Is it possible to earn a significant return from a foreign exchange (FX) account? And if so, how are account holders to calculate their returns on a one-year run of outsized returns? Step one is knowing which kind of calculator to use for the job. Fortunately, when figuring year-on-year earnings, a simple compound interest calculator will do quite well.

What’s the general situation people face when they plunk $5,000 into a trading account and work the foreign currency market five days per week?

Let’s take a look at why someone would choose that amount for daily forex trading, how much they could realistically expect to earn from diligent money management, and how they can know ahead of time what total financial rewards to aim for.

It’s imperative to use compound interest calculators to find out how much someone can earn under ideal circumstances over a one-year time span.

Here are the answers to those questions, along with all the pertinent reasoning behind each answer.

Note: There are no guarantees, especially in FX trading. Investors can and do lose money. The following example is meant to serve only as a hypothetical case in which someone manages an account perfectly, avoids impulsive trading, and is able to generate a consistent monthly amount of income from a modest initial account balance.

1. Why Choose a Forex Account?

Forex is a wise market to choose for growing an account balance quickly. Assuming all the conditions are favorable and traders don’t deviate from a structured plan, it’s possible to earn outsized returns if strict money management principles are followed.

2. Why Use a $5,000 Account Balance?

You can open an FX account with as little as $50 at some of the large online brokers, but it’s relatively difficult to build up a significant return on such a small initial amount without using excessively high leverage. Instead, a $5,000 starting balance is a reasonable sum for people who are willing to take some risks and use modest leverage.

3. What Money Management Techniques Work Best?

With a little work, traders can either develop investing strategies of their own or follow lead traders on copy platforms. Additionally, some people subscribe to signal services that guarantee certain win rates for transactions as well as favorable reward-to-risk ratios.

For this hypothetical case, we assume a win rate of 55%, 80 transactions per month, and a reward-to-risk ratio of 1.6:1. In other words, our fictitious investor makes 20 round-trip trades in a given week, with 11 winners and 9 losing trades per week. For every $1 risked, the reward is $1.60.

Stops are carefully set on each position to prevent losing more than 1% of the current account balance, which for the first month of trading is $5,000. After that, we reset the account balance on the first of every month, thus increasing the amount risked per trade.

4. What are Realistic Earnings?

Our investor’s first month of operations includes 80 round-trips, 44 winning trades, and 36 losing trades, with $50, or 1% of the total account balance, risked per trade. The 44 winners net $80 each because the reward-to-risk ratio is 1.6:1. The losers eat away $50 each. After month one, the account is increased by 44 X $80, minus losses of 36 X $50. Thus, (44×80)-(36×50), or $3,520 – $1,800, or $1,720.

That’s a monthly return of 34.4%. We’ll use this key figure as our monthly gain percentage in the compound interest calculator later on.

5. How Can Investors Calculate Estimated Returns?

The above scenario includes a lot of math, but it’s relatively simple to figure out the return on an arrangement like our hypothetical situation. However, it’s critical to remember that our fictitious investor adds each month’s gains to the account balance, thus changing the amount risked on every trade for the following month.

Let’s look at month two’s activity before doing the entire math equation for the whole one-year period.

Month Two:

The account begins with a balance of $6,720 after adding the first month’s gains. Each trade still has a reward-to-risk ratio of 1.6.1 and a stop-loss set at 1% of the account balance, this time $67.20. Losing trades decrease the account by that much, while winners increase it by $67.20 x 1.6, or $107.52. Our trader has the same win-loss record, 44 wins and 36 losses, every month.

Month two adds to the account by more than the first month did. The winning trades brought in $107.52 x 44, or $4,730.88. The losing trades amounted to $67.20 x 36, or $2,419.20. The net result for month two is, $4,730.88 minus $2,419.20, or $2,311.68. That’s a 34.4% gain once again, and as long as we keep all the parameters the same, our investor will earn 34.4% on each successive month’s account balance for the rest of the one-year period.

6. What About Taxes and Trading Fees?

We’re assuming no trading fees or commissions, as many of the top brokers don’t charge them. Instead, they make their money on the spreads between buy and sell prices. To simplify the tax situation, we’ll assume that our trader is putting all the earnings into a retirement account similar to an IRA, which means there are no tax obligations until amounts are withdrawn all at once, several years in the future.

At the end of the calculation, we’ll take estimate the person’s average tax rate at retirement to be a flat 20 percent.

7. What’s the Bottom Line Payout In the Hypothetical Case?

Assuming ideal money management, no impulse trading, no commissions, a beginning balance of $5,000, 80 trades per week, a 55% success rate, one year of trading, reinvestment of each month’s earnings into the account, a 1%-of-balance stop-loss per transaction, and a 1.6 reward-to-risk ratio, the resulting account balance would be:

$173684.57. Note that we used 412.8 as the annual percentage rate because it is the product of the equation 12 x 34.45. Then, after the 20 percent tax payment, the account is worth ($173684.57 x .8), or $138,947.66.

Is it really possible to grow a $5,000 forex account into a sum that large within a single year? Some say no, but given the assumptions above, it is entirely possible to do so.

The exact purpose of Compound Daily is to inform consumers about money matters, particularly about investments and retirement. We also have simple calculators available to input specific values to determine how much they want to save and how often. Calculators like this forex compounding calculator that we’ve provided for your convenience at Compound Daily. Enter the starting balance, interest rate, and length of terms of the investment you want to make to determine how much you should expect to earn at the end.

Most individuals have a 401k or other retirement plan through their job, but what if that’s not enough? What about entrepreneurs? What if you had some financial trouble and started investing later? There is no right or wrong answer to these questions, but they are fundamental concepts everyone should think about. 

What Is Forex Investing?

Foreign exchange currency, or Forex trading, is the trading of one country’s currency for another. For example, someone buying euros for U.S. dollars can be done in the forex market. The forex market is an electronic system of banks, brokers, institutions, and individual traders with no centralized location. Most interactions are between banks and brokers, but anyone can trade in the market. Trillions of dollars are changing hands every day, making the forex market the most liquid market in the world. 

Understanding Forex Investing

Currencies are listed in pairs with an exchange rate. The currencies are abbreviated as the country and the type of currency they use. For example, the U.S. dollar is abbreviated as USD, the Canadian dollar is CAD, and the JPY stands for the Japanese yen, and so on. The foreign exchange market monitors and regulates the exchange rates of each of the currencies, and the individual amounts vary slightly from day to day. 

The price is usually a decimal number next to the abbreviated pair, such as EUR/USD 1.1552. This means that it costs about 1.16 euros to buy one U.S. dollar. The U.S. dollar is the most traded currency and often is the highest value currency, meaning it usually costs more of another currency to buy one U.S. dollar. A person can buy a specific currency for a lower price, and after some time, the hope is that they can trade the currency again for a higher cost and make a profit. Again, this calculator is available for you to use for free whenever you like. 

Micro, Mini, and Standard Lots

These currencies trade in lots; micro, mini, and standard. You can exchange as many as you like, as long as they are in these lot amounts. A micro lot is 1,000 worth of a given currency, a mini lot is 10,000, and a standard lot is 100,000. So, for instance, two micro lots are 2,000 of the particular currency, seven mini lots are worth 70,000 in a given currency, and ten standard lots are 1,000,000 of a specific currency. 

Trading In the Forex Market

The Foreign exchange market is open five days a week and 24 hours a day across many major financial centers. You have many opportunities to exchange in the forex market because it’s vast and operates in numerous cities around the globe. London, New York, Singapore, Hong Kong, and Tokyo are the most important trading centers. 

Trading amounts are generally very substantial. For example, in April of 2019, the foreign exchange market oversaw an average of $6.6 trillion exchanged each day of the month. This number is retrieved from the Bank for International Settlements. Owned by 63 central banks, this organization monitors and works in monetary and financial responsibility. 

Preventing Unethical Financial Behaviors

As many people know already, long-term investments can be risky. It definitely pays to be cautious because honest people have become victims of fraud, scams, and other unethical practices. For example, people may obtain insider information in which they would know things that other investors don’t, giving them an unfair advantage. Therefore, organizations like the Bank for International Settlements exist. 

Regardless of the risks involved, financial planning for the future is a must. It’s simply more intelligent to have a method of ensuring your survival when you retire. Having more knowledge of how to prepare for your retirement gives you manageable and affordable options. Having a comfortable nest egg when you retire is good, but you may want to do other things with your time, such as travel or find a new hobby. For these reasons, Compound Daily is here to help you prepare for your future.