It’s no wonder that new traders quickly develop unrealistic ambitions once they’ve committed to enter the FX market as a trader. If they find FX by way of links to various forums, or by searching through search engines such as Google, they’re initially bombarded with adverts promising riches beyond their wildest dreams. And lately, with the advent of copy and mirror trading services, these promises have taken on a new dynamic. Now the suggestion is that you don’t have to engage in any part of the learning process to become a proficient trader; you just look down the list of winners on the various boards, select the trader to follow who’s making the most in terms of percentage return and just wait for those euros to hit your account. As with most things in life the phrase “if only it was that easy?” springs to mind.
Alongside the massive growth in FX trading volume we’ve experienced over recent years and the rapid improvement we’ve seen in the quality of brokers’ services, the growth in supplementary services has also risen exponentially. Traders are bombed with adverts on trading forums and financial websites promising fantasy returns of 1500% per year, all available for the cost of €100 per month subscription and the sales pitch hasn’t moved on since the Wild West days centuries back – the pitch is the same only the ‘snake oil’ has changed.
Avoiding these temptations, remaining steadfast and keeping your feet on the ground, can be a difficult process when traders are under such intense sales pressure each time they visit trading forums, however, it’s simple to package all these offers under the same description; a waste of time. Traders need to ask themselves one simple question; “if the trading systems are that good why sell it for a few ‘bucks’ per month, why not keep it under wraps, get backing for the ‘Holy Grail’ system from an FX bank and shake all the money down from the money trees?” The answer is simple, the system doesn’t work.
Actually let’s rephrase that, all systems work up to a certain level and for a certain time, and many systems released are done on a curve fitting basis; its simple to look at the historical performance on for example Euro-Dollar and curve fit a series of indicators to obtain the positive desired result for skilled marketeers. But as we quickly discover in this game, past performance is no guarantee of future success.
The situation is similar with mirror and copy trading firms, you’ll see results of 2000% a month from certain traders and what’s ‘worse’ these returns can in fact be real. However, closer inspection of these kind of stellar returns can reveal a drawdown of 85% at times, the trader is simply ‘doubling up’ on each trade, win or lose until a home run happens, many refer to this as a “martingale strategy”. Now if you’re prepared to run the risk of a loss of 85%+ on your account, or a wipe out and several margin calls, by following a trader trading with pennies who has no regards for developing a consistent income from trading as a career, then perhaps you should stop reading right here and get on board. But for those amongst us with more realistic ambitions let’s move on…
When overwhelmed by the promises of riches it can become extremely difficult for new traders’ heads not to get turned, so ignoring all the hype of 1500% – 2000% returns how do new traders go about targeting a reasonable annual return and how do they ascertain what represents an achievable percentage increase? Firstly let’s be honest…
The vast majority of traders fail to develop a steady income from trading, those that do treat the industry professionally from day one. They have a professional attitude and build a framework and trading plan around their innate professionalism. As part of that attitude they set realistic annual account growth targets. They realise that lowering their targets directly relates to their risk; the lower the risk per trade, the lower the profit, but professional traders concentrate on minimizing risk primarily not maximizing return. When adopting this model the targets become far easier to plot. Let us explain with a straightforward example…
If a trader has decided to trade the Eurodollar only and has decided to trade it as a day trader, but has limited the trades per day to perhaps 3 trades, (should their set up occur in their trading sessions) then if risking 0.5% of their account per trade their maximum loss per day will be set at 1.5%, probably less than 1.5% if using a trailing stop. This would be a maximum number of trades of circa 60 trades per month. Now if we surmise that at least half of the trades taken will be winners, but those winners pip gain will outweigh the losing trades by an estimated 2:1 then we know that the account will grow. The account could grow by circa 15% per month. Extrapolated to an annual return we could be looking at over 150% per year.
Now let’s just concentrate on this exercise and repeat the pertinent points; we’ll take up 60 trades per month, risking 0.5% per trade, we’re aiming for a 50:50 winners rate with the winners having a 2:1 return rate and we can enjoy 150%+ account growth per year, not bad, where do I sign up!?
The more you look at a reasonable return rate, and then back test it and run the numbers that’ll lead to that target of 150%, the more it looks achievable. We’re only expecting half of our trades to be winners, yet by (hopefully) letting the winners run we can enjoy a 2:1 return rate on the winning trades. Does the 150% + return rate look unrealistic based on the numbers outlined? Perhaps it is and many experienced traders will point to the fact that many targets are rarely reached; our 2:1 return rate might not be reached, we mightn’t get fifty percent winners, we mightn’t get 3 good trading opportunities per day. However, to counter this if we use a trailing stop our 50:50 percent winners may be far less than 0.5% full risk. So let’s state that 100-125% return per year looks achievable.
They key message is that using the loose framework that we’ve outlined we can enjoy an incredible level of return and whilst that level of return may appear to be subdued in comparison to the returns posted elsewhere on the internet, as an investment return in our industry traders would be outperforming the majority of their peers. And that opportunity to surpass the vast majors of traders all stems from setting down realistic targets at the outset, creating a plan and trading that plan. And as we can see even the simplest of plans can be put to work to achieve very respectable returns.