When I tell people I am a Forex trader, one of the first questions I am usually asked is whether making a living trading Forex is possible.
I had similar questions when I started to meet successful traders—Is it possible for me to do the same? What’s involved? What do I need to do next?
In this article, I will answer your questions about whether and how its possible to make a living trading Forex.
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So, How Do You Make Money Trading?
There are two ways to launch a trading career:
- Develop a trading strategy and trade it.
- Follow the signals of another trader or traders.
These two options are not mutually exclusive, and nothing stops anyone from doing both simultaneously.
Let’s look at the pros and cons of each.
Developing a trading strategy:
- It’s a time commitment. It can take months to a year to fully learn or develop a strategy. I’ve spent time learning strategies and found some valuable, but others I decided are not for me. So, take time deciding what kind of strategy you want—Forex or stocks, long-term or short-term, discretionary versus mechanical, technical analysis vs. fundamental analysis, etc.
- Knowing a strategy gives me independence and control. When I have a complete strategy, I am not reliant on another person’s skills. I have the resources I need to be successful, so I can better adapt to changing market conditions because I understand how my trading works.
Following signals:
- It gives me a shortcut to start trading successfully, assuming the person I am following is profitable.
- If I only took signals and did not learn to trade, I would not develop as a trader. I will always be reliant on others to make money in the markets.
Let’s explore these options in more detail.
Developing a Trading Strategy
A trading strategy is a set of trading rules that define when to enter and exit trades and how to control risk.
There are four parts to a trading strategy:
- Entry rules. These are the criteria that must line up before entering a trade. Forex entry rules can include chart patterns, indicator levels, timeframes, and fundamental data.
- Take profit rules. I need to know in advance when to take profits from a trade, so I am ready when the time comes. I want to avoid guessing my exit when I am in the trade because guesswork leaves me liable to emotional trading. For example, I may take profits too early because I’m afraid of the trade turning into a loss. So, I have rules on when to take profits.
- Stop loss rules. I have a pre-determined exit point if a trade goes against me. This is known as a “stop loss.” Like having a take-profit rule, I do not want to guess when to exit at a loss because I might decide emotionally. Every trader will have their own rules for where to place stop losses, but I place them at a point where I think my trade will be proven wrong if the price reaches it.
- Money management rules. I keep a maximum percentage amount that a trade can cost my account if it hits the stop loss. A common percentage traders use is 2%. For example, on a $10,000 account, a 2% money management rule means that a trade cannot cost more than $200 if it reaches my stop loss.
Learning vs. developing a strategy
Developing a strategy without help requires a steep learning curve and much more time. Today, many excellent resources and traders teach trading principles and complete strategies. Suppose I am interested in a certain trading style, e.g., Fibonacci trading or volume profile. In that case, I will look around online to see if anyone is teaching those ideas as a complete strategy. In my trading career, other successful traders who shared their ideas helped speed up my development. Making a living trading Forex does not have to be a solitary activity where you must invent every piece of the puzzle—in fact, very few people have succeeded that way.
Use of Demo Accounts
What’s demo trading?
Instead of trading with real money, anyone can open a practise demo account. All Forex platforms, e.g., MetaTrader MT4 or MT5, have a demo function.
Why demo trade?
Demo trading is an excellent way to test progress when learning how to trade. There’s no risk, and you can make mistakes without losing money. You can experiment with different markets, trading ideas, timeframes, etc. It’s a great playground for traders!
Demo trading also helps you learn how to manage your emotions during trading. There’s still a major difference emotionally between a demo account and trading a live account, but a demo account is a good stepping-stone. If you have never traded before, I would not recommend starting with a live account before trying a demo account first. It is important not to demo trade for too long, though.
Set parameters for demo trading.
If I am evaluating a new idea, I decide on parameters to demo trade, for example, 50 demo trades on 2 Forex pairs. If I find the strategy profitable, I trade live. If the strategy is unprofitable, I let go of the idea and move on to something else.
Always Use Stop Losses
I would never place a trade without a stop loss, and every successful trader I know would do the same.
There are two reasons why I consider stop losses a non-negotiable part of my trading:
- A stop loss prevents a single trade from damaging my account beyond a certain point (provided it is executed with little or no slippage). If I implement a rule on position sizes with my stop loss, I can ensure that a losing trade cannot cost me more than a pre-determined percentage of my account. For example, if my maximum percentage risk is 2%, a trade with a stop-loss should not cost more than 2% of the account value if it hits the stop-loss.
- I can calculate a risk/reward ratio when I have a stop loss.
Trading Psychology: Keep Emotions in Check
After years of trading, I am constantly surprised at how emotional it is. There can be a rush of emotions when actual dollars move up and down in the account.
Emotional trading leads to mistakes—taking profits too early out of fear that the profit will disappear, removing stop losses because there is hope the trade will turn around, and having trade sizes that are too large because of greed and ending up taking too much risk. Traders often lose money not because of bad strategy but because of emotional trading.
I record the reason I take each trade because it makes it easy to see if I took trades that were part of the trading plan or whether it was because I traded emotionally. Sometimes, just knowing I must write down why I take a trade prevents me from taking trades emotionally.
Do Not Be Afraid to Take Losses
Even in the best market conditions, there will be losses. When learning anything new, it’s tempting to give up at the slightest mistake or challenge. To help get used to taking occasional losses, trade a demo account first. When making the switch to a live account, start with a small amount of capital, and build from there.
The best analogy I’ve heard for dealing with failures is how children learn to walk: they fall over hundreds of times but pick themselves up each time without a care. Eventually… they walk.
If you’re interested in making a living trading Forex, accept losses as part of the process.
Unexpected Events
Markets have scheduled high-impact events that drive price movements—central bank interest rate announcements, GDP, employment data, etc. However, there will be unexpected geopolitical or other news events that can also create price moves. For example, in 2022, a new British Prime Minister’s unexpected economic package generated volatility in GBP pairs.
Keep solid risk management.
The best way to deal with unexpected events is to keep good risk management, especially stop losses and a maximum risk percentage per trade.
Dangers of Excessive Leverage
Leverage is simply the ability to trade a larger amount of assets with a smaller dollar amount, known as “margin.” New traders are often drawn to Forex because of the high leverage they can get.
Don’t count only the profits.
Some leverage is essential to make money in Forex because the actual price moves between currencies are typically small. However, when multiplying leverage, it always increases risk. It’s easy to count the dollars from a potential profit but not consider the dollar amount for a loss. Without considering the risk of loss, it’s tempting to jump into a trade using as much leverage as possible and an overly large trade position size.
Have risk management rules and stick to them.
The easiest way to avoid excessive leverage is to set a maximum percentage risk for every trade because this automatically controls position size and prevents excessive leverage.
Asymmetric Reward to Risk
A reward/risk ratio compares the stop loss with the profit target. For example, if my stop loss is 50 pips, and my target is 100 pips, the reward/risk is “2R” (100 divided by 50). If I take trades less than 1R, i.e., if I risk more than I am willing to gain, I will need more winners than losers to break even. For that reason, most successful traders only take trades with a minimum of 1R, by maintaining an asymmetric reward to risk ratio on all trades.
Reward/risk ratio is more important than the win rate.
In most circumstances, the average reward/risk ratio will impact profitability more than the win rate. A Swedish trader, Kristjan Kullamägi, turned $4 million in 2020 into $32 million with only a 30%-win rate. He had very high rewards compared to his average risk per trade to achieve those returns.
Is Forex High Risk?
Statistically, Forex has a high percentage of traders that lose money: brokers’ records show that 60-85% of traders are unprofitable. Forex allows anyone to take a lot of risk through leverage and trade without prior experience—this is a dangerous cocktail. Even if you do everything right, money can still be lost.
There are simple steps to turn what could be an inherently high-risk endeavour into something where the risk is calculated and managed. I’ve talked about many of the steps in this article, but let’s recap the main ones:
- Trade only with money you can afford to lose.
- Evaluate the trading strategy or signal provider on a demo account before trading a live account.
- Have a stop loss on every trade.
- Have a maximum percentage risk per trade on the account.
- Take trades with a reward greater than its risk.
Implementing those simple steps will effectively manage risk.
Calculating Your Trading Performance
There are ways to track performance metrics in trading, and here are the key ones:
- Net profit (total gains minus total losses).
- Trading expectancy: (% of winning trades x average win) - (% of losing trades x average loss). The number will be positive if you are profitable, and a good starting point for healthy profitability is 0.20 or above.
- Payoff ratio: average winning trade minus average losing trade.
- Average # of consecutive wins vs. # consecutive losses.
- Maximum drawdown.
- Percentage of winning trades: this is my least favourite metric, but it is the one everyone looks at first!
I’ve put these performance metrics in the order of importance to me, but you may have different priorities in your trading performance. Always measure performance—it is important to see if there is progress and that you are, ultimately, making money.
A Realistic Plan for a Second Income & Capital Growth
“The goal of a successful trader is to make the best trades. Money is secondary” – Alexander Elder. This seems counterintuitive to aiming for financial gains, but my experience has taught me that it’s an excellent philosophy to follow for becoming a profitable trader. If you can do this, you have a chance to build a realistic plan for a second income and capital growth from Forex / CFD trading.
How much capital can I risk?
After a period of demo or live trading, you will know what is possible with your capital. The more capital you have, the better, if it is money that you can afford to lose.
Map out some simple goals.
Using the performance data from demo or live trading, you should construct a spreadsheet outlining how much money you want to make as a trader. For example, assume:
- You have a $10,000 account
- You are willing to risk 2% per trade
- You want to make $1,000 a month
- Your average reward/risk on the strategy is 2R
- Your average win rate is 50%
With those statistics, you can calculate that you need at least ten trades a month to give you a monthly net income of $1000. You should then ask yourself: can my strategy find ten trades a month? Do I have the time to find and execute ten trades every month?
Income vs. Capital Growth
The above calculations measure income from trading. At a certain point, if you are not withdrawing from my account, you can start compounding your account for capital growth as well as income.
Bottom Line
Trading for a living is entirely possible and realistic. There are two routes you can take to get there: the first is to develop or learn a strategy, and the second is to take signals from other traders. However, taking signals by itself may not be sustainable because it means relying on another person’s skills and not having the independence and knowledge to generate trades. Following another person’s signals can also be psychologically damaging.
Demo trading offers a great testing environment to prepare skills and emotions for switching to a live account.
Always keep a trading journal and measure performance metrics.
Treat trading with discipline: control risk with stop losses, positive reward/risk ratios, and money management.
To make a second income from trading, map out some simple goals and see if it’s realistic based on your strategy’s performance and your starting capital to reach those goals.
