Managing Expectation and Taxation: Understanding Your Earnings as a Forex Trader

On the face of it, it is easy to see why aspiring financial traders are drawn to the forex market. With daily trading volumes now in excess of $5.3 trillion and an incredible level of liquidity that enables individuals to profit even in a depreciating market, this is an entity that promises immense returns on any initial investment that is made.

The foreign-exchange is also a complex and volatile entity, however, meaning that aspiring traders must enter the market from a position of knowledge and understanding. One of the most important considerations is the establishment of realistic earning goals, as you factor in elements such as profitability and tax and determine whether or not the career is right for you.

Managing Your Forex Career: How to Set Realistic Earning Goals

 The first step is to estimate your pre-tax earnings, which of course will vary depending on your amount of starting capital, appetite for risk and the strategy that you use. In simple terms, however, typical investors can look to achieve an ROI of 30% of their investment, working on the basic principle of earning 2.5% per month at a risk to reward ratio of 1:1. This is a considerable return that compares favourably with options such as real estate investment in the modern age, thanks primarily to the leverage and liquidity that exists within the contemporary marketplace.

With an estimated, annual ROI in place, you can apply this to your total trading capital and convert it into a monetary amount.

The next step is to understand the costs and taxation levies that are associated with forex trading, from broker commissions to capital gains. All profits earned from forex trading must be declared to HMRC at the end of each year, at which time you will complete a capital gains tax return form detailing your earnings and total ROI. Before you start out, however, you can apply an estimated taxation rate to your projected returns, which will leave you with a viable sum that you can classify as your earnings.

The Bottom Line: Taking Steps to Optimise Your Earnings

 Knowledge is certainly power in this respect, but there are additional steps that you can take to optimise your earnings when trading forex. CFD trading is considered to be a more tax-efficient ways of investing on the foreign-exchange, for example, with online platforms such as FXPro offering this as a key vehicle to its experienced users. As CFD trading is not liable for stamp duty or income tax, it enables you to retain more of your profits at the end of each financial year.

Similarly, cultivating a strategy that combines determinism and instinct makes it easier to optimise individual trades in any given market climate. This helps you to increase the probability of your trades over time, as you look to scale your earnings and forge a lucrative career path.