Making a Living Trading Forex

10/20/2015 9:00 am EST

Focus: FOREX

For the benefit of anyone who dreams of gaining financial freedom by trading forex, speaking from his own experience, Adam Lemon, of DailyForex.com, discusses the challenges that will more than likely have to be faced for this dream to have a chance of possibly becoming a reality.

It is not unusual for traders to dream of obtaining financial freedom and self-employment by supporting themselves through profitable forex trading online. No more boring job, no more boss, no more wasting time with administration, pointless emails, or endless meetings. Is it a realistic ambition? If so, how can it be done? In this article, I am going to speak from my own experience and try to give you an idea of the challenges you will certainly face if you are going to make a living by trading forex. I hope that forewarned will be forearmed.

How Much Money Can You Make Trading Forex?

This is the first question people always ask, even if they are only asking themselves. There is a simple answer: nobody knows. No matter how skilled a forex trader you are, you cannot control the market. You may be so good that you usually have a winning month and every year for you is a winning year. However, the exact amount that you make depends upon what happens in the market and the market cannot be predicted with certainty. For example, look at the major forex pairs for the first ten months or so of the year 2012. The market was extremely flat. Even if you were not trend trading, it would have been hard to be profitable using just about any forex strategy or approach. Later, at the end of that year, there was a huge downwards move in the Japanese yen which gave traders the chance to make a lot of easy money. The point is that the market is unpredictable, there can be several dry months followed by an enormous downpour of opportunities to profit.

A sensible approach towards deciding what you can reasonably aim for before you start live trading for an income, is to calculate in terms of probabilities. For example, that in 20% of months you expect to make about 5% profit, in 10% of months 7% profit, etc.

In order to calculate these probabilities, you have to work backwards from your average trading performance, drawdown, and starting capital, and calculate an average trade expectancy, i.e. how much profit or loss you will typically make per trade.

Calculating Your Trading Performance

The first point to begin with is how much starting capital you have to trade. It is really important to understand that the more money you are risking, and the less money you have, and the more money that you need to pay your bills, the harder things are going to be. Even if it is all the same on paper, the day-to-day experience of trading online for a living will be extremely hard psychologically for almost everyone, especially at the beginning. There is an enormous difference between live trading with money you can afford to lose to try to make enough money to pay for luxury items and risking your life savings to try to make an income which pays the bills.

You must have a good idea of your typical trading performance over the full range of market conditions, as if you had been trading continuously for years. One of the best methods to do this is to use a trading simulator and/or forex strategy back testing software to simulate many years of forex trading and ideally thousands of trades. You can then get a good idea statistically as to the probable range of returns you might achieve in any month. Of course, testing this over a long period of live trading is a much more superior method of determining your trade expectancy. By all means, look at forex signals to get trade ideas, but don’t rely upon them blindly.

NEXT PAGE: Dealing with Sudden Drops in the Curve

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Once you have these numbers, you then must consider how much drawdown you will be able to tolerate. From here, you can determine the money management and leverage you will use and now finally you can calculate the probable range of cash incomes (and losses) you are likely to experience in a typical month. Is it enough for you to meet your financial commitments? Will you be able to get through the bad times without getting into debt? Do not forget that your real performance will probably not be as good as your simulated performance, because making decisions over long periods of time with real money at risk is harder than simulated trading. Remember that a large majority of retail forex traders are not profitable, so you have to be at the top of your game.

A very important factor not covered yet is the psychological stress of trading online for a living. It is very crucial in successful trading to not become emotional about the outcome of any single trade. When you need some good results to pay your bills at the end of the month, maintaining that attitude becomes very difficult. Your trading psychology is very important to get right. A perfectly smooth equity curve gives the least stress, but is very difficult to achieve and so you will probably need to find a way to cope with the sudden drops in the curve without losing your cool.

A Realistic Plan for a Second Income and Capital Growth

If you really want to trade for a living, I strongly suggest you consider making a plan that allows you to transition into this gradually. You might believe that you will do much better when you can devote all your working energies to live forex trading, but this might not be the case. You are not necessarily going to make more money by scalping than by position trading, even though it would seem logical that the more time you put into it, the more money there is to be made.

You might be able to automate your trading, at least partially, by using a forex robot, say, for trade entries. You could then decide on trade exits every few hours or even on a daily basis. This way you can keep your primary salary and that plus what you can make from trading forex in this way is still quite likely to be more than you would make from day trading every minute of your day.

It is a really good idea to have both a significant steady income and to have a reasonably long track record of profitable trading. What you can do is grow your capital and slowly increase the risk by increasing the leverage used. This way, you gradually get used to the pressure and stress and you never take on any extra stress until you have already proved yourself.

If you move forward in this way, you should be able to make enough money to quit that job that you want to leave within two or three years of successful transitioning trading. It is tempting to think that you will perform much more profitably in your live trading if you do not have any other distractions, but many traders have found that just the opposite is the case. Trading for a capital gain is far easier than trading for an income.

By Adam Lemon, Contributor, DailyForex.com

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