Does forex trading generate passive income?
Some forms of forex trading generates passive income
If you encounter someone that says forex trading can give you a passive income however, it is important to ask: ‘how is the trading being done?’ Is it suitable for me?
What is passive income?
Passive income refers to a stream of income coming in at a regular basis and requires little or no effort to maintain it. Common types of passive income includes rental income received from owning and renting out property, dividends that come from ownership in the stock of a listed company, REITs or interest income from bonds. Less commonly encountered passive income includes collecting royalties from publishing a book or a music record, receiving dividends from a non-listed company that may be run by a friend.
There are also passive income streams arising from new business models. Some individuals advocate that income from participation in a multi-level networking marketing may also be passive income (when income is derived from activities of other individuals in the network). Similarly ad revenue from internet traffic that continues to stream in from a blog that has long become inactive may be a passive income. And then some say that forex trading generates income too.
What is forex trading?
Forex trading is the active buying and selling of foreign currencies aka forex to make a profit from price movement. In another blog posting ‘What is forex trading?‘ I discussed what forex trading is about, two different ways of trading forex and the benefits so I won’t go into detail over here. However it is important to look at how forex is traded to determine whether it does generate passive income.
Different types of forex trading
Discretionary forex trading
Discretionary forex trading is a form of trading where the trader participates actively to make buy or sell decisions, including execution of orders. Some forms of discretionary forex trading such as scalping can be done at high frequencies or short intervals. In fact the activity can be quite intense. Income is made only when trades are closed at a profit. No trading no income. Whether or not you are a full time forex trader or a trader doing it for part time income, the moment you took a one-month holiday, no trading no income. If you got knocked on the head and had to lie in bed for 2 weeks, no trading no income.
So this type of discretionary forex trading does not generate for passive income.
Forex system trading or trading with forex robots
There is a growing group of individuals who have adopted trading with forex robots. Trading robots take over entirely buy-sell-execution-close so that the individual only has to ensure that the trading robot is operating and has access to the forex market. Because of the hands-off approach, the income stream definitely qualifies as passive income. The important requirement: presuming the robot is a profitable one.
Earning interest or swaps from interest rate differentials
I think there is another income stream that can come from forex trading. Because forex brokers pass interest or swaps that arise from positive interest rate differentials from a forex pair to the customer, this might be considered interest income or passive income. This passive income can come from both discretionary forex trading and forex system trading. However, the strategy used to achieve this passive income stream must target pairs that can yield positive interest rate differentials and the position must be held open long enough for interest to be generated. Once a long position is open, no more participation from the trader or robot is required until the position is closed.
SO should I insist that my forex trading generates passive income?
Individuals who are wondering whether or not to pick for forex trading should consider the following:
- Active forex trading can be very rewarding once it is mastered. With the correct use of forex leverage, trading profit can outdo a passive income stream. In fact this is an attraction to forex traders.
- Relying on trading robots seem a very good idea. The challenge: finding one that is profitable.
- Forex markets are volatile by nature. Combined with forex leverage, gains and losses are magnified. A trader obsessed with interest from an open position may overlook that while interest income from positive swaps is great, losses incurred when a losing position is closed may outdo interest gains. But if forex leverage is not employed, then the interest income from forex trading is not any different from making a long term investment in foreign currencies or opening a foreign currency fixed deposit. (Read ‘Why should individuals invest in foreign currency?‘)