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Considerations Of Trading Forex For A Living

July 10, 2018 08:59

''The numbers speak for themselves'' - Kevin Kalkhoven.

Trading Forex for a living requires more than the average account size and sufficient funds. However, to do it successfully, you need to follow the tripod of successful trading. You need to have:

  1. A profitable Trading Strategy
  2. A proper Risk management
  3. Well developed Trading Psychology.

Keeping the tripod balanced is a crucial thing. Regarding the amount of initial investment, have in mind that you would need to have a proper business plan before you decide to invest a certain amount of money.

Theory in Numbers

To determine an estimate of funding requirements, to begin with, let's consider realistic returns. We'll use the average performance of professional 'Currency Traders' for the last ten years, as reported by Barclays Currency CTA Index.

The average for the last ten years gives us a target rate of approximately +2.32% a year. Let's assume that you are an above average trader, and you manage to achieve a return of +15% a year. Then we need to assess how much money you require to support your lifestyle. We can refer to this as your trading salary, and for simplicity, let's find a pre-tax amount.

How about 60,000 USD a year? Ok. Now we divide your trading salary by your assumed return percentage of +15% a year. Based on this you'll need minimum funding of 400,000 USD to cover your living costs as a trader. Now consider the CTA average noted above and you will need funding of over 2,550,000 USD.

As we estimate the minimum account size to support your lifestyle, have you developed a sense of disbelief at how large the account size should be? This is perhaps one of the essential realities you need to consider.

Many traders will respond with, "If so, then why even trade?" As most traders are 'solution-driven', the next logical step is to search for a better method that is more profitable. This way of thinking can only expose traders to additional risk, which can ultimately lead to lower or negative returns.

Before you try to answer the question: ''how much do I need to trade for a living?'' think very carefully about the reality of your goals and what impact it will have if you get them wrong. Besides, if you think you might need another option, keep reading.

Less is More

If you've graduated from a demo account and believe that trading for a living isn't a realistic option, then you have just become a Tween Trader. This is somewhere between a beginner and professional trader, smart enough to trade real money and intelligent enough to know that you need to keep your day job. The idea of trading while you work is attractive for many, but just like all other approaches, it also needs to be met with realistic expectations.

Consider how trading Foreign Exchange fits into your larger financial plans, and how such risks can impact your accounts, like margin calls or draw-downs that could take years to recover from. Be sure that the allocation is appropriate for your situation. If you're unsure, talk with an Investment Adviser.

Less is a Lot More

At the end of the day if your only goal as a Tween is to reduce the correlated risk of your other investments, then working from a small account and earning 15% a year might make perfect sense. If however, you still dream of a day when trading full-time is your job, then there are things you can do right now that can open doors later.

Becoming a professional trader isn't something that can be accomplished quickly, but if you are realistic about your trading career, time is a variable that is in your favour. You should be looking at trading as a job that you will engage in for the next fifteen to twenty years, depending on when you start and when you retire. Many successful traders and investors continue to trade well beyond the age of retirement. If you're careful and cautious this will be something you do for a very long time, so putting something like managed funds on the table makes sense, especially if you're good at it.

The Conclusion

Well, how much money do I need to trade to manage funds then? Figure at a minimum of 10,000 USD, traded for five years, using very low leverage, targeting 0.5 to 1% a month with very low drawdowns. It will be much harder than it sounds, but if you succeed, the upside is significantly substantial.

While you're establishing your track record, commence networking, understand the regulatory requirements, and prepare your due diligence on markets if you wish to trade and launch your company. If all goes well, clients will begin to trickle in, and before you know it, your client capital will reach a million dollars. If the risk-adjusted returns are still good, then the client finances under management should accumulate, and as your company generates a decent return for your clients, you can then charge a management fee to raise your income.

Like our other scenarios, managing funds isn't for everyone, and it brings with it a long list of stress and difficulties, but it is in many ways the best approach to making a living while sensibly approaching the markets. If you are patient and willing to put the time in, it may be a lot less work than you think. Taking the time to prepare and thoroughly research every option, as well as all realistic goals is key.

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This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.