What’s the secret to making a living from internet based forex trading?
April 10, 2008
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John Forman - The Essentials of Trading author
I recently saw the question “What is the secrets of making a living from internet based forex trading?” posted on LinkedIn. In reading through some of the responses left by members of the site (as I am) I couldn’t help but be a bit annoyed at some of what people were saying - mostly from a negative perspective. A lot of it was just pure ignorance shining through.
But, let me provide a very simple answer to the question asked. Really, the answer is the same to trading for a living in any market. It takes sufficient capitalization and consistent application of a proven strategy.
In terms of capitalization, you need enough to make the type of monthly returns you require (living expenses, taxes, etc.) reasonably achieveable. Even better, make them easily achieveable. The person asking the question on LinkedIn mentioned $2500. Personally, I would be thinking $100,000 for a minimum account to achieve that kind of performance. That’s only a 2.5% per month return, which is not pushing things and allows for porfolio growth in those months where higher returns are achieved, but if you have a method that consistently produces a higher rate of return you can get away with a lower capital base.
I wouldn’t want to be in a position where I had to make 10% per month to meet my bills. That’s a very aggressive annual rate of return by most measures, which means you don’t leave yourself much room to grow your account, which personally would be a parallel objective of mine. After all, if you’re not growing your account you probably won’t keep your trading income up with a rising cost of living.
In short, no you probably will not be successful trying to trade for a living with a starting account of $5000. I know the allure of not having a job is there, but try to be realistic.
As for the consistent application of a proven strategy is concerned, that’s pretty self-explanatory. Of course saying you will do that and actually doing it are two entirely different things. There’s no way I can get into all that here. Refer to my posts on creating your trading plan and developing trading systems for further discussion.
Here are some other posts which might interest you:
As discussed previously, I don’t believe that returns compounding 4% monthly are *sustainable*, long-term (over multiple years). I think 2.5% compounded monthly (which is basically 35% annually), over a significant period of time, *is* pushing near the edge of possibility, or at least would involve levels of activity, return volatility, and leverage that most people (including some serious traders) would find intolerable if they were having to live off of the equity withdrawals.
I would up that estimate of starting capital to $300,000.
20% annually is much more realistic for most folks; the 35%+ crowd would likely be a subset of the seasoned veterans only. Take 5% to protect for increases in cost of living and take 5% to grow capital for retirement, and the remaining 10% is the $2500 monthly that they need to live right now.
I’m not going to disagree with you there Bill, though I would make the point that if one were making 2.5% in a trade for a living perspective, it wouldn’t be compounded, so it’s only 18% annually. Even still, I personally would prefer a larger capital base and a smaller monthly result assumption. Yes, a better return is possible, but why put yourself under that pressure? I think a decent rule of thumb might be to figure your long-term average monthly (or weekly, or whatever) return and make your determination on capitalization requirements based on half that, with some factoring for the volatility of the returns you see.
[...] Forman - The Essentials of Trading authorYesterday I started answering a LinkedIn question post about trading for a living. I mentioned then that there were several ignorant statements being made. Here are some of them. [...]
[...] What’s the secret to making a living from internet based forex trading? | The Essentials of Tradin… “the answer is the same to trading for a living in any market. It takes sufficient capitalization and consistent application of a proven strategy.” Some good comments by John in reponse to someone asking about trading forex for a living. (tags: Trading Living Forex) [...]
Hi John,
As you know , there is no “secret” to FX trading. It’s the same as every other trading vehicle.
a) You must have a trading plan (be that fundamental or technical)
b) You must have discipline in trading that plan .
c) This requires hard work- You have to look at charts if you’re a technical
trader. You have to know global news and be aware of Central Bank
policies.If you’re a fundamental trader you need to know economic
policies of various countries. You need to know when there are economic data releases -like US Employment.
d) you must use good risk control
e) you MUST be psychologically prepared to lose money on trades.
f) You need at least 100K in risk capital ..Away from other assets so you’re
not putting yourself at serious financial risk.
This just scratches the surface. There is a lot more as you know. You can’t just put a position on in the morning, go to the beach and come back in the afternoon and see how much money you made.
Apologies,John, for the lengthy rant
Lou Vozza