When you consider trading Forex for a living, this is likely the first question that comes to mind.
Alternatively, you could work part-time!
It’s not something to be ashamed of. When I first started investing in equities in 2002, I was eager to learn how much money I could make.
The problem is that it’s a precarious situation.
Curiosity is a natural emotion. While there’s no harm in asking questions, the answers you get—and whether or not you dwell on them—can have serious ramifications.
In today’s post we’re going to discuss how much is too much profit, the proper time horizon for measuring returns, and an alternative method that has served me well.
Ready to do this? Let’s go!
Forget What You’ve Been Told (or Sold)
Has anyone ever tried to persuade you to buy a trading system that promises a 10% monthly profit?
How about a monthly savings of 20% or 30%?
Please feel free to leave a comment below if you have. I’d be delighted to hear from you.
If you’re one of those traders who’s still unsure how much money you can make trading Forex, disregard everything you’ve learned so far.
In this business, there are no guarantees, only possibilities and probabilities.
You won’t make a 30 percent, 20 percent, or even 10% profit every month, no matter how good you are.
Sure, every now and then you’ll have a great month, but maintaining those kinds of gains isn’t realistic. People who use these kinds of tools, in my opinion, are using them for the wrong reasons profits as a selling mechanism give this business a bad name.
Sometimes you have to forget what you think you know in order to move forward. This is an example of one of those scenarios.
If you think you’ll be able to live off your $500 trading account, think again.
The trading business is a marathon, not a sprint. It’s a slow, methodical process that necessitates a great deal of discipline, and you can’t have massive profits without massive risks.
So, if someone offers you a system that makes 30% profit every month, you’re getting a ticking time bomb.
This leads me to an extremely effective, but somewhat unconventional, approach to calculating earning potential.
Put the Trading Process Before Profits
You must first focus on the process if you want to become a consistently profitable trader.
This is something I can’t emphasise enough.
No successful trader has ever focused solely on the amount of money he or she can make each month.
Many traders don’t even have such a goal in mind.
I’m more concerned with how much money I could lose in a given month than with how much money I could make. Profits will follow if I protect my capital and follow the process I’ve laid out for myself.
That is the most important thing to remember. A race car driver does not get in his or her car and concentrate solely on winning the race.
Sure, that’s the goal, and it’ll inevitably cross their minds, but they’re more concerned with minor details like when to brake, when to turn early or late, and when to punch the accelerator.
They understand that it’s the little things that count. If they stick to the process of good driving that they’ve been practising for years, they’ll almost certainly win.
Trading is no exception. Making a 50% profit per month isn’t going to make you any money. It will, however, quickly put you out of business.
Just like the race car driver, you should focus on the trading process.
Keep your bets small, wait for quality setups and don’t trade the news. These are a few of the steps of this process that you should focus on.
Do these things well consistently and the profits will find you.
If You Must Aim for a Monetary Goal
I understand that mastering a process isn’t appealing to everyone.
Personally, I find it enjoyable. But then again, I’ve always been a process person.
Here are some ideas to consider if you need to set a monetary goal:
Keep it conservative.
Even if you trade Forex for a living, you won’t make a 30 percent profit every month.
If you keep your bets small, which you should do, your profits will be small as well.
That, however, is a good thing. There’s nothing wrong with aiming for a monthly increase of 2% to 5%. In fact, I believe that is a good position to be in.
This isn’t a goal you want to hit home runs on. If you set a monthly profit goal of 5% and make 40% instead, you most likely over-traded or over-leveraged your account, or both.
You don’t want to feed either of these habits.
Make it a monthly or higher goal.
The issue with weekly and daily goals is that you don’t give yourself enough time to achieve them.
In the Long Run
Over time, the amount you can earn from Forex is nearly limitless. Entering and exiting the market with millions on the line isn’t even a blip on the radar with $5 trillion traded every day.
That, I believe, is the source of the problem. Everyone is rushing to get their hands on a piece of the $5 trillion pie.
But here’s the thing…
The market rewards those who are self-disciplined. Those who are patient enough to wait for quality setups and never take unnecessary risks are rewarded for their caution.
Begin to treat your $100 account as if it were a $100,000 account. If you have to, write it down as $1 million to avoid the temptation of doubling your account every month.
After all, a monthly profit of 2% to 5% of $100,000 equals $2,000 to $5,000.
It’s $20,000 to $50,000 per month with a $1 million account.
Those are, of course, just hypotheticals. No matter how much experience you gain, you will always have good and bad months.
Some may find figures like these unfathomable. Many of the multi-millionaire traders we’ve read about, on the other hand, started with much less.
Bill Lipschutz, one of the greatest currency traders of all time, began with a modest investment of $12,000.
Randy McKay could only scrape together $2,000 to begin his trading career, while Ed Seykota started with $5,000.
All three grew their accounts into millions of dollars despite starting with a relatively small amount of capital.
You must think differently if you want to stand out from the 90 percent (probably closer to 95 percent in my opinion) of traders who consistently lose money.
Most Forex traders overtrade and overleverage their accounts in the hopes of making a 30% monthly profit or more.
So, if you want to be among the top 5% to 10% of traders, you must do the exact opposite. Instead of focusing on how much money you can make, you should concentrate on how much money you can lose.
Keep in mind that a trading edge is more than just a strategy. Anyone can learn to trade price action or swing trade and use their respective strategies. That isn’t particularly noteworthy.
An edge is the entire process from start to finish. It’s anything that separates you from the crowd.
So start thinking long-term. You can grow your account from where it is today into a fortune, but it’s going to take years, not weeks or even months.
That’s precisely what the likes of Bill Lipschutz, Ed Seykota and Randy McKay did to achieve greatness.
Trading any market successfully requires patience and perseverance. To become consistently profitable, it takes years, not months or weeks.
It becomes much easier to take things slowly once you have that information. Rather than trying to trade every day, keep your bets small and focus on quality setups.
If someone claims that their trading strategy or system generates 30% or 40% monthly profit, run and don’t look back. While such profits are possible, they aren’t long-term and will almost certainly result in a blown account.
I learned years ago that it’s far better to focus on the trading process. That includes things like risk management, having the patience to wait for quality setups and drawing accurate levels among other things.
As long as you master the process of trading well, the profits will follow. In other words, let the money you earn from Forex become the byproduct rather than making it your motive.
If you must aim for a specific monetary figure, make it a conservative one. Don’t make the mistake of shooting for 30% or 40% profit per month.
A goal somewhere between 5% to 15% per quarter is reasonable yet still quite attractive, especially for those with larger accounts.