I often get the question can you trade forex for a living? The short answer is yes. However, as with all professions, the key to success is effort and experience. There is an overwhelming amount of material on the internet. There are also lots of quick win schemes around trading on financial markets. Most of these are scams or bogus and will end up in you losing all your money. If you want to trade for living to keep it simple and treat it like a job.
The first step is education. This does not mean signing up for expensive courses online. You can buy a few books about online trading for less than $40 each. I have listed a few of my favourites at the end of the article but the key is to keep a sceptical attitude and read a few for balance. Look for books on trading strategies as well as successful traders. Get familiar with simple technical analysis strategies such as moving averages. Everybody is looking for the holy grail that will give you a big win. Yet, the key to trading for a living is “steady as she goes” and managing your money. This sounds easy but the biggest pitfall is human psychology.
There is an old Wall Street saying, “financial markets are driven by two powerful emotions – greed and fear.” This is as true today as it was when it was first coined in the 19th century.
I see it over and over again where emotions cause traders to do all the wrong things. You can be an intelligent careful person in all other respects yet still be swept up in the emotional bubble that is trading. Don’t get me wrong, trading is an exciting and interesting activity. It can connect you to the global world in the way little else can. Yet if you want to trade for a living, we want to reverse your natural instincts and manage your emotions.
The successful traders take emotions out of their trading decisions. This means planning the largest amount you are happy to lose on each trade. Once you have this amount, set a stop order and limit order at the same time as opening your position. The famous American investor Warren Buffet once said, “Be fearful when others are greedy and greedy only when others are fearful”. This is a great mantra to follow when you are trading.
But I hear you say I need a trading strategy that wins. Yes, you need a strategy but even if you only get your trade right 5 times out of 10 you can make money if you manage your money. The key is making sure you minimise the loss on the losing trades and maximising the gain on the winning trades. That is where human psychology becomes your enemy.
Fighting your demons
The tendency will be to close winning trades as soon as you have one. This makes sense, right? Lock in your profit before the market turns? No, we need the winners to compensate for the losers so keep tracking up until the market turns and then sell.
The other tendency is to let losing trades ride. You might say to yourself it will turn around. After all, I spent time deciding on this trade and I am now invested, psychologist’s call this cognitive bias. Unfortunately, it might but it is as likely to go against you and you increase your losses. Do you have enough capital to keep holding this position? Remember when trading CFDs you pay swap every night for the privilege. This is a tiny amount and most times you can ignore it. But if you hold your position long enough this becomes a problem.
When you have emotionally invested in taking a trading position It can be hard to admit it was wrong. The key is to set your largest loss before you open your position. Put in a stop order at that level and then walk away from it.
For winning traders use trailing limit order if your trading platform allows that. This means that you lock in profits but let the position ride until it starts to come back. You won’t get the highest price but you can extract a good return.
Trading Forex or CFDs is not a “get rich quick scheme”, no matter what you might see on the internet. If you want to make a living trading, then treat it like a job. That means learning how to trade and practising with real money.
- Educate yourself - read about successful traders and trading techniques
- Find a strategy – make sure you are comfortable with it and practice trading
- Develop a money management plan – this is key to long term success and always stick to it
Say you wanted to be a skier? Would you expect to strap on some skies, go to the top of the mountain, do some jumps and come to beautiful hockey stop at the bottom? No, you would expect to start on the lower slope, fall down a lot and spend a lot of time practising. A teacher or mentor helps as learning from others is a great way to get ahead. But you still need a lot of practice and discipline. Trading is exactly the same.
Once you have a feel for trading, and you still enjoy it, then comes the time to start. You will need:
- Capital - depending on your desired income to go full time you should have about $50k of capital to start.
- Discipline – you have your money management plan. you put in stops to limit you greatest loss on every trade. Each trade uses less than 5% of your capital. Some of the more seasoned traders even have this as low as 1% of your capital. That might seem a tiny amount, but we are dealing with a leveraged product.
- Realistic expectations – If you can get a 30% return over a year on your capital you are doing well. This is a process of grinding it out, not the big wins. You might get some big wins on the way but that’s a whole new psychological challenge.
The most successful traders I know trade almost like robots. They don’t let their emotion come into their trading decisions. They are disciplined in their planning and execution. Emotions are your enemy in trading and quick win gut feel traders rarely last the distance.
A big win is great, but it has its own problem. You can become overconfident and start over-trading and taking an ever-increasing risk. Rudyard Kipling in his famous poem If says
“If you can meet with Triumph and Disaster
And treat those two impostors just the same;”
That is a good way to think about big wins and helps you manage your emotions about losses.
Advantages and disadvantages
Trading can be an exciting and interesting activity and there are a lot of advantages:
- You are your own boss; you don’t have to report to anybody
- You can trade from anywhere as long as you have a good internet connection. Fancy living by the beach in the sunshine, no problem
- You set your own schedule, markets trade 24 hours a day if you prefer to trade in the morning or the evening you decide. You can work around your day
- You don’t have to manage any people or rely on anybody outside yourself
- You don’t need much time. If you have a good plan, all you need is an hour or two per day to scan the markets. Once you have your trading opportunities and set and forget them.
- Put your money where your mouth is. There is nothing more satisfying than showing people you were right by actually taking a trade and making money from it.
As with all activities, there are also some disadvantages.
- Like any activity, trading takes time and effort and education
- It helps if you enjoy the markets. Most traders are news junkies and trading connects you to the world in a way no other activity can
- There is a no quick win, if you want to make a living from trading you have to treat it like a job, slow steady returns over time. Try to get 6 out of every 10 trades to make a profit and have a percentage return target for the year.
- It can be very lonely. The last point might seem trivial but is the one that affects most traders the most in the long term. You might be the only person you know who trades for a living. There is no need to talk to anybody when trading it’s you and the market. Keep in contact with your family and friends. Make sure you balance your trading with other social activities in life.
The pitfalls to avoid
Losing all your capital. Financial regulations in Europe require brokers to provide the "percentage of people that lose money" trading on their web site. You often find these in the disclaimer section, here is a typical example from a UK based broker:
This brokers in its disclaimer say that 75% of retail investors lose money when trading. Why is this the case when if traders had no system and traded at random you would expect that to be 50%? This is the psychology of trading. The emotions make people do the opposite of what they should, and this is the result. Controlling your trading is a key to be in the 25% of traders that make money.
Use a reputable broker. There are hundreds of brokers in the world. Many operate with no regulation, operate from tax havens or are scams. Do your due diligence. Find a broker based in a reputable country that holds a proper license. Avoid slick web sites and give away offers. The old saying if it is too good to be true then it probably is never truer than with brokers. The licensed brokers have a lot of regulations they must meet. When dealing with a regulated broker the account opening process will be more complex. This is because they have to meet regulations and means that they are following the rules which are a good sign. Be sceptical when deciding who to entrust your money. Things to ask include;
- a) do they keep your funds secure
- b) do they hedge with a reputable liquidity provider themselves
- c) have they got enough capital to make sure they can payout when you win
- d) are they really regulated by a financial regulator that monitors their activity?
Trading like any activity has its positives and negatives. It is possible to make a living trading CFDs, but you need to treat it like a job. Educate yourself, set realistic goals, select a good broker and manage your instincts. It can be a great way to make a living particularly if you enjoy the financial markets. Perhaps you are a news junkie and love to know about the world. Even better if you have contrarian views but be aware of the loneliness of trading.
Trading for a living is a game of turtles do not hare. Are you a turtle?
- The complete turtle trader, by Michael Covel – fascinating story how 23 Novice Investors Became Overnight Millionaires learning to trade.
- Market Wizards by Jack Schwager – Interviews with top traders that gives a great insight into trading psychology
- Reminiscences of a Stock Operator by Edwin Lefèvre – written back in 1923 as a first-person by a character inspired by the life of stock trader Jesse Livermore. Still a great read and still relevant today.
- Technical Analysis of the Financial Markets: A Comprehensive Guide to Trading Methods and Applications (New York Institute of Finance) by John Murphy – great reference for the concepts of technical analysis.
- Technical Analysis for Dummies by Barbara Rockefeller – good way to understand simple technical strategies like moving averages
- CFDs Made Simple: A Beginner's Guide to Contracts for Difference Success by Jeff Cartridge(Author), Ashley Jessen (Author) – great beginners book trading CFDs co-written by an Ashley Jessen an old colleague of mine.
- Japanese Candlestick Charting Techniques: A Contemporary Guide to the Ancient Investment Techniques of the Far East, Second Edition, by Steve Nison – understanding how to use candlestick charts
- Liar's Poker: Rising Through the Wreckage on Wall Street by Michael Lewis – great story about trading in general, a must-read for all budding traders
- Barbarians at the Gate: The Fall of RJR Nabisco – not directly related to trading but a great story about financial markets in the 80s
- The Big Short: Inside the Doomsday Machine by Michael Lewis – about contrarian traders during the GFC, was turned into a movie but still a great story.