One of the first questions often asked about trading is, what can I expect to make? To answer this question I think it is important that we first look at what distinguishes trading from investing. As part of the video trading course I offer I defined them as follow:
Investing is taking a longer term usually fundamental buy and hold view on stocks, commodities or bonds and aiming to profit of the gradual increase of value through dividends and growth. Investors will also usually hold onto multiple instruments as part of their diversified portfolios, this could include individual stock, bonds or professionally managed funds.
Trading on the other hand is speculating on the shorter term price movements of stocks, currency pairs or other derivative instruments. Buy or sell decisions are often times based on technical analysis or high impact news events that might have a material impact on near term price valuation due to investor sentiment.
If we look at investor expectations we would usually see that performance between 10-20% is considered very good. Although in reality we would often find that after all costs is deducted returns of more than 10% p.a. is extraordinary rare even for the best funds out there.
Now considering the fact that investors are only expecting returns of 10-20% it is interesting to think that many prospective traders have this expectation that they can easily make much more than this in much less time.
The sad reality is that this is exactly the expectations created by internet marketers, fly-by-night scammers and even brokers. What many prospective traders do not realize is that trading is actually a zero-sum game, meaning for someone to win someone else must lose. And unfortunately there is much more losers than winners in this game.
What prospective traders also fail to realize is that their returns is directly linked to the amount of time, money and skill they put in. Let's look at some realistic numbers;
Experienced part-time traders who have been at it for some time will often look for returns of around 20-40% p.a. whilst full-time traders might look for average returns as high as 10% per month. This is clearly a long-shot from what is often portrayed on the internet.
With trading there is also no guarantee that you will have a winning month every month meaning returns will be inconsistent throughout the year. The truth is that for the most part traders often have a second source of income to help sustain them during the bad months.