There comes a time, once new traders have overcome many of their (at times) self-imposed initial trading barriers, when their attention finally turns to the reason all of us enter the world of trading; profit. We then began to ask ourselves the key question; “what can we reasonably expect to earn out of trading FX and other securities?” After all the majority of us don’t enter this (at first) hostile world as a hobby, the majority of us have designs on eventually making the leap to full time trading once we’ve become accustomed to: the complexity of the industry, the process and eventually devised a trading plan that has (at its heart) a robust strategy incorporating the ‘3 Ms’ we go to great lengths in describing; our mind-set, money management and method.
We’ll see many outrageous claims made on trading forums and websites from what we term “vendors”. Typically they’ll be selling a system, or an “expert advisor” that can be ‘plugged into’ platforms such as MetaTrader 4 and many of these vendors will promise stellar returns of 200% per month. What they won’t do is discuss the drawdown element of their software or plan. Most will be promoting trading methods that should be described as ‘on tilt’ gambling, as opposed to skilled trading.
Many of the strategies peddled by vendors will encourage ‘doubling up’ on the risk and or risking a huge percentage of your account on each trade in order to achieve these exponential returns. The assumption being that if you fail (and the account becomes wiped out) then you’ll simply just start again, like the vendor, which is hardly the measured and consistent approach we’d prefer to represent to traders, new or experienced.
Bearing in mind how we recoil versus outrageous claims is there a genuine target that we can aim for as retail traders, a genuine ‘big’ target that could genuinely get us excited about the possibilities and probabilities involved in trading? Let’s set ourselves a target of a net return of 200% for 2014.
Now let’s be clear, we’re setting this as a loose target, we’re not suggesting it’s a slam dunk target, neither are we saying it’s easily achievable. It’s a big target, perhaps out of reach, but a target to get us all excited by the possibilities that exit for us in trading FX in 2014. So how can we achieve it? Let’s do so simple arithmetic, after all maths is what we do in the creativity side of our business, so let’s get creative…
Break it up, break it down, then rebuild it in your fashion
Doesn’t that 200% seem daunting as a target this year? We’ll let’s break it down and discover just how achievable it really is.
So our 200% divided by 12 months equals 16.66% return per month. Is that feeling and reading as a bit less daunting already? Let’s take it a stage further and break it down to a weekly target of 3.85%. Now let’s be a little bit cheeky and divide that 3.85% by our five trading days and we know that there’s Bank holidays and holiday seasons etc. that’ll alter that figure, but it’s only a marginal adjustment. Our target per day would be 0.77%. Isn’t that now starting to read as very achievable?
OK, let’s finally turn this percentage discussion into monetary figures; cold hard cash. Let’s suggest we have a €10,000 account, can we take it to €30,000 in 2014? If we’re a day trader, risking perhaps 2% per trade, how many trades would we be likely to take and how many would have to be profitable?
Let’s surmise that the trading strategy we developed in 2013 has a positive expectancy, in short it ‘works’. It’s now delivering modest, regular and predictable profits. Let’s presume that we take three trades per day, let’s also accept that the ratio of winners to losers is 2:1; we enjoy two winners for every loser, a not impossible approx. 65% win-loss return. Therefore if we accept that we win to our full extent (2% each trade) and lose at our full extent (2% per trade) then we’ll be 2% up each day. Let’s just dial that expectancy down a bit by throwing some “spanners in the works” as we like to say in the UK, in short let’s create some problems in our perfect trading mechanism for the benefit of realism.
Instead of the 3 trades per day let’s limit it to 10 trades per week. Let’s suggest that we win 6 trades and lose 4 at the full loss and full gain. Therefore our gains will be roughly 4% per week, which is very close to our initial target of 3.85%.
Now as traders we can play around with the details and maths of our programme, but what we’ve shown here is how realistic it is to achieve a target (that on first inspection) looks far too ambitious.
So what could go wrong and where are the major faults? Firstly we’d strongly suggest that traders should only move up to risking 2% per trade once they’re 100% sure of their method and have used it successfully over a reasonable period of time to prove its effectiveness, if not then staying at 1% or less risk would be advisable. Secondly all the plans for the year should be laid down in the trading plan which experienced traders should really adhere to without a second thought. So let’s make an ambitious plan this week for 2014, it’s never too early.
