How much money can we earn trading currencies? This is the first questions many investors ask before investing in Forex. You can find very different opinions on this matter. Some will say that you can earn fabulous profits here almost every day. Brokers, software companies, book publishers and authors, signal providing companies like to sing this song. They are a part of this industry. If they will stop singing this song, people won't listen to them any more. But in real life, forex trading is not an easy business.
The first thing you have to decide is whether you understand and accept the existence of risk in the investment process. The risk factor is closely connected with returns. The idea of the risk/return payoff with a graph looks like this:
But the relationship between risk and return is not a linear one. In fact the relationship between risk and return looks more like this:
You can't get infinite returns but you can lose all your money. So the line must start to flatten out as you take on more risk. Eventually all returns can quickly vanish at levels where the risk is too high.
The risk and return relationship is a fundamental concept in not only investment, but in every aspect of life. The more you give to others - of yourself, your time, money - the more you get in return. With respect to Forex this means, you have to be more patient, diligent, prudent and reasonable to outsmart the market. And you need to risk with only small portion of your money. As a result, if you are interested in large consistent profits, you need to invest more money.
Now lets come back to the question we started from. How much can we profit? What is our return objective on market? To answer this question we need to look at successful examples of others and then follow them.
The picture above represents Barclay Trading Group's currency trading ranking for November 2007. We should pay attention to the companies managing more than $10 millions. These are guys who know what the word "risk" means. With millions under management, they are primarily focused on decreasing the risk to minimum levels. As you can see, the average monthly return is just around 3-4%, but annual returns are close to 20%. In my opinion, these return objectives can be used as benchmarks for your own currency trading. If you aim to get 20-30% a year, that means you have the same risk as professional traders have. The return objectives more than 30-40% should be considered as too aggressive and risky.
Identifying appropriate return requirements and risk tolerance is very important. Without identifying such factors, the trader cannot judge whether investing in Forex is suitable for him at all.
