What Kind Of Returns Can Be Expected From FX Trading?

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Whether you are seeking to earn a side income or interested in pursuing trading as a full-time career, the Forex market offers many advantages over traditional financial markets. One of the biggest benefits is that the currency market offers traders the opportunity to earn big bucks even when starting with limited capital. In this article, we will discuss how much money you can actually make trading the Forex markets.

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Forex Trading Return On Investment

One of the biggest driving factor that compels individuals to enter into the foreign exchange trading space is the potentially high rate of return that can be realized from currency trading. The question that often arises is – What is the average return of a Forex trader? This question is very difficult to answer, because there is a wide disparity between performance returns seen amongst currency traders. This is particularly true when comparing performance returns of more experienced professional traders versus amateur traders.

Another factor that can greatly influence the overall return achieved by a Forex trader is the amount of leverage that he or she uses in their trading. These are just two considerations among many that can need to be accounted for when gauging average Forex trader returns. Having said that, we will go into more detail as to what a realistic range of return look like shortly.

But as a general guideline, the potential returns that can be realized through Forex trading can be many multiples of that seen in other traditional investments. For example, over the last 50 years or so, the US stock market has realized an average annual return of approximately 10%. The return streams are similar for the real estate asset class well. Investors of high quality government bonds have realized average annual returns of approximately 5% over the same period of time.

The point being that most traditional investments in the market will typically yield returns that range from ½% to 1% per month, or 6% to 12% per year. Those that are looking for a way to earn higher returns than the above outlined, can certainly do so within the foreign exchange markets.

As such, there is a great deal of opportunity for more aggressive traders to build wealth faster by allocating a certain portion of their overall portfolio to a potentially high-yielding return stream, such as the currency markets.

It’s important to keep in mind that currency trading is a zero-sum game. In other words, for someone to make a profit on a position, there must be an opposing party that bears that loss. As such, due to the zero sum nature of the currency markets, there will be a certain percentage of Forex market traders that are in the green, or have a positive return on investment, while a certain percentage will be in the red, or have a negative return on investment.

What’s more, the disparity between these two groups is not evenly distributed. In other words, if you look at the breakdown between the total profitable traders versus the total unprofitable traders over a period of time, such as the quarter, or a year, you will find that a small minority of traders make the majority of the profits. As a raw general estimate, the top 10 to 15% of all currency market traders account for the vast majority of the profits earned, while the other 85 to 90% of the currency market traders are generally on the losing side.

calculate-forex-returnsForex Realistic Monthly Returns

Let’s talk about some numbers as it relates to realistic returns trading Forex. The key word to note here is – realistic. Why? Because unfortunately there are a fair share of unscrupulous marketers in the foreign-exchange industry that over exaggerate or sometimes completely misrepresent trading returns. You may have come across some of these outfits in the course of your research into foreign exchange trading. The typical advertisement falls under the same type of umbrella.

For example, a system developer touts a 500% average annual return using their proprietary forex trading system. The developer will show fancy metrics around this supposed yearly return, and even illustrate the hypothetical account growth based on historical data. What you need to realize is that these types of claims are overwhelmingly deceptive.

The reason I say overwhelmingly, is because there are genuine cases from time to time where a trader or hedge fund makes an inordinate amount of returns. But these are usually one off cases that result from some black swan event, which is hardly replicable into the future. So the first thing that you need to understand is the difference between realistic and unrealistic market returns. The above example of the system developer touting his trading system clearly falls into the unrealistic category.

Okay, so what then would be considered a realistic return that can be expected from trading Forex? Well, before we go ahead and answer that let’s reflect on what types of returns some of the largest hedge funds and CTAs deliver to their investors on a yearly basis? Obviously, these hedge funds are equipped with some of the best minds in the industry and so they can offer us some insights into performance returns. And we actually have data on this set of Forex market players.

Care to guess what the typical range is in terms of forex performance returns for currency trading hedge funds? Well you might be surprised to know that the vast majority of currency trading hedge funds fail to beat the returns of the S&P 500 index. And as we noted, the average return for the S&P 500 index and other related US stock market indices is around 10%.

So then, if even the most sophisticated currency trading firms in the world are only achieving returns that are similar to the equities markets, then where does this assumption of being able to earn enormous market returns within Forex come from? Well, I would venture to guess that a lot of it has to do with information that is circulated by marketing professionals rather than market professionals.

Now to be fair, the returns that you can achieve as an individual can be quite a bit greater than that noted by the hedge fund industry. This is because most hedge funds are targeting certain risk adjusted return metrics, rather than raw return metrics. That is to say that many of their clients such as pension funds and wealthy investors are more concerned with downside risk than they are with upside profit potential.

As such these firms are constantly balancing the two to achieve their target risk-adjusted return. Individual traders on the other hand can set their own risk parameters, and can achieve higher returns if they are willing to stomach more risk within the trading program.

Now with all of this backdrop in mind, we come full circle to our original question which is what is a realistic rate of return that can be expected from currency trading? If you are an aggressive trader, you should be able to target returns between 3% to 4% per month, or 36% to 48% per year from your trading activities. If you are a conservative trader, you should be able to target returns between 1% to 2% per month, or 12% to 24% per year from your trading activities.

So there you have it, a realistic rate of return from Forex trading based on your risk profile. And it goes without saying, that these types of returns will only be achievable if you have a discernible edge that can be applied in the market on a consistent basis. Without the discernible edge, you will be part of the 85% or so of losing traders.

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Projecting Your Forex Annual Return

The key to earning consistent returns from your trading activities is to know your edge inside and out. In other words, whether you are a discretionary trader or a system trader, you need to have a solid understanding of your trading strategy metrics. This includes knowing what your average win percentage is, along with stats such as number of trades per week or month, average win amount, average loss amount, maximum drawdown, profit factor, per trade expectancy, consecutive winning trades, consecutive losing trades, and more.

There are two important reasons why it’s imperative that you understand your trade metrics. Firstly, by becoming intimately familiar with the performance metrics of your trading strategy, you will gain more confidence in the strategy.

For example, if you are currently experiencing a 20% drawdown, but you know that the maximum drawdown for your strategy is 30%, then you will find comfort in knowing that the current equity drawdown is within your maximum expected range. This can go a long way to building confidence in your strategy and executing trades even when it feels difficult to do so.

Secondly, you should have a firm grasp on your trade metrics because it will provide you insights into what you can expect to make on a per trade basis, a monthly basis, or annualized basis. For example, your trade expectancy is a very important figure that tells you what the average profit per trade will be, assuming that your strategy is a profitable one.

And so, if you know that your trade expectancy is $25 per trade, then this will allow you to extrapolate many other return related figures. So based on this if you find that on average you are executing 20 trades per month, then you will know that your average expected monthly profit should be around $500. This is calculated by multiplying your trade expectancy of $25 by the number of trades, 20, per month resulting in the $500 expected monthly profit figure.

Expanding on this, this would result in an expected yearly profit of $6000. If your account size averaged $ 15,000, then the yearly return would be 40%. Can you see the power of knowing these key metrics, and how it can help you figure out what your expected Forex trading returns is likely to be?

Again, if you want to project what you can realistically make trading your specific Forex strategy you should start by knowing the trade expectancy of your strategy. Here is the formula for calculating trade expectancy:

Trade Expectancy = (Win % x Average Win Size) – (Loss % x Average Loss Size)

Let’s run through a quick example using the formula above. Assume that your strategy has an average win percentage of 50%, and your average win amount is $400, while your average loss amount is $300. So if we plug those numbers into the trade expectancy formula above we get the following:

(.50 x $ 400) – (.50 x 300) = $50

As such, the Trade Expectancy equals $50.

forex-performance-returnsIncreasing Forex Performance Returns

Now let’s talk a little bit about trying to maximize your Forex trading returns. But, before you can really start looking into amplifying your average forex return, it’s imperative that you work on building a trading strategy that has a positive expectancy. We have discussed a bit about expectancy in the prior section, so you should start with a basic understanding of that. Additionally, you must ensure that you have performed a manual or automated back test which provides you with a reasonable assumption on the overall profitability of your trading method.

Having said that, there are ways that we can increase the returns that we realize from trading the markets. One of the best ways is by increasing your effective leverage to amplify your returns. For example, if you find that your trading strategy achieves an average annual return of 10% on an unleveraged basis, then if your goal is to target a 30% return, then you could increase your leverage by 3X to accomplish this goal.

Now this goes with an important caveat. That is to say that whatever your max drawdown is within that unleveraged trading program will also likely increase by 3X due to the increased leverage. In other words, leverage will act to amplify both your profits and your losses.

Another method that can substantially amplify Forex trading returns is, profit compounding. You may have heard of the concept of compounding interest over time. The same concept can be applied to your trading account. Compounding your Forex profits can be extremely powerful and provide for exponential growth. As an illustration, let’s assume that you have a $10,000 trading account. And you’re able to successfully achieve an average annual forex return of 25% within your trading account over the next 120 months or 10 years.

In the first scenario, you will withdraw the $2500 profits every year and use the proceeds to fund various day-to-day expenses that you may have. So then, at the end of 120 months or 10 years you will be left with the original $10,000 in your trading account. Alternatively, using the same trading account size of 10,000, and an average annual return of 25%, let’s’ assume that you will reinvest 100% of the profits.

Under this scenario, your trading account would have grown to slightly over $93,000. That’s an increase of $83,000 in your trading account. That is about 3 1/2 times the amount that you actually withdrew over the 10 year period. This is the power of compounding forex returns monthly. It is one of the best tools within a traders arsenal to achieve exponential account growth.

Return On Capital vs Return Of Capital

So far we have focused on return on capital from trading the Forex market. But return on capital from trading Forex or engaging in any type of investment is far less important than the return of your capital. That is to say that while investment returns are important, the protection of our original investment is more important. Many traders and investors fail to recognize this, or if they do, they typically underestimate the importance of this distinction.

So how can we ensure return of investment while we are engaged in achieving return on investment in Forex? The simple answer is that there are no guarantees in life, and this is particularly true when it comes to trading. But having said that, there are steps that we can take in terms of our risk management model to minimize any chances of a single trade or series of trades resulting in the demise of our trading account. Only when we begin to think in terms of how much we can lose rather than how much we can make, will we have a chance of joining the ranks of the top 10% of traders in the industry.

I’ve often said that a trader’s longevity in the currency markets is inversely correlated with their utilization of leverage. That is to say that those traders that have survived and thrived in the Forex markets over the long-term are generally those that use moderate to low amounts of leverage. These are typically your professional traders who value risk control over everything else. Conversely, those traders that use an excessive amount of leverage do not survive very long in this game. These are typically your amateur traders who value profit maximization over everything else.

Download the short printable PDF version summarizing the key points of this lesson…. Click Here To Download


As you are well aware by now, there are many variables that need to be considered when it comes to the rates of returns earned by Forex market participants. But generally speaking, successful Forex traders can earn returns in excess of 20% or 30% per year. And even these returns can be amplified further with the use of additional leverage. And so, the Forex market offers one of the best opportunities for individuals seeking a lucrative revenue stream.

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