Most people seek out trading careers to get fast profits, earn millions of dollars, and live a posh lifestyle as seen in movies like “Wolf of Wall Street”. The reality is, however, contrary to popular belief, most day traders lose money. While it is no secret that trading may lead to financial loss, one has to wonder, what is the average return on a trade online? Well, we’ve done the research for you and outlined Forex trader income by Day, Month, and Year. Let’s separate fact from fiction!
Forex trading: the only job where you can make money in your pajamas and still feel like a boss!
But what is the realistic earning potential of trading forex alone? Keeping a realistic perspective is crucial.
How Do Forex Traders Earn Money? 🔎
Forex traders typically generate income by playing the currency game. The potential earnings of a Forex trader are influenced by factors such as position size, risk tolerance, risk management practices, trading strategy, and trading expectancy.
Profits can be made in Forex trading by purchasing a currency pair at a lower price and selling it at a higher price, or by selling a currency pair at a higher price and subsequently buying it back at a lower price (Going Long and Going Short). In a nutshell, it is a financial roller coaster ride with cash prizes at every turn!
Forex traders can also make money through commissions and spreads (forex rebates) charged by Forex brokers.
How Much Can You Earn Trading Forex in 2023? 💵
To begin discussing this topic, let’s classify traders into three or three different categories.
Traders in Investment Companies and Hedge Funds
- Represents the most common category of traders
- Manage millions of dollars with low risk
- High salaries, as indicated by job-related websites like PayScale
- Average wage around $79,000 in the US
- Approximately 10% of all traders belong to this group
Traders in Prop Companies (Remote Traders)
- Thousands of traders globally work for small prop companies
- Manage significant amounts, often up to millions of dollars
- Typically handle around $100,000
- Earnings range from $500 to $10,000, depending on capital size
- Approximately 15% of traders fall into this category
Retail Traders in Forex (Independent Traders)
- Majority of retail traders engage in forex trading
- About 90% of them tend to lose money
- A small percentage (a few percent) can earn profits
- Average monthly earnings range from $500 to $5,000
What is the Average Monthly Income of a Forex Trader? 🤑
There’s no definite answer to this question. Stories of individuals from humble backgrounds achieving trading success and amassing fortunes can be motivational, implying that hard work and determination play a crucial role. Nevertheless, such stories are infrequent in reality. Relying on luck is unreliable, and we should not assume it will always be in our favor.
Furthermore, accounts of Wall Street traders earning millions often neglect to mention that they oversee substantial sums of money, resulting in less significant returns on a smaller scale. For instance, while earning 10 million USD may appear impressive, it represents less than one percent of the total amount managed by the trader. In contrast, a 1,000 USD account would only generate a meager return of 10 USD per year.
What is the Average Profit % of a Forex Trader? 📊
Determining the average profit percentage of forex traders is challenging due to varying factors like experience, skill level, and trading strategy. Research suggests an average monthly profit of around 1.5%, meaning a $10,000 account may yield approximately $150 per month.
Successful traders achieve diverse profit percentages, ranging from 10% to 50% or higher. However, individual earnings can differ from these averages. Only 30% of forex traders are profitable, while the remaining 70% face losses.
Is Making Money in Forex Trading Risky? ⚠️
There are inherent risks associated with Forex trading, despite its popularity. It is crucial to assess your risk tolerance and effectively control your risk-reward ratio. During a drawdown, the temptation to make emotional trades in an attempt to recover quickly can worsen the situation. While a negative month may not be catastrophic, making impulsive decisions can have a detrimental impact on your portfolio.
It is vital to be vigilant against forex scams, as individuals or entities promising rapid wealth should not be trusted. Even prominent industry players are often involved in legal disputes, and many smaller forex brands have questionable legal backgrounds. Exercise caution and ensure you work with reputable individuals or organizations.
Factors Influencing Forex Trader Income 💰
The income earned by a forex trader can be influenced by various factors, including:
- Trading Capital: The trader’s capital investment affects income potential. Having more capital allows you to take on larger positions and potentially earn more profits. Find out How much money do you need to start Forex trading.
- Risk Tolerance: Traders with a higher tolerance for risk can earn more money, but they also have a greater risk of losing money.
- Account Type: A trader’s account type directly affects their profit potential, since larger accounts permit higher trade volumes and potentially higher earnings per trade. Explore different Forex accounts!
- Leverage: Leverage gives traders more control over larger positions with less capital, potentially increasing profits. However, leverage also increases the risk of Forex trades, making traders more susceptible to market volatility.
- Currency Pairs: Each currency pair has its own level of risk. You should know a pair’s history and projections before you open a position on it, as even the most stable currency pair can do something unexpected.
- Broker Selection: The commission and fees (trading costs) charged by brokers can impact a trader’s profitability. Choosing a reputable broker with a good track record is also crucial for efficient and effective trade execution.
- Market Conditions: The overall market conditions play a pivotal role in a trader’s income. For instance, during trending markets, traders who align with the trend can potentially generate higher profits.
- Trading Strategy: A trader’s choice of strategy has a significant impact on their income. Developing a trading strategy based-on market conditions can contribute to higher profitability.
- Experience: Experienced traders tend to be more profitable compared to those with less experience. Accumulated knowledge, market insights, and refined skills positively influence their trading performance.
- Technology and Tools: Advanced trading technology and tools impact a forex trader’s income. They include efficient platforms, real-time market data, analytical tools, and automated trading systems.
You can access global markets through AximTrade’s trading app and make informed decisions in a secure and streamlined environment.
Do you Pay Taxes on Forex Trading? Yes 🙈
Tax obligations for Forex traders differ based on their country and trading activity.
- In the US, Forex trading profits are subject to taxes ranging from 0% to 37% under section 988. Section 1256 governs long-term capital gains, taxed at 15%, while short-term gains are taxed at up to 40% based on income bracket.
- In England, Forex trading is subject to capital gains tax, but traders can utilize the tax-free trading allowance to deduct up to £1,000 from their taxes if it qualifies as an additional income source.
- In Switzerland, forex trading is taxed based on income, and the tax rates differ across cantons.
- In Canada, forex trading is subject to capital gains tax, necessitating traders to maintain records of their activities and file taxes accordingly.
- Japan levies taxes on forex trading based on income brackets.
- In India, forex trading is subject to income tax with varying rates depending on income brackets.
If a trader manages funds or trades on behalf of an institution, there may be additional tax laws that must be followed.
It is crucial to note that tax laws are subject to change, so it is advisable for forex traders to seek professional tax advice. Given that tax regulations in the forex market are constantly evolving, staying up-to-date is of utmost importance.
How to Calculate Your Potential Forex Returns? ⚖️
To calculate your forex profits, consider your trading style, frequency, initial portfolio size, leverage, and risk-reward ratio. Use the following formula to determine your potential profits based on your trading history:
1. Calculate your average wins, average losses, and winning rate ➗
For example, if you made 10 trades with a 70%-win ratio, seven wins yielded a profit of $4,000. Your average win is $4,000/7 = $571. If the three losses resulted in a loss of $2,100, your average loss is $700.
2. Use the expectancy formula 💡
E = [1 + (W/L)] x P – 1
- E = Expectancy
- W = Average win
- L = Average loss
- P = Winning rate
For the above example: E = [1 + (571/700)] x 0.7 – 1 = 0.271. An expectancy of 0.271 indicates a 27% return on every dollar traded in the long term, implying profitable trading.
3. Calculate potential returns 🎯
Consider your portfolio size and expected return. If you have $2,000 with a 27% monthly return, your potential return would be $540. Similarly, with $4,000 and a monthly 27% return, your potential return would be $1,080. The size of your portfolio significantly impacts your returns.
Remember that market conditions are not always predictable, and your portfolio may correlate with specific markets. It’s important to monitor and adapt your strategy accordingly. Adapt to changing markets well with these tips!
Forex traders make the most money in the long term 💸
Imagine you start with $10,000 and achieve a 10% monthly return, resulting in $1,000 per month. You would have earned $12,000 by the end of the year if you chose to withdraw all of this money.
Now, consider the same initial capital and rate of return. Instead of withdrawing the $1,000 monthly profit, you reinvest it. At the end of the year, your profit would amount to $31,384.28. This would triple your initial capital rather than just double it.
If you persistently reinvest over the long term, you will observe even more significant outcomes. Using the same starting figures of $10,000 in capital and a 10% monthly return, you would generate a profit of $98,497.33 in just two years of reinvesting and a staggering $3,044,816.40 profit over five years. That's an impressive $3 million within five years! Conversely, if you continued to withdraw your entire $1,000 monthly profit, you would only accumulate $60,000 over the same period.
You can exponentially increase your earnings potential by reinvesting your profits. To extend the life of your profits, it’s advisable to reinvest as much as possible.
Disclaimer: The information provided above regarding the categories of traders and their earnings is based on general observations and industry trends. The figures mentioned, such as average wages and earnings, are intended to provide a rough estimate and may vary depending on various factors, including geographical location, market conditions, individual trading strategies, and experience levels. It is essential to conduct thorough research and consult professional financial advisors before making any trading decisions.