How much do traders really earn? Forex trading income can be shrouded in mystery, so we've decided to dispel some myths. This week we're talking to Jessica* about her income as a forex trader for a big bank.
Welcome to Money Diaries, our new blog series in which we talk to different traders about the money they make, how they manage their finances, their savings goals - and their money advice to other traders.
*Name has been changed
Money Diaries: Jessica's Trading Income
What is your income from trading?
I earn anywhere from $20,000 to $25,000 in one or two months, but it all depends on how well I am doing. For example, if I have a slow month, then my income for that month will likely be lower than $20,000.
What did you earn when you first began trading and is that different now?
I began trading in 2011 and earned about $600 per month. Some of you may be surprised to read this, but there were far fewer traders in my cycle and much less information available to us back then. I am from Kenya, you know! I've been able to sustain that level of income because I've stuck with it and learned from my mistakes. A lot has changed in 10 years! Now there are so many more traders out there working hard trying to learn as much as possible about how to trade better… that's really helped drive the industry forward for everyone.
What's the average trader salary? Find out here>>
Do you earn commission?
No, I do not earn any commissions from trades I make. I pay spreads and buy and sell currencies based on my analysis of the market and economic conditions. However, some other forex brokers and institutions will offer you bonuses from time to time. Some forex brokers even offer an education package that allows new investors to trade with no fees for a limited time to help them develop their skills. Well, I can say I have benefited from these!
Do you work full-time or part-time?
Forex trading is not a full-time job as such, but rather a passive income source that I find myself doing. The best part about forex is that it doesn't require much time, and it doesn't take much time. As far as time goes, it takes me less than 15 minutes per day on average to review the charts. The time varies depending on the market conditions at that given moment.
Sometimes I'll spend more time analysing charts, sometimes less. It really depends on how the market is moving at that moment. While I do have other sources of income as well (i.e., writing), my primary source of income is still from my accounting job.
Got no capital to start trading with? No problem - here's how to start trading with no money>>
What are your savings goals?
Savings goals will depend on your situation, however, saving at least 30% to 40% of my monthly net income works well. I want to have at least six months of living expenses saved up, enough to cover any emergencies that may arise. Second, my long-term goal is to save up enough to create my own business doing something I enjoy doing. The third thing I want to do is start creating a passive income stream so that I never have to worry about money again. These are my big-picture goals.
Got some savings goals in mind for your trading account? Here's how to save money for your forex goal>>
How do you manage your finances as a trader?
A successful trader must keep track of several things, such as capital management, risk management, and daily trading activities. I keep six months of trading capital in savings and have an emergency fund of at least six months' worth of expenses. You never know what's going to happen, but I want to be prepared for anything!
It is also critical to plan and budget your finances before, during, and after trading. The first step in managing your finances as a trader is defining what you are trying to accomplish. This could mean setting a goal for the number of trades or the amount of profit you hope to make. Deciding on your trading objective will help you define how much money you need to risk on each trade.
How do you decide how much to risk per trade?
When you're just getting started, it's hard to know how much to risk per trade. You don't have a lot of experience, and your trades might lose a lot of money.
To decide how much to risk per trade, I look at my account balance and the amount I typically trade. Then I determine what percentage of my account balance I want to risk towards each trade and place that percentage into the "Risk" field when creating a new trade. For example, if I have $10,000 in the account and typically place $2,000 worth of trades, I would set the Risk field to 2%.
There is no one-size-fits-all answer to this question. Every forex trader has different risk appetites, trading styles, account sizes, and expected return on investment. The general rule of thumb is that you should risk no more than 2% of your account balance on each trade. The forex market is volatile, so even a small amount can make a massive difference over time.
Still trading forex as a side project? Here's how to trade with a full-time job>>
How does your risk management play a part in your financial management?
Risk management is an essential part of financial management. A key component of risk management is managing the risks associated with trading. This includes managing brokerage account risks, market risk, and dealing risk. Other components include monitoring accounts, position limits, and understanding counterparty risks.
Risk management also involves assessing how much capital you have available to trade with and using that amount wisely. As your experience level progresses, emotions begin to play a more significant role in trading decisions, and risk management will become even more critical to your overall success as a trade.
What does a trader's day to day life really look like? Read up on Cynthia's day as a trader for a bank here>>
What do you think is the biggest misconception about money and trading?
The biggest misconception about money and trading is that it's a get-rich-quick scheme. It's not. This business requires dedication, hard work, and an understanding of what you're doing. Trading foreign currencies can be very complex, but the bottom line is that you're making money by buying low and selling high. As long as you take proper precautions and use common sense, trading will work well for you.'
Many people believe that to trade forex; they must first invest a large sum of money. This is simply not the case. You can begin with a small account and gradually grow it, applying various strategies as your confidence grows. Don't let the size of your initial deposit prevent you from trading! It's always a good idea to have some working capital if something goes wrong and you're forced out of the market.
What are three pieces of advice you would give to a new trader about money expectations and money management?
First, be realistic about your trading account size and how much you should risk on each trade. This will help you avoid the emotional trading mistakes that many retail traders make, such as risking more than they can afford to lose.
Second, be disciplined about entering and exiting trades based on your plan, and stick to it even when it feels difficult.
Finally, a good money management strategy also includes having an emergency fund that you can draw from in case of unexpected expenses or market losses.