To get to where you want to be as a trader, first you need to know where you are going.
This is why having very clear and precise objectives is so important. But sometimes figuring out your objectives is easier said than done.
After all, unless you have traded successfully for a period of time already, how do you know what you are capable of producing? And if you have been trading without objectives, then you will probably have found it hard to trade successfully. The classic catch-22 situation.
To help you figure out what you can actually make, here are some key considerations.
Your objectives are a roadmap
Before you begin your journey, you should have a roadmap in place. Even if you decide to take a different route later on, you still need to be following a plan to begin with.
Your objectives are a guide for your future actions, rather than a reflection of your past achievements. Good objectives help you to:
- Size your positions correctly
- Work out how many trades you need to take
You need specific return and drawdown objectives, as well as a targeted number of trading opportunities at the very least.
Once you have these, you can build your position-sizing model and start working on the how much per trade aspect of your system. This is what will give you the chance to generate the returns you are after.
More on objectives in lesson #6 of the Advanced Forex Course for Smart Traders.
Risk vs. Return
The next thing to understand about objectives is that because you control the size of the position, you can actually have any return objective you want.
But with a caveat…
The greater the return objective, the greater the maximum drawdown is going to be.
So yes, you can make 100% a year trading Forex. You may need to be prepared to risk 30-50% of your core capital to do so, though.
Think carefully about how much you are willing to risk when deciding how much you want to make.
In general, your max drawdown should be about 1/3 of your targeted returns.
A smooth equity curve
As you will discover: the smoother your equity curve, the more you can risk.
If you have limited drawdowns and consistent growth in your account (a smooth equity curve), then you can start to increase your trade size.
So initially it may be more sensible to target 15% per year with a tightly constrained risk of 3%, than to go for 50%, with a drawdown of 25%.
If you can prove that you can make 15% a year in this example, then you could start to apply leverage to increase your returns. If you apply 3x leverage, your 15% turns into 45% with a risk of 9%.
So you don’t need to swing for the fences when trading Forex. If you keep your goals reasonable and focus on a smooth equity curve, in the long run you could end up making much more, with a whole lot less stress.
Know your trading style
The returns you can generate are dependent upon how you trade.
The more trades you can take, the faster you can turn over your portfolio and the more rapidly you can progress, as you can generate more R-multiples in a shorter space of time. Thus, it may be easier to have larger goals if you employ a day trading approach (that trades a lot) compared to a long-term position trading approach (that does not trade much).
Some trading styles are also going to be less consistent than others. For example, a long-term trend following strategy may rely on a few big winning trades to generate its profits, while a mean reversion strategy relies on chipping out small gains.
If the approach is less consistent, you may want a larger capital base, as the profits will need to cover those times when you are losing.
Your financial situation
When determining how much you can make trading Forex, you want to consider your financial situation.
To illustrate, let’s look at two hypothetical situations.
You have $200,000 in the bank and have expenses of $100,000 a year.
You have $1 million in the bank and have expenses of $100,000 a year.
In situation #1 you would need to make 50% each year to cover your expenses. In situation #2 you only need to make 10%.
Not only is it easier to make 10% a year than 50%, it is a much less stressful scenario to be in.
Many traders approach the markets with a goal of making large returns, putting a lot of pressure on themselves. Most of the full-time traders I have coached who went in without adequate capital struggled.
Traders in this position tend to operate out of fear of losing what they have, and find it difficult to be in the moment with the market.
Instead, it may be better for you to learn how to make small gains on a large amount of capital. While you may not have this capital in the bank right now, if you can display good risk management skills and the ability to generate returns, it is pretty easy these days to get seed funding or eventually you will grow your own account.
Otherwise, just keep working, saving, trading and growing your bankroll.
More on this in lesson #3 of the Advanced Forex Course for Smart Traders.
Another way you can manage your returns is you can split your capital into two pots.
One pot of money is treated conservatively (generally your main account), while the other pot of money is traded more aggressively.
Each pot is given different objectives, and positions are sized accordingly.
This can be a powerful psychological tool, as it gives you the freedom to really go for it on a small part of your funds, while keeping the rest of your money safe.
I have seen all sorts during my time in the markets.
This includes traders turning $20,000 into 2 million in the space of two months, and an ex-bank trader turning a $50,000 personal account into $600,000.
On the flipside, I have seen several traders wipe out $100,000+ accounts in a matter of weeks.
Personally, for my long-term trading, I target a 30% return with a max drawdown of 12% a year (or 3% a quarter) and the option to swing for 100% if thing go really well.
For our daily signals, we target 20-30% a year with no more than a 5% drawdown (view performance).
With the amount of leverage available in Forex, the sky really is the limit. But, of course, greater risk comes with greater danger.
What’s possible for you?
To work that out, start with your objectives and then build a plan to achieve them. Go for something you feel comfortable with, given your time restraints, and keep the risk management tight so you don’t put pressure on yourself.
Finally, remember your objectives are not set in stone. Have a plan of what you want, and then review it periodically to make sure it is still the right fit. If not, then make changes.
About the Author
Sam Eder is a currency trader and author of the Definitive Guide to Developing a Winning Forex Trading System and the Advanced Forex Course for Smart Traders (get free access). He is the owner of www.fxrenew.com a provider of Forex signals from ex-bank and hedge fund traders (get a free trial). If you like Sam’s writing you can subscribe to his newsletter.