Forex trading is getting a reputation for being an industry where incredible percentage gains are possible. Almost tainted with the same brush as Cryptocurrencies, traders are coming into the market expecting 200% monthly returns – which is simply not possible. But what is possible? What kind of returns should you expect to make from forex trading?
Consistently profitable forex traders average 2-3% gain per month. This works out at an average of 35% gain if compounded throughout the year. This is based on a metric of using 1% risk, or less, per position traded.
Realistic Returns From Forex Trading
Before even getting involved in the forex market, it’s very important to manage your expectations and understand what kind of returns are possible. If you’re an investor, you need to know that your capital is being allocated properly.
It’s important to know if your trading results are realistic for the amount of time you spend trading. If you trade on a part-time basis, it is unlikely that you will be able to generate 2-3% monthly returns (or 28%-55% yearly). Of course, if you have a full-time income to support your trading activities or are willing to put in the time necessary, anything is possible.
A monthly return of 2-3% may seem low to some beginner traders that expect returns of 100% per month – but the key is to remember that forex trading is a zero-sum game. This means, for every winner there’s a loser, or in this case, for every 2%, someone loses 2%.
It is possible to make consistent profits with forex trading – even if you are able to generate returns of 1% per month on average, that gives you 30% per year on your starting capital. Now, if you can manage to produce 2% monthly returns, this puts your yearly profit at 60%.
Of course, trading is not just about making money – it’s also about managing risk and protecting your capital. If you are able to maintain proper position sizing and win odds, you can trade with a much larger percentage of your account than someone who uses 1% risk per position, although this isn’t advised.
When looking at expected returns from the forex market, this heavily depends on your risk tolerance. Capital preservation should be your number one consideration, therefore risking 1% per trade is suitable. However, if you’re a riskier investor with less capital, your could risk up to 10% per position.
Factors That Effect Your Expected Yearly Returns From Forex Trading
There are a few factors that massively effect your expected and actual trading results and percentage gains…
- Leverage. Leverage plays a huge role in your potential profits within the forex markets. With higher leverage, you can either make or lose more capital per trade. With lower leverage, you’re limited to a smaller position size and exposure.
- Knowledge. If you’ve been trading for 10 years, I’d wager that you’re going to have more knowledge than someone trading for 6 months. Thus you will have more control over your emotions, risk-taking ability and knowledge of markets. Therefore you are very likely to have greater returns than someone with less experience.
- Tightness Or Looseness Of Your Stop Losses. The tighter you set your stop losses, the higher your return on equity has a chance of being. This is because you’re allowing yourself to maximize your winners. By keeping tighter stop losses, you can increase your returns exponentially with higher win ratios and larger position sizing.
- Trading strategy. Trading strategies are not created equal. Some trading strategies are able to net huge returns in the markets… Some are not.
- Risk management. If you’re happy to risk a higher percentage per trade, you’re more likely to earn larger gains. You’re also more likely to lose your trading capital at a much faster rate. It’s important to trade conservatively with smaller position sizes, or take a larger portion of your total trading account and risk the same percentage.
Projecting The Yearly Average Returns From Trading Forex
The projected yearly returns from forex trading greatly differ depending on whether you plan on compounding your profits, or withdrawing each month.
For instance, if you are able to trade on a compounding monthly basis and generate 2% compounding returns per month, this would give you an annual return of around 60%. Of course, if you withdraw your money each month instead of letting it compound in the markets, you have to pay fees. If these fees are 2%, you’ll be left with a return of around 30%.
If you can trade on a compounding basis, this gives you the ability to earn more money than those traders who withdraw their profits each month.
Compound interest has been called one of the wonders of the world by some investors. If you are trading part time and don’t need your forex trading income for bills and living expenses, you are more able to compound throughout the year and net larger percentages. Whereas traders that need their trading income to survive won’t be able to compound as much of their profits.
2-3% Per Month Isn’t Enough To Live From – What Can I Do?
The reality is that on a £10,000 trading account, earning a consistent 3% monthly isn’t going to matter as you cannot live from that. This is the issue that most beginner traders face. This causes traders to over-leverage and use huge risk as just having small consistent gains isn’t enough. So what can we do?
There are now over 30 forex prop firms, dedicated to funding forex traders. You have to prove your profitability by taking a small trading challenge on a demo account. If successful, you’ll be awarded an account that could be even as large as £400,000. You’ll be trading the firms capital, with no contracts, and take a large percentage of the profits. The profit split is usually around 80%.
The most popular funding option is FTMO. They offer a £100,000 account with just a simple challenge to get funded. Making 35% per year on a £10,000 isn’t that great, but a £100,000 account – now we are talking!
What Kind Of Returns Should Be Expected In The First Year Of Trading Forex?
If you’re in your first year of trading forex, making money shouldn’t even be on your mind. Staying alive in the markets and keeping your trading capital should be the only thing you care about.
Your main priority should be just learning to trade forex and capital preservation. With this in mind, your expected return in your first year of the markets should be 0%.
Typically, it takes over a year to learn to consistently trade the forex markets. Traders that are making 3-4% per month have been trading for much longer than a year.
This is where most traders quit, within their first year as they feel unmotivated by the lack of consistent trading profits.
Forex Trading For Consistent Returns vs Capital Creation
One of the largest misconceptions regarding forex is that it can be used for capital creation. What do I mean by this? Well, forex trading should be used as part of a portfolio to generate consistent yearly returns.
However, with a low barrier of entry that forex trading has, traders are coming into the markets with $100 and trying to make millions in net profits. This isn’t how the markets work, nor has it ever been.
Forex trading is not a get rich quick scheme. It’s simply an industry where traders can generate consistent returns, even if they’re modest. On average, forex traders are looking to make 2-3% each month – which equates to around 35% per year on average.
If you’re looking to generate vast amounts of capital, quickly, from the forex market, then I would advise looking at a riskier market like Crypto because those levels of returns just aren’t possible from forex trading.
In Conclusion – Average Expected Returns From Forex Trading
In summary, the average monthly returns from profitable forex traders is in the range of 2%-3%. If a trader can make a consistent 3% monthly return, this results in a 42% yearly return.
Though the average returns from forex trading are modest, traders should be looking to make 2-3% per month after year 1. Once you have learnt the basics of trading and developed your strategy for success, this is when profiting from small moves in the markets can be achieved on a consistent basis.
If you’re looking for capital creation from forex trading, then I would advise looking at a riskier market like Cryptocurrencies because of the lack of barriers to entry and weekly fluctuations that can generate vast returns.
Overall, if achieving around 35% yearly gain on your investments sounds appealing to you, then forex trading is the market for you.
If you have any questions, please do let me know in the comments down below.