Everyone knows the main thing that draws people to the markets is the promise of mega returns.
Particularly when the banks are offering us next to nothing for our savings, there comes a point where we think there must be a better option – and what better option is there, than to manage our money ourselves and return a bajillion dollars a year instead of the generous $3.50 our banks are offering?
New traders tend to come into the game thinking anything less than 1283% per annum is an outrage, and that living off investment returns is a given.
But in truth, they have nothing at all to base that assumption on other than the claims of the various market spruikers trying to capitalise on their stupidity. They certainly don’t know anyone returning that kind of money. They just ‘know’ its possible.
I came across the Forbes “40 Highest-Earning Fund Managers and Traders” list this morning and was disappointed to see that I had, once again, been pipped at the post by a few no-name hedge-fund managers. But after my tears had dried enough that I could see again, I noticed that these high-earners didn’t make such outrageous returns.
You know, a mere 30% or so was about the top return, and this was in a bull market where a do-nothing buy and hold strategy on the S&P500 ($SPX) would have returned you just under 12%.
It makes you think. If these ‘top’ fund managers – the best of the best – are returning 20-30%, are our expectations wildly unrealistic?
What Can A Private Trader Really Achieve?
Personally, I think a trader can achieve anything they set their mind to. The article is about top earners in a dollar amount so it really isn’t a leader-board in terms of return. I know there are private traders out there who earn substantially more than that every year in percentage terms – but that does not necessarily mean it’s a given for everyone.
The problem is, most people start out grossly over-estimating what they themselves are capable of. Not everyone is going to be a great trader earning 100% or more every year, and in reality most people will struggle to even be a good one, especially to start with.
Returns can depend dramatically on a few factors which will vary considerably between traders.
- Skill Yes, you need skill and bucket-loads of it to make any kind of (consistent) return, let alone an out-sized one. Do not under-estimate the time, practice and devotion to your craft that is required to see success in this. It’s pretty safe to say that aiming for a 100% return on your account in your first year is going to leave you pretty disappointed. In fact, if you get to the end of your first year and your account is in the black, you should be happy-dancing around the table.
- Time Frame With all else being equal, a trader using 5 minute charts will out-perform a daily chart trader simply because they get more opportunity to trade. Their edge is presented more frequently, trades are closed more frequently and as a result the profits accumulate much more quickly – assuming, of course that their system is a profitable one. A 5 minute trader can trade a 7R trend in a day, where the same trend on a daily chart will take weeks, if not months to develop.
- Trade Risk Some traders who earn mega-returns take stupid risks to do it. There is no point shooting for out-sized gains by risking your whole bankroll when it means you’re finished if it goes wrong. Keeping things more moderate means a slower accumulation of profit (and loss) and lower returns, but it will also ensure you have a chance to make some kind of return year after year, rather than having your star fall and explode as quickly as it rose. Common wisdom suggests keeping risk on each trade to less than 2% of your account.
- Portfolio Risk Some traders will keep their trade risk small, but have a large level of portfolio risk. This is when a trader risks say 1% per trade, but has 25 positions open that are not yet at break-even. Again, kinda dumb as all it takes is a shudder though the market and a quarter of your account is gone. But, you’ll also get higher returns when things go right.
- Trader Conservatism or Aggression Our personalities will dictate to a large part what our returns have the potential to be in any given market. Someone who is more conservative might decide not to add to profitable positions, while a more aggressive trader might add to their positions through the use of options, for example. In a favourable market, that can be the difference between a decent return and an amazing one.
- The Ability to Change Course. The sad fact is that the market does not always go up. Traders who have the ability (or some kind of mechanism that shows them) to change course quickly is a trader that will earn more simply because they know how to profit from all market conditions, and can recognise which conditions are prevalent in the market at any given time.
All this just goes to show that there is no real answer for the “What kind of return can I expect?” question. Return is a huge balancing act between market conditions, personal skill and risk appetite; there is no ‘standard’ return for a private trader.
So How Do We Know How Good We Are?
In trading as well as life, it’s usually counter-productive to compare yourself to other people. As you can see from above, there are so many variables that it just isn’t helpful.
However that’s not to say you shouldn’t have some kind of benchmark to rate yourself against. It is helpful to see yourself improving, or having something to tell you somethings changed and things aren’t going so well.
For example, If you trade the constituents of the S&P500 on a daily time frame, you would want your efforts to outperform the index otherwise what you’re doing is a waste of time and you may as well just buy the $SPY.
Or, if you trade just one thing like I do, you could look at the percentage change for the period, and compare that to your results. For example, it’s the last trading day of February today, and in the month of Feb the $EURUSD fell about 3.5% . I want to return more than that, and if I do I’m a happy girl. (I’m a very happy girl this month )
When you’re just learning, you can compare your own progress in a not-return way. For example, how often did you stray from your plan this month, compared to last month?
At the beginning, no-one knows how good they are going to be, it’s something that slowly gets revealed as a trader progresses, but the facts say that most people will fail. So for most people, 30% return is brilliant but there will always be outliers who are capable of more. But before you try for outsized returns, prove you can make ‘insized’ ones, and then, with time and experience the outsized ones may come.
*Do you bench-mark differently? Love to hear your thoughts in the comments section!
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