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Are you curious about the potential earnings in forex trading or the typical income of a forex trader?

You've likely heard stories of traders raking in substantial profits from the financial markets. However, it's crucial to recognize that comparing your results to theirs may not be the most accurate approach.

Why,

Well, it's because you and these successful traders have distinct differences. Factors such as your account size, risk tolerance, risk management approach, trading strategy, and other variables set you apart.

Drawing parallels in such cases is akin to comparing apples to oranges, and it doesn't yield meaningful insights.

That's why I've crafted this post - to provide you with a clear understanding of how much money you can realistically make from forex trading based on objective criteria.

Let's get down to brass tacks. No more conjecture, no more overly optimistic predictions, and no more delusions. We're delving into pure statistics, hard numbers, and the objective truth.

Are you prepared? If so, let's commence our exploration.

Let's break it down:

You might aim for a 1 to 2 risk-to-reward ratio in your trades. However, if your win rate is only 20%, you'll consistently end up on the losing side.

So, what's the secret sauce? Is it all about your win rate?

Not quite.

You could have a 90% win rate, but if you're losing $0.95 for every dollar at risk, you're still in the red.

Here's the solution:

Your success hinges on the synergy between your win rate and risk-to-reward ratio. This synergy is known as your "expectancy."

Expectancy is a simple formula:

**E = [1 + (W/L)] x P – 1**

Where:

- W stands for the size of your average wins

- L represents the size of your average losses

- P signifies your winning rate

Let's illustrate this with an example:

You've executed ten trades, with six wins and four losses, resulting in a 60% win rate. Your six winning trades netted you $3,000, making your average win $500. Your losses totaled $1,600, giving you an average loss of $400.

Now, plug these numbers into the expectancy formula:

E = [1 + (500/400)] x 0.6 – 1 = 0.35 or 35%.

In this example, your trading strategy has a positive expectancy of 35%. Your strategy is expected to yield 35 cents for every dollar traded over the long haul.

If you're employing a high-frequency trading strategy, making an average of 1-2 trades daily, remember that you're generating 70 cents in forex trading profit per day, keeping your Expectancy in mind.

Now, let's delve into frequency.

Have you noticed something interesting?

Most casinos operate 24/7, 365 days a year. Wonder why?

It's simple: the more they play, the more they earn. The same principle applies to trading.

You might be wondering, "How does this relate to trading?"

Here's the connection: the frequency of your trades matters. The more you trade (while maintaining a positive expectancy), the more you stand to profit.

Imagine this scenario:

You have a forex trading strategy boasting a 70% win rate with an average risk-to-reward ratio of 1 to 3. But there's a catch—it only generates two yearly trading signals.

In this context, it's crucial to consider the impact of trading frequency on your profits.

When you look at it, the potential returns from this forex trading strategy may not seem very substantial. There's a 9% chance of losing two trades in a row, underscoring the importance of understanding the bigger picture.

Now, let's address the elephant in the room:

While the frequency of your trades certainly matters, it alone won't determine how much money you can make in forex trading. Several other factors come into play. Keep reading to discover what they are.

You've probably heard stories of traders turning a small account into millions in no time. What often goes unmentioned is that thousands of traders blow their accounts for every success story.

So, let's not treat trading as a get-rich-quick scheme. Instead, approach it as a business you aim to grow over time steadily.

You can generate an average annual return of 20%.

- With a $1,000 account, that's an average of $200 per year.

- On a $1 million account, you're looking at an average of $200,000 annually.

- With a $10 million account, you can earn an average of $2,000,000 annually.

It's worth noting that these figures are based on the same strategy, risk management, and trader, with the only variable being the trading account size.

Can you see where I'm going with this?

Regardless of your strategy or system, you need capital to make money in this business.

You've likely heard the saying, "The bigger the risk, the higher the reward." Is this always true? Well, yes and no.

Here's why it's a "yes":

Imagine your trading strategy boasts a positive expectancy, yielding a return of 20R annually. You have a substantial $100,000 trading account. How much can you make?

It all comes down to your risk per trade:

- Risk $1,000, and your potential annual profit is around $20,000.

- Risk $3,000, and you could make an average of $60,000 annually.

- Risk $5,000, and you might net about $100,000 annually.

Remember that this scenario remains consistent with the same strategy, account size, and trader. The larger the risk per trade, the greater the potential returns.

However, there's a "no" to consider:

Excessive bet sizes increase the risk of wiping out your trading account, diminishing your expected value. I recommend reading Ed Seykota's risk management article to delve deeper into the mathematics behind this concept.

Moving forward...

A common question among traders is whether to withdraw profits or let them compound. Let's explore the impact of this decision:

Imagine you're consistently making an average of 20% annually with a $10,000 trading account. After 20 years, it would be worth $383,376.00.

Consider an alternative scenario: What if you withdraw 50% of your profits each year?

In this case, you're effectively earning an average of 10% per year, and after 20 years, your account would be valued at $67,275.00.

Compounding your returns yields the highest potential return. However, whether this is feasible depends on your trading business management.

Here's why:

If trading is your primary income source, as a day trader, you may need to make withdrawals to cover living expenses. But if you have a full-time job and trade on the side, you can compound returns without withdrawals.

There's no one-size-fits-all answer. You must align your approach with your trading goals and understand how withdrawals can impact your long-term returns.

Now that you understand the key factors influencing your forex trading earnings let's determine how to calculate your potential profits. Here's an example:

Trading Expectancy: 0.2 (or 20%) Trading Frequency: 200 trades per year Account Size: $10,000 Bet Size: $100 Withdrawal: None

Use this formula to calculate your potential annual earnings:

In this case, it would be:

0.2 * 200 * $100 = $4,000

With the given metrics, you can expect to make an average of $4,000 per year.

To express this as a percentage of your account size, use this modified formula:

This yields:

[0.2 * 200 * $100] / $10,000 = 40%

In other words, you can expect an average annual return of 40% with these parameters.

So, is forex trading profitable? Absolutely, as long as you have an edge!

While some brokers don't require a minimum deposit to start forex trading, I typically recommend that beginners begin with at least $500. Here's why:

Most brokers offer one micro-lot size, which equals 1,000 units. Assuming an average transaction cost of 3 pips (about 30 cents), let's calculate the risk for a trade:

- You're going long on 1,000 units of EUR/USD.

- Your trade has a 50-pip stop loss.

- Each pip is worth 10 cents.

So, your risk per trade is $5 ($5 + 30 cents).

Starting with only $100 would mean your risk per trade easily exceeds 5%. However, beginning with at least $500, you can maintain a consistent risk per trade, typically between 1% and 2%.

Now that you understand how to calculate your earnings let's explore a valuable strategy to increase profits without raising your risk: the "9th wonder of the world."

Here's how it works:

In addition to compounding your returns over time, regularly add funds to your trading account and compound those.

Consider this example:

You have a $10,000 account, earning an average of 20% annually. After 20 years, you'd have $383,376.

Let's explore the impact of adding funds to your trading account annually:

If you start with a $10,000 account and earn an average of 20% per year, then you add $5,000 to your account each year...

After 20 years, your account would be valued at a substantial $1,503,504.

This demonstrates the significant growth potential when you consistently contribute additional funds to your trading account over time, allowing for both the power of compounding returns and regular capital injections.

Let's summarize the key takeaways:

In forex trading, no single factor determines your potential earnings. Instead, it's essential to consider five critical metrics:

**Trading Expectancy**

**Trading Frequency**

**Account Size**

**Bet Size**

**Withdrawals**

To calculate your expected earnings, apply the following formula: **Trading Expectancy * Trade Frequency * Bet Size.**

This formula provides you with an objective measure of your potential income from forex trading.

Now, the question for you is:

Feel free to share your thoughts in the comments below. Your expectations and goals are essential factors in your trading journey.