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How Much Can I Earn With Options?
I’ve encountered a group of questions and comments from traders that tells me that traders have a certain way of viewing the world. These each represent part of the Trader’s Mindset. Today I’ll tackle one of those questions: How much can I expect to earn when using options?
I plan to reply to each question and will group them as part of the Trader Mindset Series. Taken together, they represent how one trading professional, but psychology amateur, views the psychology of how trader’s think.
Are You Asking The Right Questions?
I understand the thought process behind today’s question, but it always disturbs me. It’s just the wrong question. It would be better to ask any of these:
- How much time should I expect to devote to my options education before expecting to earn money?
- How much cash do I need before opening an options trading account?
- Do most new option traders find success? Or do most give up?
- I’ve never traded stocks or anything else. Will that make it difficult to learn to trade options?
- Should I learn to trade options or pay someone else to trade for me?
These questions demonstrate that the person who wants to become an options trader recognizes that this is not a gimmie, and that some time and effort must be expended before rewards can be expected. The commonly asked question: ‘How much can I earn?’ suggests to me that the person asking ‘knows’ success is easy, and that the only thing holding him/her back from joining the game is wondering whether it’s worthwhile.
I seldom, if ever, receive a question along these lines: ‘What does it take to succeed?’ It’s always similar to: ‘I’m going to succeed. How much can I make?’
A recent letter from Jo:
Is it possible for an ordinary person to generate income from trading options if they are able to sustain themselves for a few months without a job while they learn the ropes? How much can one hope to earn through trading options on the conservative side, and how long does it take to become an expert on average? Is it necessary to purchase special software for options trading (technical indicators and such)?
Yes. It can be done. You can generate income. However, when you ‘need’ the money for living expenses, it often places too much pressure on the investor/trader to succeed, and succeed right now. That added pressure can will lead to poor trading decisions. I know you understand. And that’s why you plan to have ‘a few months’ cash in reserve.
The good news is that you recognize that profits do not begin from day one. The not so good news is that you are asking whether it’s reasonable to learn enough to make a living – during those few months. The first answer is that every student has a different ability to learn and some just have a better aptitude and can understand how options work more quickly than others. So yes, it is possible to produce earnings within that time slot. But not everyone can move that quickly.
To succeed, you must understand what you are trading, and that means taking time to learn options basics. You should have no trouble understanding that options are different from other trading vehicles.
But I must warn you that some traders never get the special characteristics of options and mistakenly believe that they can be traded as if they were stocks. Options are different. Not difficult to understand, but they are different.
If you are brand new to trading, that means there is even more to learn, including basic things such as how to enter an order, how to use your broker’s trading platform, the different order types (market, limit, stop etc.). Someone with stock trading experience is already familiar with those items.
In addition to how options work, the trader must possess (or be able to develop) certain personality traits.
Jo, if you are willing to learn how options work, and if you believe you can demonstrate the traits listed below, then you may very well be able to succeed. No guarantees.
I do want to mention one important point. If you expect to make money (income) by buying options and then selling them for profits, let me tell you that this is an almost impossible path. When earning an income stream, the method of choice is to adopt specific option selling strategies – all with limited risk.
Anyone can trade. Anyone can enter the arena and place his/her bets. But to have a chance of making money on a consistent basis, the trader must have:
- The ability to recognize risk
- How much money is at stake for a given trade
- The probability of losing money
- Patience to learn before trading
- Patience to practice what you have learned, usually in a paper-trading account
- Ability to control your feelings.
- Fear leads to panic, which results in terrible decision making
- Greed has you taking too much risk for too little reward
- Pride has you refusing to recognize that you made a bad trade and must accept a loss
- Recognize that a few successful trades does not make you a star trader
- Understanding that you cannot make money every month
- Understanding that low probability events do occur – just as statistically predicted
- Recognize that a 90% chance of winning means there is a very real 10% chance of losing
- Accept the fact that you cannot make much money when you only have a small sum to invest
- Knowledge that luck plays a role, and your job is to manage risk when luck is bad
If you are not a member yet, you can join our forum discussions for answers to all your options questions.
Now, to your Question: How much can you make?
If you trade high risk strategies, you have a chance to earn a large sum (10+% per month), but that comes with a very high probability of going broke. High rewards come with high risk.
If you are more conservative (as you are), you may try to earn ‘only 2-3%’ per month. That’s a very good return. Most professional traders cannot earn that much. Brett Steenbarger once told me that the best professional traders earn ‘in the low (emphasis on low) double digits’ per year. That sounds right to me.
Going by that, earning 1% per month is a realistic target.
However, to give you a better answer, I must ask: How much cash do you have for trading? This is a key question that most beginners ignore. They assume they can earn the same amount of money, no matter how much cash is in the account. This is a huge fallacy. Why? When you begin with a small sum, the risk of ruin, or the probability of going broke, is very large. When you have extra cash, you can withstand a string of small losses and still stay in the game.
Also: When you have a small account, if you have outstanding success and double the account in one year, the total dollars earned is small. It does take money to make money.
Thus, I repeat, how much cash do you have? If you have $10,000 and can do an excellent job and earn 2% every month, that’s a grand total of $200/month. That will not take you very far. I assume you would want to earn a minimum of 10 to 20x that amount. To do that you would have to take big gambles. There’s a chance that you could have a nice win streak and quadruple your money in a year or so. But the most likely outcome of seeking such huge returns is the loss of all your capital.
Yes Jo, you can do it. If you have the patience. If you take the time to learn and are not rushed into trading. And if you have sufficient capital to give you a realistic chance. If you lack the capital, you can still learn and trade part time. If you grow the account, if you save more cash over the years, if you show the talent and discipline, you may eventually have enough to try trading full time.
I wish I could offer better encouragement, but trading is not a business for everyone. Being a successful investor can be very rewarding over the years. Trading full time is different.
Becoming an Expert
On average, far more traders go broke than become experts. Very few become experts. This question depicts another trader mindset that I believe demonstrates no conception of reality. How long does it take to become an expert? A lifetime.
Experts are few and far between – assuming that by ‘expert’ you are referring to someone who knows how to make money and then actually makes it and keep it. With that definition, few are experts.
Trading is a game in which you are continually learning. And that’s important because markets change over time and if you still do whatever it is that you are an expert at doing, eventually it will no longer work and you will cease being an expert.
It is not necessary to become an expert. You do not have to earn more than the next guy. In my opinion, you can do well (earn decent income) if:
- You have the ability to understand how options work. This is not difficult, but some people just don’t have the head for it
- Trade with discipline and overcome emotions. Fear and greed are harmful. It takes a while to overcome those and trade with confidence
- You take the time to practice. That means using a paper-trading account with fake money. But to gain useful experience, you must believe it is real money and trade accordingly
- If you don’t have to win right now, you need the time/patience to learn. I don’t know if a few months are enough. That depends on you
No. I have NEVER used technical indicators. I know that some traders are very skilled in doing just that. But they do not learn overnight, and anyone who tells you it’s easy to learn is not telling the truth.
I use no trading software, other than risk management software supplied by my broker.
I suggest getting started by reading or attending some free seminars. If you like what you read and hear, if you understand what you see, then go for it. Plan to spend some time in the education mode. Especially if you set a few months as the time limit. There’s no time to waste. I wish you good trading.
Want to see how we handle risk?
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Human Nature and Option Risk
Traders may tend to think of risk in purely mathematical terms. It can be quantified by analysis and by a deep understanding of probability. But there is more to this than just the math, and for options traders, some of the intangible considerations might have more impact on trading decisions than the formulas.
By Michael C. Thomsett, 9 hours ago
Discount Stock Shopping In High Volatility Markets
The COVID-19 pandemic has rocked markets over the past month. The fear of the virus, the fear of the impact on global economics from the mitigation taken on by governments, and, finally, the fear of “what’s next” has propelled the VIX.
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The Fallacy of Market Timing
The headlines say it all. “The worst day since the financial crisis”. “Markets in turmoil”. And today was “Stock markets post best day in years as governments fight coronavirus with cash”. Could anyone predict the crash? And can anyone tell us where we are headed next week/month/year? Is it possible to call the tops and the bottoms?
By Kim, March 24
Long Option Risks
Among all options, the most easily calculated payoffs are tho se for long options. But there remains a great misunderstanding, even among experienced option traders. This must be clarified before moving forward. The misunderstanding is often seen expressed online and in the literature: “75% of long options expire worthless.”
By Michael C. Thomsett, March 20
Option Payoff Probability
Many options analyses focus on profit, loss and breakeven. These show what occurs on expiration day, assuming the option remains open to that point. But this is not realistic. Most options are closed or exercised before expiration, is calculation of how probable a payoff is going to be, how likely the loss, or the exact neutral outcome (breakeven), are all unrealistic.
By Michael C. Thomsett, March 6
Value of Trend Following During Periods of Market Volatility
Our trend following system looks at two things when planning a position. The first piece is obviously the direction of the trend. Does the system signal up or down? The second piece of a position plan is how much risk we are going to take.
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Intrinsic vs. Extrinsic Value
A lot is written about intrinsic value, but how does it work and what does it mean? The fact is, intrinsic value is an estimate of how future premium levels will change. It is base don current volatility and a set of assumptions. In dividing premium into its component parts, most descriptions deal with intrinsic and time value.
By Michael C. Thomsett, February 23
McDonald’s, Not A Shelter in the Coming Storm
The amount of time and effort that investors spend assessing the risks versus the potential returns of their portfolio should shift as the economy and markets cycle over time. For example, when an economic recovery finally breaks the grip of a recession, and asset prices and valuations have fallen to average or below-average levels, price and economic risks are greatly diminished.
By Michael Lebowitz, February 19
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Risk Depends On Your Time Horizon
Those who are nearing retirement and those who have recently retired represent the majority of my financial planning and investment advisory client base. One of the most common mistakes I hear from these types of individuals is something similar to “I no longer have enough time for the market to come back.”
By Jesse, February 18
Estimating Gamma for Calls or Puts
In a recent article, the details for estimate Delta were explained. This article deals with estimates of Gamma, which is denoted with the Greek symbol Γ . This calculation measures the rate of change in Delta and is summarized in percentage form. It is alternatively called the option’s curvature.
Day Trader Salary – Learn How Much Top Traders Earn
You’ve heard the stories; you’ve heard of the growing popularity of forex; you’ve done your research and are now ready to become a forex trader.
What appealed to you in the first place are probably the many advantages of forex trading, including:
- No commissions/exchange fees or government fees
- Low transaction costs
- Works 24-hours, 5 days a week
- You can use leverage to enhance profits
- High liquidity
- Not controlled by government/banks
Those sure are some attractive aspects of forex trading and have drawn a large number of new traders over the past years. All of the above-mentioned characteristics and more contributed to the forex market becoming the largest and most liquid market in the world with an average daily volume of trading exceeding $5 trillion.
The size and depth of the forex exchange market is what makes it an ideal trading market.
Today, we want to specifically talk about day traders and try to answer essential day trading questions including what day traders do, how to get started with day trading and, of course, the most important question of them all – How much money can I earn from day trading?
Every trader is in it for the money. The question is how do you become an efficient day trader? And how can you benefit from the market?
The answer to these questions is simple: get a proper trading education!
We can help with that.
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Before talking about day trading, how to become a day trader and what is a day trader’s salary , we want to talk about Trading Education and how we help beginner traders on their new and thrilling trading adventure.
Trading Education offers a beginner’s guide to forex trading to the traders of tomorrow. Our course is absolutely free and is easily accessible once you apply on our official website: “The Ultimate Guide To Forex Trading ”.
Why is it free?
It is sponsored by our partner brokers who want to make sure there are more well-educated traders out there. Traders who easily quit after the first run, ending in an inevitable loss, are usually those who lack preparation or those who think that forex is just a quick-buck-scheme. Well, it’s not. It requires effort, knowledge and the right mindset.
We want to make sure traders stick around for the long run and enjoy the many benefits of the forex market. For them to do so, they need to be well-educated.
Thus, it becomes a win-win situation for both sides.
Let’s go back to day-trading and talking a little bit more about the income of a day trader.
What is Day Trading?
First thing you have to know about day traders is that they make money by buying commodities, stock or in our case currencies (or any other tradable securities) and hold them for a short period of time (from a few minutes to several hours) before once again selling them off.
The goal is to make a profit from short-term price fluctuations. To do so, day traders enter and exit positions throughout the day, rarely holding positions overnight.
Basically, forex day trading is buying/selling instruments only within the same trading day.
To be a successful forex day trader, you need to have a solid amount of capital and a great deal of knowledge. That’s not news, though. It’s something you should be very well aware of if you are interested in becoming an efficient trader.
One more thing you should always keep in mind is the risk.
Having a decent amount of capital and a good amount of knowledge doesn’t necessarily mean that you will succeed. Sometimes prices fluctuate enormously during the day and you might end up losing a lot, especially if you forget to use a stop-loss.
One of the best professional traders, David Green, for instance, always advises against risking more than 1% on a trade, depending on the size of your portfolio. If you stick to the 1% risk strategy, set up your stop-loss and profit taking points, you have the key to managing your risk and limiting your losses.
Day traders use leverage to get more financial power and larger profit possibilities. Forex day traders leverage their capital in order to obtain an asset and then sell it when the price of the asset changes in a positive direction.
Day traders are usually looking for a day trading currency that is highly liquid.
Some of the major currency pairs that traders consider the best choice (since they have the highest trading volume) are EUR/USD currency pair. The reason why it’s so advisable to focus on this particular currency pair is that its price fluctuates a lot and it usually has the best trading conditions, especially for beginners.
Though, as we already know, using leverage is very risky and beginners should be very cautious of using it or, in fact, not attempt this strategy at all.
How to start Day Trading?
The first thing we want to say is that day trading is definitely not a get-rich-quick scheme and if you are in it for a quick buck you better step back.
Everyone agrees that day trading is a very risky activity and should be approached only if one has the knowledge and a clear understanding of all those risks.
Let’s talk about what are the necessary qualities a successful day trader should have:
Capital is the most important thing to a trader. The way a trader operates it (how much you have, how you distribute it, etc.) will basically determine his final income.
Forex day trading doesn’t have a legal minimum, meaning you can start with as much as $500. However, if your goal is to produce a good monthly income, it’s advisable to start with $5,000.
Day traders are looking for more return, in comparison to the regular sizes that traders usually achieve. Therefore, a large amount of capital with a suitable risk/reward ratio is definitely what day traders need.
Market knowledge and experience
We’ve already mentioned it but let’s talk about it again. If you want to become a successful day trader, you must have a complete knowledge and understanding of how the market works and be able to keep an eye on and quickly analyse both fundamental and technical indicators.
Ultimately, practice is key to day trading. Practice your strategy.
Some experts or websites will probably advise you to start with a demo account before risking your money. We, at Trading Education, however, think that this might not be the best idea. A demo account can’t possibly emulate the true emotions and pressure you will feel if trading with your real money. Thus, it will you will never be trulyprepared for the high-risk forex trading environment.
Discipline and a Well-Formulated Strategy
In day trading, discipline is everything.
You have to be aware of all price movements and not make any hasty trading decisions. Monitoring prices requires a lot of discipline.
In addition to discipline, you have to adopt one (or more) strategies that work for you and will maximise your profits (and naturally minimise your losses.)
Market conditions change every day. Therefore, a day trader needs to adjust their techniques and strategies accordingly. A creative mind is also something a day trader should have in order to succeed in trading forex.
Important to remember:
Day traders risk their own capital every single day to make the profits they strive for. Day traders need to be focused, flexible and knowledgeable. In addition, they need to be using the right broker, do a lot of research and last but not least, log their trades and keep a trading journal.
Traders need to weigh in all these aspects and decide for themselves if they are up for the task. Day trading surely is no joke or a way for them to get rich overnight.
Let’s talk about salaries and how much can a day trader make.
Most day traders are not particularly keen on disclosing their trading results to everyone out there (except the maybe tax authorities if outside the UK), therefore an exact answer to how much money an average day trader makes is kind of difficult to answer.
It’s impossible to give an exact answer because the results vary depending on the strategies a day trader uses, the risk management techniques and, of course, mostly on the starting capital each individual trader works with.
For example, if you start day trading with $500, your earning potential would be much less than someone else who will start day trading with $50,000.
An article by forex day trader Cory Mitchell says that if on average, you make around 100 trades per month (that’s approximately 5 trades per day/20 days per month) and your starting capital is $30,000, you can make around $3,750. Of course, you do have to pay commissions and other fees.
In this example, you are likely to end up with a net profit of $2,750 once you deduct your commission costs.
In the end, since you started with $30,000, your monthly return will be over 9%. Reinvesting in those profits will bring you even higher yearly profits.
The best thing about everything – you don’t even have to get suited up for work.
However, keep in mind that as good as those results sound, everything is too subjective and depending on the current market conditions. We can’t simply come up with a list of things you have to do and the amount of money you have to start with or how many trades per day/week you have to make to win a certain amount of money.
Keep in mind that forex is a dynamic marketplace and things can change in a blink of an eye. Nothing and absolutely no one can guarantee that you will be the trading millionaire you strive to be.
There are myths and then there is the reality.
Some studies point out that only around 1% of day traders actually make a profit at the end of the year.
Ultimately, this is not news to us. The percentage of traders who lose money is higher than the percentage of those who make money. The whole idea is to make more profits than losses, not to completely eliminate losses.
It is quite easy to lose money day trading (the reason why we have been talking about the importance of trading education throughout this whole article.)
How much time you put into trading is also important. If you want your income to be consistent (meaning you have a good trading plan and the resources, such as time and capital, to implement it), it will take you around one year or so, if you are willing to dedicate yourself full-time to day trading. If you plan on practising day trading only part-time, it might take you a number of years to develop a consistent strategy and end up with satisfying and steady returns.
Ultimately, how often you trade is determined by your trading strategy. If your strategy is making, let’s say, 70% winning trades. Skipping day trading many times will result in skipping winning trades (70%) than the losing trades (30%). Try to find the balance.
One more thing that we should consider is that day traders can also incur relatively high fees from the transaction costs.
Last but not least, another important factor that can certainly influence your earnings potential, as well as your future career is whether you choose to trade independently or for an institution/band or a hedge fund. Of course, if you work for an institution, you are not technically risking your own money and they are way better capitalised. Not just that but big financial institutions have access to beneficial information and various tools.
Day traders have to pick the right broker, utilise a successful strategy and a good risk management plan. All these things can affect the final income results.
Future career opportunities and Bottom Line
You have to think about career longevity and how determined you are to turn day trading into your future career.
However, it would be somehow wrong to think of day trading as a hobby or activity that you can just do every once in a while.
If you want to succeed, you have to be serious about it.
Yes, predicting your average rate of return over a specific period of time maybe somehow difficult; there are also no guarantees that you will make money.
However, there are strategies and techniques you can study that will minimise your losses and help you progress.
We want to yet again emphasise on how important it is to learn discipline , patience and risk management techniques if you want to become a successful day trader.
Many people say that forex day trading is for those who have great experience and who should consider doing it only full-time.
Others claim that day trading is one of the best ways to make money in no time and it prevails over any other type of trading.
We are not saying one is right and the other one is wrong.
Whatever the case may be, day trading has its pros and cons and there’s one thing we can agree on – it’s only effective for those who are eager to learn and commit a lot in order to end up succeeding.
Day trading will put to test your stress, emotional intelligence, discipline, willingness to improve, confidence and skills.
If you are ready and understand the risks, we at Trading Education can help you achieve your goals.
“ The Ultimate Guide to Forex Trading ” course application is now open and we welcome future forex traders aboard.
For more information, take a look at our official website.
How Much Money Can You Make from Forex Trading?
Last Updated on March 26, 2020
I’m sure you want to know how much money can you make from forex trading, right?
You’ve heard of traders making millions in the financial markets.
But here’s the thing:
You can’t compare yourself to them.
Because you’ve got different account size, risk appetite, risk management, trading strategy, and etc.
If you do so, it’s like comparing an apple with an orange (it’s silly).
That’s why I’ve written today’s post to explain how much money can you make from forex trading — with objective measures.
No more second guesses. No more ridiculous projections. No more illusions.
Just statistics, numbers, and the cold hard truth.
Then let’s begin…
(Or if you prefer, you can watch this training below…)
The most important metric in your trading career
Here’s the thing:
You can have a 1 to 2 risk to reward on your trades. But if you only win 20% of the time, you will be a consistent loser.
Now obviously your risk to reward isn’t the answer. Then what is? Your win rate?
Perhaps you have a 90% win rate. But if you lose $0.95 for every dollar you risk, you will also be a consistent loser.
So, what’s the solution?
Clearly, your risk to reward and win rate are meaningless on its own.
Well, the secret is this…
…you must combine both your win rate and risk to reward to determine your profitability in the long run.
And this is known as your expectancy.
Your expectancy will give you an expected return on every dollar you risk.
Mathematically it can be expressed as:
E= [1+ (W/L)] x P – 1
W means the size of your average wins
L means the size of your average loss
P means winning rate
Here’s an example:
You have made 10 trades. 6 were winning trades and 4 were losing trades. That means your percentage win ratio is 6/10 or 60%. If your six trades brought you a profit of $3,000, then your average win is $3,000/6 = $500. If your losses were only $1,600, then your average loss is $1,600/4 = $400.
Next, apply these figures to the expectancy formula:
E= [1+ (500/400)] x 0.6 – 1 = 0.35 or 35%.
In this example, the expectancy of your trading strategy is 35% (a positive expectancy). This means your trading strategy will return 35 cents for every dollar traded over the long term.
Why you must play more to WIN more
Have you realized this?
The majority of casinos operate 24 hours a day, 365 days a year. Why?
Because the more they play, the more they make — and it’s the same for trading.
You’re might wonder:
“How does this relate to trading?”
This means the frequency of your trades matter. The more trades you put on, the more money you’ll make (albeit having a positive expectancy).
You have a forex trading strategy that wins 70% of the time, with an average of 1 to 3 risk to reward.
But here’s the thing…
…it only has 2 trading signals a year.
How much money can you make from this forex trading strategy?
Not a lot, right? Heck, you might even lose in that year since there’s a 9% chance of losing two trades in a row.
Can you see how important this is?
The frequency of your trades is important but it’s not enough to determine how much money you can make in forex trading.
There are still a few more factors that play a major role. Read on…
Why money is the lifeblood of your Forex trading business
You’ve probably heard of stories where a trader took a small account and trade it into millions within a short while.
But what you don’t hear is that for every trader that attempts it, thousands of other traders blow up their account.
Let’s not treat trading as get a rich quick scheme. Instead, treat it as a business you’re looking to grow it steadily over time.
Now, let’s say you can generate 20% a year (on average).
With a $1000 account, you’re looking at an average of $200 per year.
On a $1m account, you’re looking at an average of $200,000 per year.
On a $10m account, you’re looking at an average of $2,000,000 per year.
This is the same strategy, same risk management, and same trader.
The only difference is the capital of your trading account.
Can you see my point?
That’s not to say you can only make 20% a year because, for a day or swing traders, the percentage could be higher (as you have more trading opportunities).
But no matter what strategy or system you’re using…
…the bottom line is you need money to make money in this business, period.
Why your bet size determines how much you can make
You’ve probably heard this before…
“The bigger you risk, the higher your returns.”
So is this true?
Well, yes and no.
Here’s why I said yes…
Let’s say your trading strategy has a positive expectancy and generates a return of 20R per year. Also, you have a decent size $100,000 trading account.
So, how much can you make from your trading?
Well, this depends on how much you’re risking per trade.
If you risk $1000, then you can make an average of $20,000 per year.
If you risk $3000, then you can make an average of $60,000 per year.
If you risk $5000, then you can make an average of $100,000 per year.
This is the same strategy, same account size, and same trader.
The only difference is your bet size (or risk per trade). The bigger you risk, the higher your returns.
Here’s why I said no…
If your bet size is too large, the risk of ruin becomes a possibility. This means you have a higher risk of blowing up your trading account — and it reduces your expected value.
If you want to understand the math behind it, go read this risk management article by Ed Seykota.
Do you withdraw or compound your returns?
If you make an average of 20% a year with a $10,000 account, after 20 years it will be worth… $383,376.00.
But what if you withdraw 50% of your profits each year?
This means you will make an average of 10% a year and after 20 years your account will be worth… $67,275.00.
Now clearly, compounding your returns will generate the highest return.
But whether it’s feasible or not depends on how you manage your trading business.
If you’re a day-trader, then chances are trading is your only source of income. You have to withdraw from your account to meet your living needs.
But if you have a full-time job and you’re trading on the sides, then you don’t have to make any withdrawals and can compound the returns in your account.
There’s no right or wrong to this. Ultimately, you must know what you want out of your trading business — and understand how withdrawals will affect your returns over time.
So, how much money can you make from Forex Trading?
You’ve learned the key factors that determine how much money can you make from forex trading.
Next, let’s see how to use this knowledge and calculate your potential earnings.
Here’s an example:
Trading expectancy – 0.2 (or 20%)
Trading frequency – 200 trades per year
Account size – $10,000
Once you know your numbers, plug and play them into this formula…
Trading expectancy * Trade frequency * Bet size
0.2 * 200 * $100 = $4000
This means you can expect to make an average of $4000 a year (with the above metrics).
Now if you want to convert to percentage terms, then use this modified formula…
[Trading expectancy * Trade frequency * Bet size] / Account size
[0.2 * 200 * $100]/$10,000 = 40%
This means you can expect to make an average of 40% a year.
How much do you need to get started on Forex Trading?
While there are brokers which don’t need you to deposit a minimum amount to get started with Forex trading…
I usually recommend newbies to start with at least $500.
This is how the math works out (on most brokers):
- Minimum size is 1 micro-lot: 1,000 units
- Transaction cost: Average 3 pips (which is about 30 cents)
Now let’s take for example:
You want to go long on 1,000 units of EUR/USD.
And your trade requires a stop loss of 50 pips.
Since each pip is worth 10 cents, this equates to a risk of $5.
After adding transaction cost, your total risk is $5 + 30 cents = $5.30
(Notice that the transaction cost also takes up a fraction of your risk per trade.)
Now imagine if you start with only $100.
Your risk per trade easily becomes more than 5%!
So by starting with at least $500…
You’ll keep your risk per trade constant – at 1 to 2% each.
Then let’s move on…
Bonus: How to massively increase your returns using the 9 th wonder of the world
You’ve learned the formula to calculate how much you can earn from forex trading.
Now, you’ll learn a simple tip to help you massively increase your earnings without increasing your risk.
I call it the 9 th wonder of the world.
Here’s how it works…
Instead of only compounding your returns over time, you also add funds to your trading account regularly — and compound it.
Let me prove it to you…
Here’s an example:
If you have a $10,000 account and you earn an average of 20% a year.
After 20 years, you have… $383,376.
What but if you add funds to your account every year?
If you have a $10,000 account earning an average of 20% a year, and you add $5000 to your account every year.
After 20 years, you have… $1,503,504.
Now we’re talking!
Can you see how powerful this is?
So, how much money can you make from forex trading?
Well, there’s no one factor that determines how much money you can make in forex trading.
Instead, you must look at these 5 metrics:
- Trading expectancy
- Trading frequency
- Account size
- Bet size
Then apply this formula… Trading expectancy * Trade frequency * Bet size
And you’ll have an objective measure of how much money you can make in forex trading.
Now, here’s my question for you…
How much do you expect to make from forex trading?
Leave a comment below and let me know.
It took me 4 years to understand this over and over again. Coz the market and charts somewhat deceiving…
Better late than never!
Can I earn big money using small capital
I have not met a genuine trader telling the truth for free ….u r inspiring many newbies in trading…thank u God bless u Rayner
Thank you for this wonderful article. In fact, I figured out myself these 5 metrics in the past few months, but you have put it in a formula. That’s really cool. Thanks Rayner.
You’re welcome Peter!
Excellent and informative article Rayner. Thanks for sharing this knowledge.
The pleasure is mine, Tim
Great article! I remember when starting, i calculated to be a millionaire within 2 to 3 years… Hehe, well i still have a bit to go after X years of trading. I must say that your longer time frame approach really has helped me improving my results, since i have adopted your style of Forex trading as much as possible. Brgds and thx.
Hi Rayner from the time following your article which is “How to be a profitable Trader Within the next 180 Days “from the bigning of thise month july 2020 i made 16 trades which 11 winning and 5 lossing trades .and with tis article you wrote the winnig expectancy formula: i am doing well which is E = 0.17 or 17%.
Again Rayner i thanks you for you give me your exprence and trading formula even i will update you as my promise when the 180 day trade experment proformance after i finsh them.
Awesome to hear that! Keep me updated of your progress bud.
Wonderful article, thank you.
I just want to point out that, if set the size of the bet as a percentage of your account ( let say 2%) instead of fixed bet size, the result would be very much different.
Yes, I would agree.
Most of the time I trade in demo account and still not profitable, every 10 trades 8 lost and 2 win.
Presently my broker is FxPro.
This post here will help…
Nice article again Raynor. Thanks for sharing !!
You’re welcome Marzi
Great article. You are right about the number of trades will help to increase total profitability, but traders must be mindful that every transaction costs money in spreads and slippages. A retail trader that make 4 trades positions a day, loses about US$100 to the brokers in spreads. So the expectancy calculation must include all those cost.
That’s a great point, Steven.
Won’t the “size of average wins” and “size of average loss” in the Expectancy formula take care of spreads and slippages ie assuming you are using the net amount for wins and losses ?
Yes if you do so.
Another excellent article, thanks Rayner!
I average 1 to 10 trades per day and use a risk of ruin calculator to compute my position size once weekly. My goal is to slowly increase my bet size and eventually make 1000k per day.
Nice, keep on going!
Hi Peter. Curious if you have reached your goal of 1k per day yet?
Another excellent and very informative article. Thanks you so much Rayner
The pleasure is mine buddy
Rayner, once gain Than You for the great article.
I have been looking at Risk:Reward as the means to being profitable.
I don’t trade that much my objective is $700.00 per month.
I will take this new information to help me reach that goal.
I can’t keep the money with my broker. I will withdraw it monthly if there is a profit regardingless of how much. My inner evil will grow (greedy and superhero gut) and ruin the account.
Basically i feel i can only trade the money i am willing to lose, instead of growing it. So i prefer to deposit more money into the trading account when i am afforded to do so.
Yes. Totally agreed with the number of trades will increase the probability of profit if your winning rate is greater than losing. Eventually the losing trades will be covered by winning trades. But, sometime it will be a chance of drawdown and happen the opposite way.
Hence, remember to trade at the most crowdest zone..
Thanks for sharing YJ. Hope you found something that works out for you.
I was confused by the RRR measurement until I know how to use “expectancy” to evalute my trading.
And in this article you have put everything together with a formula. Great Job! Thanks Rayner.
Awesome to hear that, O!
Always enjoy reading your article.. simple English great explanations and illustrations on how and why. This really helps for a new learner. You answer many of my questions, thank you for the sharing.
I’m glad to hear that Lee.
Don’t hesitate to let me know if you’ve got any questions, I’ll be glad to help.
Top Question and at the front of the queue with any new Trader.
The way I see it is im unlikely to have the kind of account size to earn a living from trading around my current job. BUT heres the thing, its about consistency! If you can become consistently profitable with a small account, you can be consistent with a larger account. Ok you might not have that money lying around but dont think about that, its not important. Whatever account size you have doesnt matter. Think consistency and nothing else.
Heres my point,
If you can trade consistently with a small account you can scale it up. ok get a journal and track record and approach a proprietary trading firm. Do for them what you do with your account and they will throw money at you and give you half of what you make them.
Consistently Profitable. If I had a trader working for me who could make say 10% profit month on month I would employ them and the more I gave them to trade the more Id make.
Rayner good post again bud.
I hope this take on it helps out.
I totally agree.
For Trading expectancy * Trade frequency * Bet size
How to calculate if the bet size (which I assume is an amount) is not fixed, say 1% of funds in account that fluctuates from trade to trade?
Just round it to the nearest number to make it easy on you.
Great post Rayner! When I first learned about expectancy it was like a light switch that went off. All of a sudden everything made sense to me, and I had much more confidence in my trading system. It does take time and practice to figure this out, but it’s a great area to focus on. Thanks again for your trading insights!
You’re welcome, Jay.
Glad to hear it’s helping. cheers bud
Hi Rayner nice to hear from you . I will make tonnes of money in Forex trading. for the next one year at least million dollars . I am not kidding. I have to make . if possible please guide me.
May be, it Will be worth if there social media like Telegram or others, so any viewers here can share intensively, it’s because need to enter email and etc when we want to comment this site here, need more times less efficienty and not effective i mean.and because i,ve any question also .
I don’t have telegram.
fundamental is important wereas technical is useless
Hello sir, 20% in a year …….cannot we make more …my dreams is to be professional forex trader but 20% in a year not satisfy for me …because if we keep money in bank we get return 10.5% . Without any risk…please make it clear ….I expected 10% per month with low risk…
Then trading is not for you…
Hello there you said about 40 percent a year i was aiming for 5 to 6% a month 60 to 72 a year is that possible? And am not talking about a newbie am talking if i had abount 3 years experience to make 60 to 72 percent and if i read about 20 books and a hundred plus videos and determination patience and all am going to put effort into it
Hi , I think 20% per year is okay especially if you are a new bie to trading
If you don’t have well tested strategy and good risk management and you are in a learning curve then I think the advice is to go with 20 %,
Why? So that you can keep on learning and trading at the same time.
You see, I have account which started with a balance of $50,000 two weeks ago, and now I am seating with $100,000 which I made in 2 weeks.
If you don’t have trading schedule, good strategy, good risk management, a mentor, and lots of experience under your belt, then I prefer you go with the 20% per year from Rayner.
My advice is don’t rush for the money yet, go for proper education and mentor ship first .Build your experience for a couple of years.
Steven aka Sniper
Hi Steven! Care to mentor??
Good Idea brother
lesson first and slow movement towards a settled goal….
Plus they say..
Learn first then earn later..
big advice to us beginners so great..
Is being long a currency like being long a stock position… or does it expire after a period of time? is being short like being long a stock position or an option position ??
For spot forex, you can stay long for “unlimited” amount of time as long you have enough margin to meet the requirements.
What is a reasonable expectancy though?
That is the question that I can’t find a proper answer to. And by reasonable I mean what do competent traders make?
I know that the answer will be a range but I’d love to know what that range is.
Aside from the obvious (how much money people can expect to make) it is also really important for the psychology of expectation management. If you’re making 20% per year and this is what most good traders make then you know you are doing something right. If most good traders make 100% then at 20% you are doing okay but not losing money – you know that you could find a better strategy.
There’s really no clear answer to this.
I would say making 20% a year consistently and risking 1% each trade would rank you as one of the best out there.
Great article Rayner, You make it so simple that even a layman can understand the complex term “forex trading”. I like your examples. Sometimes i laugh a little bit on those examples. Brilliant knowledge you have. Kudos
forex is like formula 1, crypto seems safer lol
Great post. People should understand that and be more realistic. Maybe it is an influence from the “make money fast” sites and programs.
i’m a successful trader,I’ve been trading for 3 years now,i’m mostly 70%+ accurate on all the trades that i take,i only target moves with 1:5 to 1:20 risk:reward on the market.i risk 5% or lesser on every trade and i usually grow my account by 100-250% monthly.so what i think is that how much risk you should take should be based on the lowest performance you have on the Forex market,not according to these trading rules people write about online because i call that slow death if you’re a loser and slowest growth if you’re winning which makes you end up not successful but living the same kind of life as a person working 9-5 job.and honestly speaking Forex is the hardest thing compared to any job you’ll find out there.
Thank you for sharing.
Hi Tshilidzi. You mentioned that “Forex is the hardest thing compared to any job you’ll find out there”. Could you enlighten me and elaborate. Thanks.
The free signals in your telegram messages shows the contrary. risk:reward
I don’t have any telegram.
I read your “How Much Money Can You Make from Forex Trading?” article, That has affected my mind very much. My knowledge store has further mitigated.
Recently, I read a “Forex Trading In India Legal” article, That is similar to what you write “How Much Money Can You Make from Forex Trading?” matter. I liked it very much.
I was in this trading for 2 years since 2020. I wasn’t successful. I lost everything I invested. But I believe that I can recover all that and for that I need your help to restart what I shut down almost 2 years ago. I am still hopeful for sucessful trading ahead. Thank you for this article.
Really its a very nice info. Thank you very much for this.
My sincere congratulations. Great content here, you have a nice writing style, and certainly wonderful that you are so well versed in this niche. I will definitely follow your work further.
I appreciate it, Rozina. cheers
Hi man, I’ve been your following your posts lately. I am just curious, how many traders do you do per day on average? I understand based on your post that you are a high-frequency trader since you always emphasize massive number of traders that a trader should do to win more.
I’m not a high-frequency trader. I’m a swing and position trader taking about 10-20 trades a month.
On that 10 swing trades monthly… do u risk 1% of capital per trade? And aim 2 or even 3? Thnaks
I risk 1% per trade.
Do you trade for other’s?
That was helpful. 20% sounds pretty reasonable. I’ve regularly made that (and I’m a little new) – but I’ve also had those trades that undid everything I made because I didn’t set my risk limit properly. I’ll call those “educational expenses”
So, when you say you risk $1000 per trade, for example, is that the place you’ll set the stop loss? Or is that something different? I definitely need to get better at limiting my risk so I stay positive rather than having to build back to even over and over again
It means the loss of one trade will not be more than $1000.
This post will help with your risk management and position sizing
Hi Rayner, good article. But isnt it that “playing more to win more” is not quite applicable in Forex? Especially when you mentioned that you need to combine the favorable risk-reward ration of at least 1:2 and a good winning rate. Or perhaps you are referring this article to day traders or scalpers who executes plenty of trades a day? In my experience, there are less “quality” set-ups that can give high probability or at least qualify the risk-reward requirement, you need to wait and wait even longer, so with that, you cannot expect to have 100 trades in a month or not even 50, unless you will gamble all levels in the markets (which doesnt make any sense).
Pls enlighten. Or maybe you can specify what trading style are you referring to. Because for DAILY CHART TRADERS, trading a lot like 100 or 50 trades per month is very impossible. Unless you are a gambler or just randomly put trades with no edge at all. Thanks buddy!
…and by the way you mentioned about CASINO’s why they operate 24/7. It is very possible because Casino’s do not need to wait for their EDGE to appear. Their edge is already in place, like you are seeing a lot of confluent pin-bars or engulfing bars. But in Forex, you need to wait for your edge, and by the way, that edge should meet your favorable risk-reward ratio as well. So I dont really think you can trade a lot to win a lot. I dont even think you can do 50 trades in month or even in a quarter as Daily Chart swing trader, unless you are a scalper.
Not everyone trades off the daily timeframe.
The point I’m trying to make is you need to trade more in a shorter period of time if you want to see consistency quickly.
Or else, it’ll take months or even years if you have a low number of trades.
That’s why most full-time traders don’t trade off the daily timeframe because it takes too long for the law of large number to work in your favor.
For those trading to grow their wealth, then that’s another thing altogether.
20% a year?
With 1000 u got 200+ = 1200 at the end of year… this is far from true …. all of this guys should do backtesting their thing and see results after year…. its not 20% with 1:2 and 45% win rate
Its much much higher….. just be consistent
I want to explore Forex trade.
A 20% success rate means the person isnt following the rules.
I enter 10 trades and I excute and profit 10 trades. I only enter
Into a trade where I have calculated 90% probability of making money.
Remember as soon as you enter your trade you have 90% probability .( once you confirmed All tests )
Every second /min /hour you stay in trade your probability heads down.
I just started trading live with real money. Into my second week now I am making $1000 day on a $50,000 account.
For me its a game. I follow all the rules. I test and confirm about 10 rules before each execution.
I suggest reading up on how crocodiles in wild target prey. That same mentality is exactly how to bag each profit target in forex. Watch, watch,watch then launch.
Thank you for sharing bud.
Would you be willing to share your 10 rules of Forex trading?
Well i expect to make atleast 50% of my account size anually. That’s cool for me.
Do you have a private coaching program?
Enrolment is closed now. But you can join my email list and I’ll update you when it’s available.
well done Rayner as usual.
I work on around 20% a month, Im a full time trader…
Using your formula should help lots of newbies on this site.
Awesome to hear that, Martin!
You’re a gifted teacher
Another very good informative article thank you Mr Rayner with your teachings I have learned a lot
Awesome to hear that!
Over a million dollars
can i know what platform are you using rayner?? thanks a lot for this wonderful information.
The charts are from TradingView.
Great article Rayner,
What fx trading platform would you recommend ?
I don’t publicly discuss brokers because in this day and age, we have no idea what goes on behind the scenes.
If you want a recommendation, drop me an email me and we can discuss it.
I want to make $20,000 trading income per quarter and withdraw $10,000 every quarter for my use.
How much should I invest in trading capital based at 1: 30 leverage and stop trading voluntarily when the margin level drops to allow Drawdown to take its own time and revert back to profit zone or hit Equity Loss point of 50% of the initial equity. Maximum open trades restricted to 18 positions or 36 mini lots. Outset Consecutive Loss: 15% of initial equity.
I am providing the actual latest statistics gathered by myfxbook.
I am a scalp trader. I never use Stop Loss and when capital is locked up in Drawdown I wait for the reversal to happen or liquidate trades when initial account equity crashes to 50%.
The statistics are based on Myfxbook analytics.
Trading period: 82 days.
Active: 50 days.
Inactive for 32 days because of drawdown and stop-out margin activated not allowing to trade further. Margin level had dropped to 140%.
Trading Expectancy is 12.3 pips (calculated by Myfxbook.com based on profits missed and drawdown even though I have no R:R planned.)
Gross TP before the commission, spreads, swap costs: 18 pips
Trading Frequency is 12 times (based on the active trading activity of 50 days)
and 7.5 times based on total trading activity which includes 32 days of inactive trading
Account Size: US$20,000
Bet size: 2 lots of mini (10k) contract
Lots traded: 127 or 2.54 average per day
Withdrawals: Every 4 months. 50% of profit and add 50% to trading capital.
Trading Strategy: Scalping for TP 18 gross pips (nett 12.3 pips after commission, spreads and margin funding costs )
Strategy for Adverse Trades: NO STOP Loss. Wait for Drawdown or Account Stop-Loss. Trading to stop if maximum trades cross 18 positions. There was no strategy for margin level% but after experiencing how the stop-out levels cripple trading, I want to stop trading when margin level % drops to 25% for each lot. So if 18 positions is the maximum permitted, the trading should stop when margin shrinks to 450% of the margin level. O
Maximum Drawdown: 41.26% .
Stop Loss: 50% of Initial Equity
Trading income (nett): 46.6% for 82 trading days (Jan 21, 2020 to May 15, 2020) . If calculate for yearly of 248 days trading then it becomes 186.64% per year.
For active trading days of 50 (year trading days fixed at 240 days) days, it becomes 223% per year.
Other Myfxbook statistics are as under:
Equity: (100.00%) $30087.08
Highest: (Mar 26) $31970.72
Profitability: won 552 out of 602 (92%) ; Lost 50 out of 602 (8%)
Average Win: 15.79 pips / $27.27
Average Loss: -27.07 pips / -$109.72
Longs Won: (334/355) 94%
Shorts Won: (218/247) 88%
Best Trade($): (Mar 26) 153.20
Worst Trade($): (Mar 26) -927.68
Best Trade (Pips): (Feb 07) 58.0
Worst Trade (Pips): (Feb 07) -237.7
Avg. Trade Length: 2d
Profit Factor: 2.74
Standard Deviation: $68.52
Sharpe Ratio: 0.00
Z-Score (Probability): -16.18 (99.99%)
Expectancy: 12.2 Pips / $15.89
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