Hello and Welcome to the ditto educational series that will provide you with the skills you need to become a forex trader!
In this episode we will discuss The process of Making a passive income through trading forex and the methods for doing so and if it is a viable solution for you as well as the risks entailed in doing so.
Firstly though what is the difference between active and passive income?
What Is Passive Income?
Passive income a is regularly generated income that requires minimal to no effort on the part of the investor or passive trader to earn. Gains on stocks, interest, commodities, gambling profits and capital gains are some examples of passive income.
Some of the rules surrounding the definition of this income especially tax wise will vary from country to country so you will need to check which could apply to you when generating passive profits.
Active Vs Passive Trading
Active Trading
Active trading is the process in which a trader will spend a great deal of time analysing markets and economic data in order to find opportunities to enter a trade with the purpose of generating profits.
Passive Trading
Now passive trading differs as you’re looking to generate an income from trading, but don’t actually want to put in the effort of learning and actively trading the forex market, for this sacrifice of effort you may be required to pay a monthly fee or be required to split your profits based on a pre decided ratio. Unlike active traders, your passive income will fit around your lifestyle, rather than dictate it.
Pros & Cons of Passive Income
Before we look at some of the methods to earning passive income let’s briefly discus the pros and cons of passive income as it’s important you understand both the rewards and risks at hand.
Firstly the limited amount of time you will need to commit is an obvious benefit with passive income, although Deciding on a provider can be time consuming it’s generally brilliant for people with no time but money to invest.
passive trading can sometimes result in a slower stream of profit compared to actively trading on your own terms with proper strategy and risk management. There is also a danger that you could neglect monitoring your passive income.
This could result in losing out on potential profits for instance if you were part of a signal service which traded time frames unsuitable to your lifestyle or during unsociable hours. Alternatively, psychologically speaking you may spend to much time worrying about your positions and excessively interfere, diminishing your returns.
The forex world is also littered with scams regarding passive income particularly in reference to social media, Ponzi schemes and sub par signal services to name a couple are rife and millions are lost daily to such scams.
So How Can we Generate Passive Income?
One option is automation. To make trading passive income easy so to speak, some turn to automated trading software sometimes referred to as EA or a expert adviser. When Used correctly, automated systems may enable you to generate substantial profits consistently.
Human beings can only take advantage of a limited number of trade opportunities per day due to time being a factor. A sophisticated algorithm or EA can automatically enter and exit positions as soon as pre-determined criteria has been met, this criteria is programmed into the EA by better minds where forex is concerned, obviously not every EA you come across is a winner and you should monitor your trades with very low to no risk as well as viewing its historical data.
Even though you may understandably be skeptical of these systems approximately 75% of all trades made on the New York stock exchange and the NASDAQ now originate from these algorithms, it’s big business, big money and serious institutions need their software more than human traders in order to take advantage of every opportunity.
Software
Always Do your research and check the reviews before you invest in any EA, you can never be to cautious when it comes to your finances and don’t take someone at their word, operate on facts and evidence when deciding which to use.
Once you have chosen your trading software, you will need to monitor it daily. Creating a checklist of your trading parameters is often a good place to start. You may want to consider checking that your parameters are in order one functioning and perhaps even switch your EA off and close out positions before high impact news.
Algorithm
If you are already a successful trader you may consider programming your own EA in order for you to take a more relaxed approach to trading or trade alongside your parameters. The coding can be relatively simple for these but you may want to hire a programmer to make sure everything is correct and help you through the development stage.
Of course you will then need to back test your EA on a demo account to ensure no mistakes are made for a extended period.
Copy Trading
another method for passively obtaining income can be done through copy trading. Rather than devoting your time and effort into developing your own forex strategy you can benefit from the success and experience of existing experienced traders.
There are many websites you can choose a copy trader from and then a programme will mimic that trader’s behaviour with your own account. As always the platform or trader will take a percentage fee or subscription cost as anybody that can make you money deserves to be paid for their efforts.
As always there are risk factors to consider!
You must be prepared mentally that due to the uncertainty of the forex market, you could lose some if not all the capital you initially invested. Even a few losses can throw you psychologically if you are not prepared for that scenario.
Always Choose your trader carefully.a very aggressive trader may make some short term superb gains but on the reverse side they could blow your account in several days. Always consider their trading approach, check their recent trade history and see what people have said in their reviews to gauge an idea of the trader. Ideally you want steady and consistent results with minimised drawdown Percentage.
Forex signal services
Now while this not strictly passive I feel it should be included as a lot of the thought process is taken away from the client traders. Forex signal services are massively popular especially on social media and as I mentioned previously, they are also a pitfall for you to potentially be scammed through investing or through poor service. The advice is always the same in the sense that you should do your homework and trade with a reputable service that provides historical trading data.
Even though you will be manually placing trades the hard work is done for you so when you choose a signal service you must choose one that suits your lifestyle in terms of trading frequency and time. The risk aspect is determined by you which can be a positive or a negative aspect, please refer to our video on trade psychology for more about creating a plan surrounding trade mentality.
Lastly I would like to say all of these passive income opportunities can serve to educate as well turn a regular profit. If you can actively watch a successful trader place trades it can serve to show you how a successful trader acts and reacts to the ever changing market conditions.
In conclusion passive income is a very attractive prospect as who would not like the idea of generating a income while you sleep or relax at home. We must always remember that everything in forex is risk vs reward and consider the potential downfalls involved with any venture. A passive income stream within the forex world does not mean that it eliminates the need to be educated in forex, in-fact I would say it highlights how you need to know and understand its key principles so you make informed decisions that protect you and your capital. You should always aim to be as safe as possible when partaking in risk based investment.
I hope you have found our discussion today informative ladies and gentlemen please sit back and contemplate what you have learnt here today and Remember contemplation is the key to learning.
