The reader was talking about my performance this year (+36.47% portfolio growth after commissions) and basically his argument was that such a return is not worth it, specially for smaller accounts that you can not live off. He knew, first hand, about other successful traders who were able to win big, and whom he trusted. He asked for some guidance in me disclosing systems that could double his account every month, systems which I probably knew about, due to my blogging for so long, but of course such a good system, if I had one, I wouldn't share it for free publicly. He mentioned that he was not asking to double his account every week, because he had realistic expectations! So, his goal was to only double it every month.
Well, I don't have a system that doubles your account size every month. Such a system doesn't exist. And he mentioned that he would then focus on investigating other sites and stop wasting time on mine if that's all I had to offer.
First let's play with the numbers for a while to analyze this. Doubling your account every month represents a 100% monthly return.
Imagine you start with $1000 dollars and you obtain a 100% monthly return.
12 months later your account balance is $4 096 000. That's more than 4 millions dollars in one year trading.
24 months later your account balance is 16 777 216 000, yep, you saw it right, that's 16 billions in 2 years trading, starting with a $1000 dollar account. At that point you can feed your dogs with $100 dollar bills. You can donate two dollars to every single human being on this planet and still be a billionaire.
100% monthly returns are not possible.
Even 10% consistent, long term monthly returns are not possible. You can have a system that returns 10% or more in a given month, even 20%. But that's a statistical anomaly that you can't expect to happen consistently every month for years.
With a 10% monthly returns a $1000 dollar account grows to $92 709 068.82 in 10 years. That's 92 million dollars. No body will ever turn $1000 into 92 millions in 10 years trading. No one.
If you want to talk about realistic returns in terms of monthly returns then we can analyze the following compounding examples:
1% monthly return represents a compounded 12.68% yearly return, perfectly possible.
2% monthly return represents a compounded 26.82% yearly return, great result and still possible.
3% monthly return represents a compounded 42.58% yearly return. Excellent return, this is elite, but still achievable. It has been done.
4% monthly return represents a compounded 60.10% yearly return. And that is out of this world. It has been achieved by some traders one year, but that number is not consistently achievable year after year.
So, the top is right there, around 3% - 4% per month. Again, I'm talking about consistent average returns on the whole portfolio. Returns of over 10% a month are achievable, heck I'm a nobody and scored a couple 6% and a 7% this year. But consistently averaging that monthly return is what I'm talking about. And consistently averaging anything above 3% per month is by all means elite.
Many websites reflect past track records with a lot of 7%, 8%, even 10% per month, but all of them reflect the return on particular trades and not on the overall portfolio. This leads to a lot of confusion and false expectations in newbie traders.
It is understandable why so many people have unrealistic expectations. The industry is full of marketers, brokers, news letter advisories making hollow promises to lure new capital into their pockets. There are too many cheap advertisements promising the moon out there and portraying trading as the ultimate money generating machine. But, the sooner you realize what realistic profit expectations are, the sooner you will stop chasing the holy grail that will make you a millionaire in a couple months, and the sooner you will be on your way to profitable long term trading.
Trading can indeed be profitable, very profitable. But it is not the lottery, it won't make you reach in a few months. You will need decent returns, and years of compounding, and obviously discipline to keep doing it for such a long period of time.
This article is very related to another one I wrote in early September 2012, How much capital do you need to trade for a living? It is a good read to complement what I have said here today.
Thanks for reading folks! And happy trading! (With realistic expectations :) of course )
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