There are many reasons why we become traders; we could be looking for a more exciting destination to place a proportion of our savings. We may be looking to develop a new investment skill; we may need to generate a small part time income in order to cover a few extra bills. Or ultimately we could be unsatisfied regarding our current employment prospects and be looking to start small with trading, to eventually develop our FX trading skills and profitability, in order to finally impress upon others that we’re worth hiring. One thing is for sure FX is not a ‘one size fits all’ business.
There are infinite methods available for us to trade the markets and there’s a long list of reasons why we become attracted to the industry. However, there’s one recurring question many new traders have regarding trading; [quote]How much do I need in my account in order to give myself a really good chance of having have a really good ‘go’ at trading?[/quote]
The answer isn’t simple because we’d need to establish what we’re looking for as individual traders in terms of a return. But if we’re looking to make a start and to experience some real market action and to enjoy tangible returns that are worth getting excited over, we’d suggest a level of roughly $3K dollars in an account is a reasonable sum from which to develop. Why do we suggest this?
Well in some ways were quoting the average account size according to various data sources. However, despite being tricky to verify these retail account sizes can be severely distorted by institutional level traders having accounts with many of the retail brokers. As huge retail firms have improved their offerings through the advancement of straight through processing (STP) and their electronic configured networks (ECN) the line between retail and institutions has become blurred. It’s not uncommon for a retail broker to handle a million and in certain cases multi-million dollar accounts. So the 3K level may be too high, but we’ll use it as an average, for now.
There’s another reason, rather than the average reported account size, that were quoting the 3K as an appropriate level; it represents the approximate level of reward for a part time job according to recent stats from the USA and UK. Therefore if we conservatively aim at a one hundred percent growth level for our account we should, in theory, be achieving the average wage we’d enjoy if doing a part time job, approx. 300 dollars a month. And for many of us, who are looking to take our trading a step up to consider it as a part time job, a $300 extra income appears to fit in with many other metrics we’ve seen on the internet, whether anecdotes or retail broker metrics.
Now how do we earn that circa 100% return? Well if you’re expecting us to deliver up a tried and tested Holy Grail type of trading system at this stage then we’re very sorry to disappoint. However, what you’ll notice is that we’re erring on the side of caution where our potential returns are concerned. In doing so we’re hopefully impressing upon you that the 100% return is very achievable.
What we can do now is break down our circa 100% potential annual return on investment into: months, weeks and days of activity. We can then add in some (reasonable) assumptions, in relation to probability and money management, in order to arrive at some realistic targets based on all the afore-mentioned criteria.
So let’s start with the monthly target of 8.3%, which breaks down into a profit of 1.9% weekly. How are we doing so far, is it looking realistic? Of course it is and what’s more our estimates are some distance from the quite frankly ludicrous returns we see claimed in many advertisements regarding FX trading. We’re aiming for less than 2% return per week, a very conservative return.
We’ll once again refer to points we’ve made in previous blog entries regarding the likely breakdown in the levels of probability and as is our habit we’ll err on the side of caution. We’re aiming for a 50% success rate on our trades; fifty percent will be profitable, fifty percent will be losers. Now that R:R is very low in comparison to what traders may read elsewhere, but the purpose of this exercise is to prove that, even at low levels of probability and profitability, we can build a winning trading method and strategy. Now let’s look at the actual money risked.
The suggestion would be that with the 3K account you only risk 1% per trade, 30 USD per trade. Therefore in order to enjoy circa $300 gain per month we’d require ten winners and no losers, which would be a highly unlikely scenario. However, if we take on average one trade a day, as part of a day trading strategy outlined in our trading plan, and the gains we make on our winners are twice our losers we may be in business.
15 losers at 1% would be a loss of $450. Our 15 winners however, on a 1:2 risk versus reward, would return $900. Our profit would therefore be $450; we’d be exceeding our target by $150 each month. Now it’s reasonable to assume that not all our winners will reach a 1:2 reward versus our risk. But it’s also a reasonable assumption that with the effective use of trailing stops not all our losses will be at the full one percent level.
So in conclusion with our 3K account, using very cautious trading methods, controlling our risk through hard and trailing stops and letting our winners run, we can look towards a reasonable and conservative account growth of 100% per annum. And that return beats what’s on offer at banks by approximately 95% at the moment. Would we sign up for that 100% return if offered to us ‘on a plate’? Without a doubt, but with a little bit of effort and control of our trading plan we can earn the right to grow our small account by 100%.
