Earn an Income from Trading Forex?

Oct 8, 20239 min read

Many people dream of trading Forex for a living. Can it be done? Can you buy an EA and put it on a chart and collect your profits from a sandy Mediterranean beach? How much can you expect to earn with the amount of trading capital you’re willing risk? Or, how much capital do you need to generate the income you desire?

Why are you trading forex?

At first I think there are two types of dreams that would-be traders have:

If the guy on the right is you, then please click my sponsor link below when purchasing your Lamborghini.

In practice, though, this is a far more realistic perspective to have:

I know (or am willing to learn) how to trade, and I may (or may not) use an EA to help me automate my trading. I am okay making a small percentage of return because I believe I can out-perform other types of investments. I understand that this type of trading is higher risk than most other forms of investment and I might lose everything.

Obviously the "two dreams" graphic is somewhat tongue-in-cheek. In practice, the journey that many Forex traders go on is about coming from wherever they are to this much simpler view of small percentage returns with a high level of consistency.

What are your goals?

If you’re trading to build up some savings (e.g. a vacation fund or retirement account) or for income, you should have some expectation of monthly return and a long-term goal. Some of the most successful, professionally managed investments can generate returns of up to 10% per year [1,2], and that fluctuates from year to year. If you want to earn $50,000 per year from investments at 10% per year, you’d need to be investing at least $500,000 of capital. And honestly, if we had $500k to put into a high-risk investment strategy where we might lose the entire amount, we probably don’t need the returns from a high-risk strategy to generate income.

This is the catch-22 that many of us face as retail traders. We want to make enough money from trading to mean something, but most of us aren’t starting out with huge trading accounts. This leads many to look for unrealistic returns, take higher risks, and try more and more desperate strategies. And unfortunately, it makes many traders susceptible to the fraud that plagues the retail trading industry.

Let’s say our goal is to earn a net of $50,000 per year from trading. That’s a solid income. That would mean earning a net of $4,166 per month, on average. If you’re starting with a small trading account of $5,000, you would in effect need to earn over 80% return per month. That is not a realistic expectation. If you think you can reliably generate that type of return from trading on a monthly basis consistently, then please click my sponsor link below when opening your Bitcoin account.

For many retail traders, $5,000 is a lot of money to put into a trading account. If you are one of the rare, top 2-4% of traders who can consistently earn 10% per month from trading [3], then you’re making $500 per month. Most of us are making much less as a percent of returns. If you’re just starting out, then you should be thinking 2% per month, on average. (Well, if you’re just starting out, you should be thinking to trade a demo account with $0 invested for a while until you can reliably earn at least 2% per month.) With experience and confidence that can improve to 5% per month, and when you’re trading at the top-level of performers you may be able to get as much as 10% per month on occasion. But even at 2-4% per month you’d be gaining 24-48% per year return, which is FAR more than any of the traditional types of investments.

If your goal is to make $50k per year and you’re earning 2% per month, then you need to be trading an account over $250,000.

What about prop?

Because most of us have small amounts of capital to start with, and we need large amounts of capital to generate any kind of real returns, there is an industry designed to indulge our fantasies. Prop firms offer the promise of large trading accounts and significant returns, if you can just pass their evaluation stages, for a small fee. Oh, and don’t violate any of their rules. Sounds like a great deal, doesn’t it?

You are the source of revenue for the prop firms, not the other way around.

Just like with trading in general, the vast majority of people who sign up for prop accounts fail their evaluations [4]. In fact, the prop firms are not in the business of generating income from successful traders. They are in the business of selling demo accounts to people who dream of being successful traders and are willing to pay for a chance to win, over and over again.

If you are considering trading a prop account, then approach it with the same careful consideration you would with any trading account. Most prop firms have both a total drawdown limit and a daily loss limit, for example 5% drawdown per day. Can you consistently trade your strategy and never exceed 5% daily drawdown or loss? If you are not confident that the answer is yes, then don’t buy a prop account.

Demo accounts are free from most any broker. Setup a demo account with the account size you want to trade, and trade this demo account exactly like you would trade your prop account. If you can reach the target (usually 8-10%) without exceeding the total or daily loss limits, and often in the limited timeframe (e.g. 30 days), then you may be ready to try a prop account.

Just think about that equation for a moment. Reach a goal of 8% within 30 days without going over 5% daily loss/drawdown? To reach that goal in that time you have to already be near the top 2-4% of traders, and/or go in with exceedingly high risk, in which case you are highly likely to breach the daily loss limit. These challenges are specifically designed for traders to fail, so they come back and purchase more and more evaluations. That’s the prop firm’s business model. You are the source of revenue for the prop firms, not the other way around.

Some people take a “Go Big” strategy with prop accounts. Buy several at a time, go with maximum risk and hopefully pass one or two, and then repeat this for passing the second stage evaluation. And suddenly, within a day or two, you’ve got a funded account! But then what? If you can’t consistently trade this account without exceeding the limits, then you’re going to blow this live account too. Now your’e just gambling and hoping you make enough to cover the costs. That may be fun, and if you enjoy this type of investment sport then please click my link below for my “Vegas Risk Off Weekend” GoFundMe page. Just have realistic expectations.

Also, don’t forget that prop firms don’t give you 100% of your gains; the profit share is more likely in the 70-85% range. So if you’re making 2% per month, at 85% profit share you’re only getting 1.7% of that.

But really, what about prop?

On August 29, 2023, one of the largest and most popular prop firms, MyForexFunds (MFF), was shut down by the Commodity Futures Trading Commission (CFTC) in the US and the Ontario Securities Commission (OSC) in Canada, charging them with defrauding their customers. Since then several other prop firms have also shut down. The entire industry is on edge waiting to see what fate awaits MFF. In the meantime, MFF customers who were either trading funded accounts or had paid for evaluations that were in progress have had their trading accounts shut down, with no idea whether they will either regain access to their accounts or get a refund of their fees. This has had a chilling effect on the whole prop space.

Whatever the outcome with MFF, it is likely that we will see the business model and trading conditions of prop firms evolve in response to this action by regulators. If you purchase a prop account there is no guarantee that the firm you bought it from will exist long enough for you to gain any returns. I saw a firm come and go in the space of a week: they started selling evaluations, never provided trading accounts, and then shut down without issuing refunds.

I’m ready to trade

Whether you’re trading prop or personal funds, demo or live, you’re ready to trade. Let’s say you want to start with 2% goal per month, with the expectation that you may increase that to 5% over time.

If you don’t know how to trade and you’re expecting that you can just drop an EA on a chart and pick up your 2% at the end of the month, I have some bad news.

Trading is hard. It is a profession that takes many years to become skilled at. In terms of the proficiency needed, it is similar to being a pilot or a doctor. There is a huge amount of knowledge to master, and it takes time. Years. The difference is that anyone can download a trading platform, deposit some money and start trading. There is no required training, no certification to pass before being given the keys to your shiny new trading platform, no license to drive and no insurance required. Would you lie on the table and let a surgeon whose prior experience was the equivalent of playing “Operation” and watching “Scrubs” take a scalpel to your spleen?

If you’re trading, even with an EA, you are responsible for all of your trades. You need to know what the EA is doing, how it’s working, what the level of risk is. And when things go wrong, you may need to take control and make decisions. And to do that, you need to know what you’re doing. So even if you’re using an EA like MultiMAX that automates the vast majority of your trading activity, you should still be prepared to give oversight and take over if necessary. It’s like driving a Tesla with Autopilot turned on [5]. Sure it takes care of most of the mundane tasks of driving and can do so with an impressive degree of situational awareness, but at times you might need to take over. And to do that you must be a licensed, insured driver with the competence and experience needed to drive.

Paying Taxes

Be sure you understand the tax laws in the country where you pay taxes. I am not going to go over any specifics here because they are different everywhere and they are very dependent on your personal situation, whether you’re trading as an individual or through a business entity and so on. But I will say this: do NOT expect that you can earn income from trading and not pay taxes on it. And when you do pay taxes, don’t be surprised if you’re giving up 15-25% to the tax man, and possibly more. Know your tax rate, and take that into account in your calculations.

Escape Velocity

Let’s say you’re trading with one of the strategies that uses a risk pool of 15%, and you’re gaining 7.5% per month returns. (Well done!) At the end of the first month you’ve got a balance that is +7.5% over your starting balance. That’s great! But you also have equity that is 7.5% below your starting balance, because you’re in 15% of drawdown. What is more important in this scenario, balance or equity?

For my own trading I try to keep a minimum balance that is my starting balance + risk pool %. If I were trading a $10,000 account with a 15% risk pool, then I would need the account balance to reach a minimum of $11,500 before I would withdraw any profits. This means that I'd be trading for a minimum of 2-3 months before there is sufficient balance in the account to be safe. And if the equity ever does go below the starting balance, I'd want to adjust my risk settings.

Putting it all together

Let’s say you have starting capital of $5,000, and you’re going to plan for 2% per month gains. Let’s pick a round number for taxes at 20%. How much can you expect to earn per year? What if you were to bump that up to 5% returns per month?

With a typical amount of starting capital and a beginning level of achievable returns, your profit range is from $960-$2,400 per year. And keep in mind, it’s estimated that over 80% of traders lose money, and only as few as 1% of retail traders can make profits for 4 or more quarters in a row [6]. This level of performance is exceedingly difficult to achieve.

If your goal is to make $50,000 per year in net income, what amount of capital do you need to trade with these rates of returns?

You need significant capital to get the kinds of returns necessary to trade for a living.

To solve the capital problem, let’s say we go for a funded account with a prop firm. The calculations are similar, but we also need to take into account the profit sharing percent. I’ll start with $10,000 since that’s the smallest account size that most prop firms start with.

And again, what size account is necessary to achieve our $50,000 annual net profit?

Depending on the level of returns that you can consistently earn, you would need over $100k of capital to trade, or more realistically, over $300k. And considering how difficult it is to trade within their limits, this is not the easy path that many may think it is.

If you want to adjust these numbers for your own situation and goals, the excel spreadsheet I used to calculate these tables is available for download.