to reward.
But the thing is that it only has 2 trading signals a year.
How much money one can make from this Forex trading strategy?
Not much, right? Heck, one might even tend to lose in that year since there’s only 9% chance of losing two trades in a row.
Can you now imagine how much important is this?
Now, as you know that the frequency of your trades is important but that’s not enough to determine how much money you can earn or make through the Forex trading.
There are still few more factors that plays the major role in the Forex trading. Keep reading…
Why is the money life blood of the Forex trading business?
You people must have heard about the stories of the traders who took a small account and trade it into the millions within a short while, but the actual thing is not heard by everyone that for every trader that attempts it, thousands of other traders blow up their account.
So let us not treat trading as a scheme to get rich. Instead of this, treat trading as a business which you are looking to grow it steadily over time. Now, let’s say that you can generate 20% a year on an average.
With a $1000 account, you’re looking at an average of $200 per year. On a $1m account, you’re looking at an average of $200,000 per year. On a $10m account, you’re looking at an average of $2,000,000 per year.
This is the same kind of strategy, same kind of risk management and the same trader. The difference is just of the capital amount of your trading account.
Have you understood my point?
No, I am not saying that you can only make 20% a year as for a day trader or for a swing trader, the percentage could be higher as you can have more of the trading opportunities.
But that doesn’t matter what kind of strategy or system is being used by you. The main point is that you only need money to make money in this business period.
Why does the bet size is the determinant of the amount of money you can make?
You must have heard this before…
“Higher is the risk, higher is the return.”
So what do you guys think…is it true or not?
Well probably its yes and no both
Here’s why I said yes…
Let’s say your trading strategy has a positive expectancy and generates a return of 20R per year. Also, you have a decent size of $100,000 in your trading account.
So, what amount of money you are expecting that you can make from this trading?
Well, this clearly depends on how much you are risking per trade.
If you risk $1000, then you can make an average of $20,000 per year. If you risk $3000, then you can make an average of $60,000 per year. If you risk $5000, then you can make an average of $100,000 per year.
This is the same kind of strategy, same kind of account size, and same trader.
The only difference which comes out is of your bet size or the risk you take over per trade. higher is the risk, higher are the returns.
Here comes the point why I said no…
If you tend to enlarge your bet size, then the risk also gets enlarged and there becomes the possibility that business can get ruined. This means you have a higher risk of blowing up your trading account and this leads to reduce your expected value.
If you want to understand the math behind it, then you must read the risk management article.
Let’s move ahead…
Do you withdraw or compound your returns?
If you make an average of 20% a year with a $10,000 account, after 20 years it will be worth… 383,376.00. But what if you withdraw 50% of your profits each year? This means you will make an average of 10% a year and after 20 years your account will be worth… $67,275.00.
Now clearly, compounding your returns will generate the highest return. But whether it’s feasible or not depends on how you manage your trading business.
Here’s the reason why…
In case, if you are a day trader, then there rises the chance that trading becomes the only source of income. You have to withdraw the amount from your account to meet your living needs.
But in case, if you also have a full-time job and you have indulged yourself in trading as your side business, then you are not required to make any withdrawals and you can compound the returns in your account.
Now there’s nothing right or wrong in this, as ultimately one must know what he/ she wants from your trading business and should also understand how does withdrawals will affect your returns over time.
So, at the end the big and important question is how much money can you make from Forex Trading?
Now, you must have learned the key factors which determine how much money you can make from the Forex trading. Next is the turn to see how to use this knowledge and calculate your potential earnings.
Here’s the good example for this:
Trading expectancy – 0.2 (or 20%)
Trading frequency – 200 trades per year
Account size – $10,000
Bet size – $100
Withdrawal – None
Once you get to understand about your numbers, then plug and play then into the following formula:
Trading expectancy * Trade frequency * Bet size
And you get:
0.2 * $100 * $200 = $4000
This means that you can expect to make an average of $4000 a year (with the above metrics).
Now if you want to convert this into percentage terms, then you can use this modified formula…
[Trading expectancy * Trade frequency * Bet size] / Account size
And then you get:
[0.2 * $100 * $200] / $10,000 = 40%
This means that you can expect to make an average of 40% a year.
So, how much money can you make from Forex trading?
Well, there’s no one factor that determines how much money you can make in from the Forex trading.
Instead, you must look at these 5 metrics:
- Trading expectancy
- Trading frequency
- Account size
- Bet size
Then apply this formula…
Trading expectancy * Trade frequency * Bet size
And then you’ll have an objective measure of how much money you can make in from the Forex trading.