What you need to know to become a better trader

 

I will tell you a rough estimate on your account size for trading depending on your goals and timeframe.

I won’t give you crazy hyped numbers, but I will also provide a very clear guide on how you can quickly escalate your account, even if it’s small, to eventually have a supplemental income or even a full-time income.

I had the idea to make this post since I was a beginner Forex trader. I was always asking myself: does anyone makes money trading Forex? If you are a beginner and even intermediate trader, you might be wondering the same.

It doesn’t matter if you start your forex trading career with only 100 dollars, 1,000 or even 100,000 there is a way to escalate and build a good amount of capital if you are willing to be discipline, let time work in your favor and use the so called “Most powerful force in nature”: compounding.

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In this article we will not speak so much about trading strategies but about money management and other SUPER important topics most beginner traders want to avoid, or simply don’t see them as so important.

But are key to your success.

Anyhow you should remember these are not typical results nor you should expect to make this amount or any amount of money from the Forex markets and these numbers are provided solely as educational and reference point of view.

If you want to learn some simple and effective trading techniques enroll to my free video course on Forex Trading or go buy my book on Amazon

 

Trading is comprised of three big topics and all of them deserve equal attention:

1. 1. Trading System (Determine entries and exits) – most traders focus all their energy and time on this subject, however it’s not enough to know when to enter in order to make money, if you only focus on your entries you will have 1/6 of the equation only.
   2. Money Management and position sizing – you need to determine your risk and reward ratio. How much are you willing to risk in order to make X amount of profit. So anytime you lose, your account won’t suffer a catastrophic loss, if your strategy is good, your system will give you a winning number in the long run.
   3. Trading psychology – When we trade, we must face two very important human emotions: fear and greed. It is a key factor in winning that you learn how to control your emotions and trade in a systematic and methodological fashion.

In this article we will analyze some case studies, but please take into consideration they are hypothetical cases and in no way they are financial advise, just some ideas so you can do your own due diligence and discuss with your financial planner.

So, without further due let’s begin with the first step:

Determine how much money you are setting aside for trading the forex markets

I know this may sound obvious but it’s not so much as you think, it has several implications we are going to analyze.

1. Forex trading with $100 dollars

Yes, I know what you will say, $100 dollars is not enough money to trade the Forex Markets, and you will be completely right. It’s VERY hard to make a substantial amount starting with such a small sum.

However, there are other factors to consider and if that’s all you have right now for trading it’s fine, it’s a good start.

If I only had $100 dollars to start trading, I would follow these steps:

• Find a broker that allows you to trade micro lots (Those are $1,000 lots or .01 in MT4)
• Open a demo account at least for 1-3 months trading with virtual $100 in your demo account.
• Trade for that time until you see your system Is working, you are making money and you know your way around the platform and the broker.
• Put the $100 aside from the beginning and try to increase that amount by adding money every week or every month.
• Make a savings plan to increase your trading account, even if in your demo testing phase, you are able to save another $100 and start with $200 you will now have double the amount, which counts for a lot in trading.
• After determining your Risk/Reward Factor, you can start your live trading and start seeing returns. Even with a smaller account like $100 you might be able to increase it by 20-30% every month.
• Continue your savings plan, so maybe by the end of one year you have a reasonable amount of money in your trading account.

Let’s make a quick case study scenario:

I know the case study is ideal in the sense that to make exactly 20% from the Forex markets every month is completely impossible, your numbers will look more like: 1^st moth 14.23%, 2^nd month -7.12% 3^rd month +36.45% and so on. But the average of around 20% is very achievable on many simple trading strategies.

Starting capital: $100

Demo trading for 2 months: +$0

Savings plan $25 per Week X 8 weeks: $200

Live account: $100 capital + Savings $200 = $300

1^st month live trading:

$300 + 20% = $360 ($60 profit)

Savings plan $25 X 4= $100

2^nd month live trading:

$360 capital + $100 savings = $460

$460 + 20% = $552 ($92 profit)

3^rd month live trading:

$552 capital + $100 savings = $652

$652 + 20% = $782 ($130 profit)

4^th month live trading

$782 capital + $100 savings = $882

$882 + 20% = $1,058 ($176 profit)

5^th month live trading

$1,058 capital + $100 savings= $1158

$1158 + 20% = $1,390 ($231 profit)

6^th month live trading

$1,390 capital + $100 savings = $1,490

$1,490 + 20% = $1,788 ($298 profit)

7^th month live trading

$1,788 + $100 savings = $1,888

$1,888 + 20% = $2,266 ($377 profit)

8^th month live trading

$2,266 + $100 savings = $2,366

$2,366 + 20% $2,839 ($473 profit)

9^th month live trading

$2,839 + $100 savings = $2,939

$2,939 + 20% = $3,527 ($587 profit)

10^th month live trading

$3,527 + $100 = $3,627

$3,627 + 20% = $4,353 ($725 profit)

End of the first year, after the first 2 months of demo

Capital: $4,353

I am sure by now you have seen the power of this strategy. If you only had $100 to start with, I am sure that the perspective of having close to $4,000 in only a year sounds very interesting.

With those $4,000 you could be making over $800 in profit every month and compounding. So, your $100 monthly savings are now 9 times more than what your abilities to save were only a few months back. Of course, the idea is to keep growing your nest egg until you have a significant amount of money for you to live off your trading or to save for something important.

2. Forex trading with $1,000

Although this amount is not enough to make a living from trading, it’s definitely a better start than our previous case study of $100, you will have the ability to grow it much faster to an amount that is important to your trading.

If you have the discipline of saving, even if it’s a small amount of money every month it can definitely help to boost your account and achieve your goals much faster.

If I’d have $1,000 to start my trading, I’d follow these steps:

• Put your $1,000 aside in a savings account or similar
• Find a broker that allow you to trade micro lots (Those are $1,000 lots or .01 in MT4)
• Open a demo account at least for 1-3 months trading with virtual $1,000 in your demo account.
• Trade for that time until you see your system Is working so you are making money and you know your way around the platform and the broker.
• Start a savings plan in those months while you demo trade, ideally try to save something like $30 – $100 a week depending on your possibilities.
• Once you see your system and the platform are working you can start trading live
• After determining your Risk / Reward Factor, you can start your live trading and start seeing returns. Even with a smaller account like $1,000 you might be able to grow it by 20-30% every month.
• Continue your savings plan, so maybe by the end of one year you have a reasonable amount of money in your trading account.

Let’s see a case study to help you determine a scenario with your initial $1,000 as trading capital.

Starting capital: $1,000

Demo trading for 2 months: +$0

Savings plan $50 per Week X 8 weeks: $400

Live account: $1,000 capital + Savings $400 = $1,400

1^st month live trading:

$1,400 + 20% = $1,680 ($380 profit)

Savings plan $50 X 4= $200

2^nd month live trading:

$1,680 capital + $200 savings = $1,880

$1,880 + 20% = $2,256 ($376 profit)

3^rd month live trading:

$2,256 capital + $200 savings = $2,456

$2,456 + 20% = $2,947 ($491 profit)

4^th month live trading:

$2,947 capital + $200 savings = $3,147

$3,147 + 20% = $3,776 ($629 profit)

5^th month live trading:

$3,776 capital + $200 savings = $3,347

$3,347 + 20% = $4,016 ($669 profit)

6^th month live trading:

$4,016 capital + $200 savings = $4,216

$4,216 + 20% = $5,059 ($843 profit)

7^th month live trading:

$4,016 capital + $200 savings = $4,216

$4,216 + 20% = $5,059 ($843 profit)

8^th month live trading:

$5,059 capital + $200 savings = $5,259

$5,259 + 20% = $6,311 ($1,052 profit)

9^th month live trading:

$6,311 capital + $200 savings = $6,511

$6,511 + 20% = $7,813 ($1,302 profit)

10^th month live trading:

$7,813 capital + $200 savings = $8,013

$8,013 + 20% = $9,615 ($1,602 profit)

End of the first year, after the first 2 months of demo starting with $1,000

Capital: $9,615

So now you can expect around $2,000 a month!

I know is not something that will make you retire and live wealthy for the rest of your life, however if you have enough patience in only a few years you will be able to generate a full income from trading and live your life in your own terms. You will not depend on anyone but on your own skills.

There will be no clients, no boss, no economical crisis and you can potentially scale your numbers to infinity, that’s the beauty of trading.

In my opinion that’s worth a few years of waiting and discipline to achieve.

Let’s scale things up and imagine you have $5,000 that’s a much more reasonable amount to begin your Forex journey, although is not a lot of money in general terms you can grow it quickly and start using it to bring your lifestyle up.

3. Forex Trading with $5,000

This example works if you have those $5,000 saved but also if you have a nest egg already saved, let’s say $50,000 I would never recommend you move that entire sum of money to a Forex broker account (I am telling you because that’s exactly what I did when I started and it was disastrous to my financial health).

I’d say move only $5,000 to $10,000 max, and start there, the returns anyway will be much higher than if you leave all your money in some sort of savings account and if your trading is going great you can always add more to increase your trading account.

If you avoid depositing your entire savings, you will be protecting your initial capital from at least two factors

1. Your bad trading: let’s always prepare for the worst but work for the best. Specially because you might still be learning and the pressure of having bigger sums of money being loss or won in a matter of minutes/hours can be VERY difficult to endure psychologically. Also, why risk putting all your savings in one institution when you can use the power of leverage?
2. Black Swan events: during the Swiss Franc volatility spike in December 2014, when the central bank removed the peg, the CHF spiked around 30% in a matter of hours; of course, there was many people holding big leveraged positions. The movement bankrupted not only those traders shorting the franc, but also brokerage firms that were big and reputable like Alpari. If you’d have your money in a CHF trade and were caught on the wrong side, even if you had stop losses most likely due to the dramatic move they wouldn’t have triggered it or if they would, it was with a big slippage, so many people faced insane losses, to the point of owing more money that they originally had in their accounts (which is not supposed to happen) even with Sop Losses ready to protect them. Black Swan events occur every few years and they can be devastating, so again it’s best not to have all your capital in a trading account.

Ok, let’s build our case study with $5,000. I will use some savings because I believe everyone must have the habit of saving, even if it’s not a big amount. Of course in this case won’t have such a dramatic effect on the account like in the $100 case study, however it will help to boost your account in the long run.

Starting capital: $5,000

Demo trading for 2 months: +$0

Savings plan $80 per Week X 8 weeks: $640

Live account: $5,000 capital + Savings $640 = $5,640

1^st month live trading:

$5,640 + 20% = $6,768 ($1,128 profit)

Savings plan $80 X 4= $320

2^nd month live trading:

$6,768 capital + $320 savings = $7,088

$7,088 + 20% = $8,505 ($1,417 profit)

3^rd month live trading:

$8,505 capital + $320 savings = $8,825

$8,825 + 20% = $10,591 ($1,765 profit)

4^th month live trading:

$10,591 capital + $320 savings = $10,910

$10,910 + 20% = $13,092 ($2,182 profit)

5^th month live trading:

$13,092 capital + $320 savings = $13,413

$13,413 + 20% = $16,095 ($2,683 profit)

6^th month live trading:

$16,095 capital + $320 savings = $16,415

$16,415 + 20% = $19,698 ($3,283 profit)

7^th month live trading:

$19,698 capital + $320 savings = $20,018

$20,018 + 20% = $24,022 ($4,004 profit)

8^th month live trading:

$24,022 capital + $320 savings = $24,342

$24,342 + 20% = $29,210 ($4,868 profit)

9^th month live trading:

$29,210 capital + $320 savings = $29,530

$29,530 + 20% = $35,436 ($5,906 profit)

10^th month live trading:

$35,436 capital + $320 savings = $35,756

$35,756 + 20% = $42,908 ($7,151 profit)

End of the first year, after the first 2 months of demo starting with $5,000

Capital: $42,908

I know fictitious case studies, like these ones, are deceiving and things can look to be too simple, believe me, they are not. However, I decided to put them here just to give you an idea of the potential outcome taking into consideration a disciplined trader with a good system. Also, to answer the question I get very often: how much money can you make trading forex?

Here’s a link to my YouTube video where I discuss this same subject of how much can you make trading Forex, with a bit of a different take and information:

Conclusion

If you decide to take action and start a similar plan, maybe you won’t be able to make these results in one year, let’s say it takes you double, and in 2 years you are achieving these numbers. It doesn’t matter, you will be much better off from where you started, and you will be able to call yourself a Forex trader.

I am sure by now you have a very clear idea of the power of this strategy, just adapt it to your numbers, your ability to save money and build your own scenario. I know it’s not that simple and life will put many challenges in front of you that won’t allow you to achieve your goals exactly how you planned them, however with trading anyone has a real chance of succeeding if you are willing to put on the work. Maybe you’re expecting to make 20% a month, but your strategy is making you only around 12%, well that’s a lot of money anyway! If you are able to produce consistent returns every week, month and year, it’s only a matter of time before you can reach your financial goals.

I encourage you to share any stories you have regarding the amount of money you had when you started trading or, if you are about to start, what amount are you considering and how are you planning to manage it to maximize your returns and protect your downside.

Waiting for your comments and wishing you great luck in your trading,

Paul

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