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    How Profitable is Forex Trading

    I am sure you want to know how much money can you make from forex trading, right? You’ve heard of traders making millions in the financial markets, but you really cannot compete with these big boys and the reason is that you have different account size, risk appetite, risk management and trading strategy.

    This generally depends on your trading strategy, and on the risks, you are willing or are able to take. Generally, profits and losses are almost unlimited in the Forex Market. Mostly, it depends on your risk appetite, your trading strategy, and your level of understanding.

    That is why this article will give just the statistics, numbers, and the cold hard truth.

     

    The Problem

    • You can have a 1-2 risk to reward on your trades, but if you only win 20% of the time, you will be a consistent loser.
    • If you have a 90% win rate, but you lose £0.95 for every pound you risk, you will also be a consistent loser.

     

     Forex ctrader solution

    It is clear that the risk/reward and the win rate are useless on their own, you will need to combine both your win rate and the risk/reward to find out your long-term profit and this is what's known as your expectancy. Your expectancy will provide you with your expected return of profit on every pound you risk.

    The mathematical equation: E= [1+ (W/L)] x P – 1

    • W means the size of your average wins
    • L means the size of your average loss
    • P means winning rate
    • If you have 5 trades and 3 were winning trades and 2 were losing trades it would mean that your % win ratio is 3/5 or 60%
    • If each of the 3 trades gave you a profit of £90.00 then your average win will be £90.00 / 3 = £33.00
    • If your losses were only £50.00 then your average loss is £50.00 / 2 = £25.00

    If you now apply this to the expectancy formula:

    E= [1+ (33/25)] x 0.6 – 1 = 0.35 or 35%

    The expectancy of your trading strategy is 35% which is a positive expectancy and this means your trading strategy will return 35 pence for every pound traded in the long term.

     

    Do More Trades Equal More Profit?

     

    In our view this is not always true, many traders feel that if they have many trades open especially with an automated trading robot they will make more profit, this is far from the truth.

    "Some of the best-automated trading systems we have seen only open a few trades each month"

    "Many of the big traders only place a few trades a year"

    There is a reason that casinos are open 24 hours a day all year and that is for them to make money as the odds are in their favour. Why do Forex traders lose money, there are many reasons and over trading is one of them.

    Why Do Forex Traders Lose Money

     

    When More is Better

    If you are using the formulas above then the frequency of the trades does actually matter because for every 3 winning trades there 2 two losing trades, so the more trades that are placed in a month the more the more profit you make. The frequency of your trades is important but that is enough to determine how much money you can make in the long run.

     

     cTrader Get Rich Illusion

     

    The Illusion of Wealth With Traders

     

    Many traders start out trading Forex thinking that they will get rich with only a few months experience of the industry or an idea they found on the internet, the hard truth is that there is no quick rich scheme or golden egg, if there was then everybody would be winning and the industry needs losers to pay the winners.

    Everybody has heard the stories where a trader took a small account and trade it into millions, but what you didn't hear is that for every trader that attempts it, many other traders blow up their account.

     

    Do Not Think You Will Get Rich Fast

     

    Now, let’s say you can generate 20% a year (on average).

    • With a £1000 account, you’re looking at an average of £200 per year.
    • With a £1m account, you’re looking at an average of £200,000 per year.
    • With a £10m account, you’re looking at an average of £2,000,000 per year.

    This is the same strategy, the same risk management and the same trader, the only difference is the capital of your trading account.

    So, in a nutshell, you need money to make money.

     

    cTrader What Is Financial Risk

     

    Position Size & Risk

     

    Many traders think that the bigger the risk the higher the returns, the answer to this is both yes and no.

    If your trading strategy has a positive expectancy and generates a return of 20R (20 x risk) per year, how much can you really make a year?

    • If you risk £100.00 then you will make roughly £2000.00 per year.
    • If you risk £200.00 then you will make roughly £4000.00 per year
    • If you risk £500.00 then you will make roughly £10,000.00 per year.

    The calculations above uses the same strategy and account size, the only difference is the amount you risk, as you can see the higher the risk the higher the returns, but also the higher the risk of blowing all the money in your account. 

     

    Should You Compound Your Profit?

     

    If you make on average 20% a year with a £5000.00 trading account and you do not withdraw any money, after 5 years it will be worth £12,441.00

    So, it is obvious that by compounding the profit over 5 years you will get the highest returns, every trader should have a clear business plan before they start on how they plan to make and manage money.

     

    Summary

     

    Now, let us provide a real example using all the information above on how much money you can expect to make trading Forex or any other instrument.

    Trading Expectancy: 0.2 (20%)

    Trading Frequency: 200 trades per year

    Account size: £5000.00

    Position Size: £50.00

    No Withdrawals

     

    Trading expectancy * Trade frequency * Bet size

    0.2 x £50.00 x 200 = £2000.00

     

    With the above values, you would expect to make £2000.00 per year trading Forex.

     

    To find out the % of profit each year you need to use the calculation below.

    [Trading expectancy * Trade frequency * Bet size] / Account size

    [0.2 x £50.00 x 200] / £5000.00 = 40%

     

    This means you can expect to make an average of 40% a year.