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Are you thinking about making money from trading forex?
Is forex trading really profitable?
Are there forex traders really making money consistently, or even make a living from it?
If yes, then the question becomes, can you make money from forex and how much can you expect to make trading forex?
Now, let’s dive in and help you uncover the answers to these questions.
Is Forex Trading Profitable?
So, is Forex trading profitable?
The short answer is yes if you have a profitable forex trading system.
Okay, what is a forex trading system?
Also, how do you tell if a forex trading system is profitable or not?
You probably already know what is a forex trading strategy.
A Forex trading strategy tells you ONLY when to enter a trade and when to exit a trade.
Let’s look at a hypothetical example of a forex trading strategy.
You buy the currency pair when the price goes up above the 20-day simple moving average on the 1-hour timeframe, and you sell when the price goes down below it.
On the other hand, a forex trading system tells you not just when to enter and when to exit but also what your trading position size should be and how much you can risk per trade.
Basically, a forex trading system shows you how to trade as well as how to manage your risk, so you can trade profitably in the long run.
Now, let me explain.
Let’s say you have a total trading capital of $1,000.
Whenever you get a buy signal, you risk $500 on every single trade.
If you lose, you lose all of $500.
But, if you win, you will make $1,000 on that trade.
So, does this sound like good risk management to you?
Obviously, it does not.
When you lose 50% of your capital, you will have to make a return of 100% JUST to recover your loss.
So, if you want to make money trading forex in the long term, you must manage your risk and money well.
Now, let’s look at some real-life examples of profitable Forex traders.
Legendary currency trader, George Soros, made more than £1 billion from shorting the pound sterling in 1992.
Bill Lipschutz, one of the top currency traders in the world, made hundreds of millions of dollars at the FX department of Salomon Brothers in the 1980s with no previous experience of the currency markets.
Just like me, you might not feel so relatable to their forex trading success.
So, are there any ordinary people just like you and me who become successful forex traders?
The answer is yes.
In fact, there are some Japanese housewives who are very profitable forex traders.
Yes, you read it right – Japanese housewives.
When I first read about their story, I was just as shocked as you are right now.
Here’s an article on The Times about a Japanese housewife who made 1.7 million trading currency and evaded tax on her currency trading profits.
If you have not read the book called ” Millionaire Traders”, you should definitely read it.
Inside this book, there are interviews with twelve ordinary individuals who transformed themselves into millionaire traders.
One of them, AShkan Bolourals is a retail forex trader who made at least $1 million trading forex.
How Much Can You Make From Trading Forex?
So, exactly how much can you make with forex trading?
This really depends on these three factors:
- Trading capital
- Profitability of trading system
Now, let’s look at each one of them in detail.
Factor #1: Trading capital
First of all, your trading capital determines how much you can make as a forex trader.
Let’s just compare these two scenarios:
Scenario #1: you have a trading capital of $1,000
Scenario #2: you have a trading capital of $100,000
Assuming that you are not using any leverage here and your trading system gives you an average return of 10% a year, you will make a profit of $100 a year (or $8/month) with a trading capital of $1,000.
On the other hand, you will make a profit of $10,000 a year (or $800/month) with a trading capital of $100,000.
So, you see your trading capital can result in a huge difference in how much you can make from trading forex.
Factor #2: Leverage
The leverage you get from your forex broker can also determine how much you can make trading forex.
First, what is leverage?
And how does leverage in forex trading work?
In forex trading, leverage means the amount of money you can borrow from your broker to trade forex.
For example, if you have a trading capital of $1,000 and your broker gives you a leverage of 1:50, what that means is that you can initiate a trading position worth up to $50,000.
With leverage, you can significantly increase your rate of return on your capital.
But, it can also make you lose your capital much much faster.
So, if you have a profitable forex trading system, then you can take advantage of the maximum leverage to maximize your return.
If you are just starting out trading forex, then it’s wise not to use high leverage.
Factor #3: Profitability of forex trading system
Lastly, the profitability of the forex trading system also determines how much forex traders can make.
When it comes to the profitability of a forex trading system, you have to understand this one simple concept – Expectancy.
So, what is expectancy?
Expectancy basically means how much money you can expect to win per trade by trading this forex system.
To find out the expectancy of a trading system, you must know three numbers:
- Win/loss ratio (i.e. a forex trader’s number of winning trades relative to the number of losing trades)
- Average size of your win
- Average size of your loss
Let’s say the win/loss ratio is 60/40, the average size of your win is $100 and the average size of your loss is $50, then you can calculate the expectancy like this:
Expectancy = Win rate * Average win size – Loss rate * Average loss size
Expectancy = 60% * $100 – 40% * $50
Expectancy = $20
So, what does an expectancy of $20 mean?
It means that for every trade you take based on this forex trading system, you expect to earn a profit of $20.
Basically, the more trades you make, the more you can expect to make from your forex trading.
To help you understand this better, let’s look at an analogy.
This is just like a casino.
You all know that the casino is a very profitable business.
The house has a winning edge.
In fact, the casino designs all its games to make sure that the odds are in its favor, so it can expect a POSITIVE profit from each game played inside the casino.
So, the more bets people make, the more money the house will make.
The same can be said about forex trading.
If you have a forex trading system with a positive expectancy, the higher the expectancy and the more trades you make, the more money you can expect to make.
Can You Make Money From Forex?
So, the most important question is, can you really make money from forex trading?
As a matter of fact, up to 70% of retail forex traders lose money trading forex.
It’s simple to get started trading forex, but it’s going to take hard work to master the forex trading game.
If you want to make money trading forex, you just need to have the following:
- A profitable forex trading system
- Discipline to stick to your forex trading system
The first one is well-understood.
Without a profitable trading system, you are not going to make money in the long run.
The second one is one of the biggest reasons why a lot of forex traders lose money.
Amateur forex traders often let emotions get in the way of their trading.
For example, if the market goes against them, they are likely to revenge trade or refuse to cut their losses.
The difference between a profitable trader and an unprofitable trader is that the former knows the importance of keeping their emotions under control and have the discipline to stick to their trading plan.
Now, if you are serious about trading forex for profits, then you should focus on mastering these two things mentioned above before risking your money.