How Much Profits You Should Expect from Trading Forex

 

 

Trading forex is full of misconceptions indeed.

Many novice’s come into trading forex through very smart marketing techniques. These techniques tend to produce fairy tales around very logical concepts.

They are designed to make trading Forex very attractive by promising the impossible. Among many, the income expectations in the retail FX market  are seriously overdone.

 

man wonderingMarketers give traders an unrealistic picture about the potential income or a promise of becoming financially independent by working 10 min per day. He?

They make it look like hedge fund and pension fund returns are very small to compared to the opportunities waiting in FX market.

Traders are expecting to make 100%, 200%, 500% in few weeks.

All the above should sound at least suspicious to a semi intelligent human being.

 

Here I would like to give you my view on a few misconceptions.

I got an email from one of my followers asking very valid questions about important factors of trading forex including income expectations.

Below is the email from John. I hope I can provide valuable and logical advise.

 

I have been trading FOREX  for many years on a dummy account in order to achieve consistency. From the end of Feburary 2015 to the end of December 2015 I had been trading positively and increased the account size by 16%. I only ever risk 1% of my capital per trade.

After this run I decided to try and increase my return. I changed absolutely nothing except I spent more time in front of the computer and took more trades. This did not work out I was once again I started losing money.

My questions are as follows;

Is 16% return in 10 months reasonable?

What would you consider as an average return for a retail FOREX trader?

How many trades per month does an average trader place? It seems to me that the best trades are low risk trades and these are few in the month. As I try to increase the number of trades I am taking higher risk trades which turn into losers. What’s your view?

Presently I look for a 1.5 return on my trades. What would you consider to be an average Risk/Reward ratio? Or a range.

For a successful trader what is the average win to lose ratio? I find it decreases as I try and place more trades. Is this normal?

 

I am going to jump right into your questions and provide feedback at the end

 

Is 16% return in 10 months reasonable?

 

This is just over 19% per annum. In my opinion, this is an excellent return given that you kept your risk at 1% at the time.

Kudos to you. To give you some perspective see the list of top performing hedge funds in 2015 with funds between $250 mil and $1B in assets.

hedge fund list

 

You note that the returns average around 26% per annum. Hedge funds are known for aggressive portfolios and high results. Other funds and investments vehicles available to an ordinary break eater would produce much lower results, especially in the era of global depression and zero bound interest rates. There is no easy way to make money since housing bubble has burst.

See the sample of popular Mutual Funds below. Full data can be accessed here

 

mutual funds list

 

You see how these funds achieve only single digits returns and some of them were negative last year.

You could do some more research and find out that the standard pension fund is working off 8% annual return benchmark (at least the last time I checked). Anything beyond that is bonus or come with increased risk.

Obviously portfolios can be allocated/focused on certain industries. The performance will depend on the “alpha” of the fund manager and economic conditions at the time.

Portfolio theory clearly states, the higher the return the higher the risk. There are no two ways about it.

I want to make two points:

1.

Your 20% per annum of return would put you way above the standard pension or mutual fund portfolio and pretty close to top performing hedge funds with over $250mil in assets. Not too bad I think!

2.

Surely people who run those funds are probably the most intelligent human beings on this planet. They came from families who could afford to send them to best schools. They are ambitious, hardworking executives with an excellent understanding of economics and finance. They often have influential friends in many sectors they invest in.

I don’t see any Hedge Fund achieving 100%, 200%, 500% returns on the list above. How is that?

If they can’t do it, why would anybody think they can come in, open MT4 with no knowledge of finance and economics or previous experience and produce 500% returns by drawing lines on EURUSD 5 min chart.

How many of us think, we can outsmart these guys with Stochastic crossover strategy?

 

What would you consider as an average return for a retail FOREX trader?

 

I don’t know what is the average return of an average retail FX trader but I can tell you that on average 90% of people who open a trading account blow it for an average of $600 in less than six months.

This is why brokers can afford paying $10-$30 per click in google adwords or put a banner on the home page of  busy Forex websites at cost of $50K/ month. This industry is comparable to the insurance or mortgage brokerage industry in 2008 where life time value of the customer is high.

From this alone, it’s hard to calculate an average return. Those accounts might have produced 3 digits returns for few weeks but this is only possible by taking enormous risk which results in margin calls sooner or later. Most of those people will never see the money they deposited with the broker again!

The TRUE average return would have to be calculated over long period of time on accounts of traders who survived and are still in money today. I guess the average would be less than 10% per annum.

Please feel free to challenge me on this as I have no hard evidence.

 

How many trades per month does an average trader place? It seems to me that the best trades are low risk trades and these are few in the month. As I try to increase the number of trades I am taking higher risk trades which turn into losers. What’s your view?

 

There should be no benchmark for how often you trade.

I can see your gut tells you: “lower the risk and trade safely” This is good. Listen to it. The market will tell you how often you should trade.

Take only high probability, low risk positions. Volume does not matter.

I base my trades mostly on Commitments of Traders analysis. This allows me to spot high probability market reversals and position my trades accordingly. I could have only few trades per year, but once I’m in the market, I stay in for months. This kind of strategy also allows me to cash in the carry trade interest on leverage positions.

I want to make two points:

1.

Many “traders” are interested in trading itself rather than preserving and grow capital over time. Don’t be one of them.

Take only low risk positions in accordance with your tested trading technique. Keep your risk as low as you can and you will succeed.

If you believe your strategy is valid and makes money, add more funds to your account and increase the lot size rather than increase the risk as a % of equity per trade. Do not trade more often because you believe your strategy is sound.

The FX market will always be there, there should be no rush. The price will always print no matter what, even 100 years from now. Patience is one of the great qualities of a successful investor.

“The most money in this world was made by waiting not working.”

I forget who said that, either Jessie Livermore or Warren Buffet?

2.

Every time you press the button BUY/SELL you expose your account to a possibility of a loss. The least often you trade as better it is for your account. You will save a fortune over time on broker’s fees.

You need to be taking only low risk positions every time you press the button.

A Professional trader generates 80% of income from 20% of winning positions. Every time you see that in stats, it means the trader stays in winning positions as long as possible, instead jumping in and out.

Once you recognise a trend – get in, sit back and ride it. It takes a great deal of patience to do so as the market is there to shake the weak players out. Most traders don’t wait, they get it and out and lose money.  Don’t be one of them.

 

Presently I look for a 1.5 return on my trades. What would you consider to be an average Risk/Reward ratio? Or a range.

 

1.5:1 is rather the lower band of a good risk reward ratio. Having said that, it will allow you to stay ahead, even if you have less than 50% losers. You should always assume less that 50% accuracy in the long run. Thinking you can get more is statistically incorrect.

If you can, look for 2:1 ratio by testing the strategy to see if you are hitting the same amount of winners.

Increasing ratio means increasing take profit levels. This will result in more breakeven trades as you will hit profit target less often. You might end up worse off in terms of a total profit.

Instead of moving the profit target, try limit orders. I find it much more effective.

Let the price fill your order at the better price and keep your profit targets unchanged. This way you will improve your ratio over time.

It will depend on your time horizon as well. A good trading strategy will produce most profits out of the least winning positions. This means, you stay in winning trades longer but cut losing position quickly.

Such a strategy might be only 30% accurate but still generates healthy profits.

 

For a successful trader what is the average win to lose ratio? I find it decreases as I try and place more trades. Is this normal?

 

As mentioned above, you need to assume to hit less than 50% in the long run. You should also account for broker’s fees and swaps. This will decrease your odds again.

Good, sustainable strategy is less than 50% accurate. It will show fewer trades with huge winnings and many small losers. Such a dynamic shows that the trader cuts losers quickly and let winners run.

 

My feedback

I want to make two points: (as usual)

1.

As I understood, your return was made in demo account? Is that correct? If so,  I don’t want to burst you bubble but it is very unlikely (in my humble opinion and based on my humble experience) to replicate it in the real money account.

Once you put your own money on the table, your heart starts to beat differently and your mind plays tricks on you. You need to account for this.

Over the years I’ve learnt to test all new trading strategies on a real money right away. Many will tell you, this is BS, but it worked for me. I don’t mind paying for testing once I get real, unbiased results.

Psychology in this game is tricky, you need to expose it as early as possible.

Another thing to remember, the real account will have totally different spreads. The broker does not hunt your stop in demo account or increase the spread during volatility. It might seem little but It makes a difference. The broker will hunt your stops in real account and widen spread during news releases.

My advice – If you are thinking long term, move to a real account right away to get better understanding of real trading conditions.

 

If you are already trading forex in a real cash account – Kudos to you again!

 

2.

You made 20% in one year. Now you will need to do it over and over again for the rest of your professional career. Do you think you can do it?

Do you think your strategy is resistant to ever changing market conditions? What is bullish for dollar today, might be totally bearish in 5 years from now. You will need to update your strategy with new variables to adjust to ever changing markets.

The LTCM story has proven this is some challenge indeed!

If you want to average 20% for the next 20 years. It’s likely, you will have years with 50% profits and years with no profits at all.

It will be hard to get through the latter ones.

I guess over the long run; you will place thousands of trades. Statistically, it is likely you will have more than 10 losers in the row. You need to be ready for this.

 

Once you get all above right, think about rewarding yourself in the form of compounding.

The equation below shows how your equity could grow over 20 years with 20% annual return.

This is assuming $1000 initial investment.

coumpounding

That’s a good retirement, even after taxes so stay going as you are.

 

As you probably now imagine, triple digit returns promised by internet marketers would translate into 100s of millions of dollars over time from trading forex. This is just not adding up.

My advice is:

  • Don’t over trade
  • Be patient
  • Preserve your capital
  • Be consistent
  • Adjust with new information.
  • Stay humble

 

 

Hope that helps you!

 

6 Comments

  • Thanks for all the great information. I’m in the same situation as John. I’m going to pull the trigger on a live account in a few months and I wanted to know your opinion of brokers available to US customers. I’ve been trading on the FXCM tradestation platform and I feel really comfortable with my set up. They require a $ 2500 initial deposit to bypass the dealing desk, will this make a big difference? Thanks for the great site.

    • Hi. Can you specify what are the benefits of “bypassing the dealing desk”?
      I assume, you orders will e filled quicker?
      Orders should be instant on any modern online trading platform.

      There might not be any tangible difference to you and lots of risk by going from demo to real account.
      I would ask what exactly am I getting for this service and is it going to be beneficial to me.

  • No dealing desk just gives you access to better pricing. With the dealing desk it looks like they will be betting against my trades. Either way is there any brokers you would recommend for me as a US customer?

    • Hi
      I would recommed FXCM. If I were you,moving to real account for the first time, I would start with much smaller capital than $2.5K.
      Not sure what is ” better pricing” you mentioned. I assume, lower spread. Unless you scalp many times a day, half pip or less per order wont make much difference. I would be happy to pay that and test with $500 for the first few months.

  • Excellent post. Really puts things into perspective for a Retail Trader.

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