The dreaded question of rates of return and trading for a living

Hello all,

I’ve been studying the FX market for a few months, and have had a few demo accounts, learning the ropes, etc.

In my survey of the FX community I find that there are a wide range of opinions on profitability, worst thing is that there is no verifiable body of statistics to work from in order to make assumptions.

It seems the standard Wall St. rule of thumb is that top traders make 20-30% annually, on a fairly consistent basis. We’re talking big money here of course, nine-ten figure funds where orders have to be worked over a day, not the instant hit bid/ask stuff that retail traders do. Some big heroes in the commodity world like Paul Tudor Jones can net a 100% return several years in a row. But the Paul Tudor Joneses and Ed Seykotas are a rarity.

Articles in futures magazines have interviews with traders who are proud to say that they’ve made 40-50%, maybe getting lucky occasionally and hitting a 100% return one year.

Alexander Elder mentions in “Come Into My Trading Room” that he’s oriented on 20% a year. Now Elder is definitely a very well learned trader, I can tell the guy isn’t an idiot - he even developed two indicators. However, according to him it seems that unless you’ve got half a million bucks in a trading account, there’s no way you can play the game and live off your trading.

On the flip side, the internet is full of urban legends who turn five and even four figure stakes into over a million bucks in just a year or two. The Wall St. journal had an article on one FX trader, Ray Firetag, who using a fundamental based strategy was able to turn a 50K stake into “north of seven figures”, and he started trading in March of '08 (blew out one account, then scored on the next one). He had no previous financial experience whatsoever.

There are books like “Millionaire Traders”, where this one guy Hoosain Harneker managed to turn a $1000 stake to six figures in just three years shooting for 10 pips a day (with a 20 pip risk per day). There are news traders there who turned $5000 into $100,000 in a few months, and so on.

Then there’s 90% of the rest, who manage to earn negative returns of 90-100% in six months :smiley:

Now, you’re somebody like me who wants to trade for a living. You think that this is the coolest job that ever is. You don’t want to do this for a few hours when you come home from work, you want this to be your main bread.

Obviously, 20% a year is just not going to cut it, unless you’re an MD like Elder, for whom saving up a six figure sum while learning the ropes is reachable within a few years.

If you started with a $10,000 stash (reasonable for most middle class working people), if you attained an average 20% performance a year it would take you an entire 25 years to work your account to about half a mill (inflation adjusted), at which point you can finally live off it. It’d take you about 10 years less if you added $10K each year from your savings.

So the question now stands, who is right and who is not?

Street wisdom says 20%, with 100% being the big home run you score every now and then, if things go your way. Urban legends speak of much greater returns, and people with five figure trading accounts who make 100%+ returns a year, as well as people who daytrade with such accounts and live off their trading alone.

My assumption has been that with daytrading, it is theoretically possible to make more money because of the compounding effect (Martin Schwartz, profiled on Market Wizards, had a 25% per MONTH average return before he started managing other people’s money). It seems most of the fulltime traders are very short term, and those are the ones that apparently trade for a living. However, there is a school that says that daytrading is bunk and after commissions you’re a loser compared to the swingtraders, you sit in front of the monitor all day and net you’re down compared to the swing traders.

Swing traders, however, all seem to universally swear that 20% is the bacon you want to aim to take home, and that anyone who is making triple figure returns has got to be taking on too much risk, and is simply riding a good wave before it crashes. Most of Wall St, for that matter, is also swing and longer term oriented, except the boys hopping around in the NYMEX and CBOT pits. They say if you haven’t got enough dough, develop a solid record for a few years and go trade for a bank or get the money of friends, family, and fools.

Granted, I’m at the stage where I am still scraping the breakeven bar, but I want to be able to set solid goals. I believe in the 2% per trade risk rule, and I’m fine with sticking with that. I want to be able to trade fulltime. Within a few months I’ll have $10K ready to go (assuming I have a good stretch of profitability), meanwhile I’m on one of those $10 accounts and trading with teensy contracts. I live with the folks, so my expenses are as low as they can be.

Are there any thoughts on my long treastie here?

Great question! I too plan to become a full time trader (in about 2 years) after I retire from my current profession. During that period of time I will be honing my skills, proving my method, and accumulating trading capital. I plan to trade a large account because I do not want to feel the need to take unnecessary risks to get a 30-40% monthly return. My goal is a consistent, 10% per month. That is, in my opinion, very reasonable while keeping risk to a minimum and not over utilizing leverage. Some traders here feel that is not nearly enough.

I think comparing FX trading to equities trading is like comparing apples to oranges. Just my opinion.

Thank you, TonyIommich, for this thread! Those percents motivates to think a little bit and differ reality from dream inside head. I quess most people would not even start looking at forex if they would really understant truth about yearly earnings.

And it was also interesting to read because you mentioned many great traders :slight_smile:

Thank you,

have you looked at the stock market the last few years? :eek:
talk about a high risk investment!

I’m very sorry, my last posting was removed because I misread the post I was replying to. The poster said that they would be satisfied with 10% returns per MONTH, I read it as “per year”.

Yeah, 10% a month is exactly what I want to be my ultimate consistent goal, with bi-monthly compounding (once I hit 21%, compound and increase the risk). That works out to 120% a year non compounded pre tax, or over 200% if compounded every two months.

Basically, the idea is that you have to hit 2.5% each week on average, assuming some weeks will be up, some will be down, but three out of the four weeks per month will add to 10% somehow. Its tough because the market isn’t an ATM machine, and you’re not always in sync with them. The trick I think is fanatical money management, which should come first.

Just for reference, direct quotes from “Come Into My Trading Room” by Alexander Elder:

“The goal of a serious amateur or a semiprofessional is to generate
a 20% annual return on equity. At this stage, the size of
your trading capital becomes an important factor. If you are
trading a million dollars, you may be able to start living off
your profits. But what if you trade a relatively small account,
say $50,000? You know you can trade, but 20% of $50,000 is
not enough for a living. Most undercapitalized traders destroy
themselves by overtrading, trying to squeeze unrealistic returns
from their tiny accounts. Take crazy risks, and you’ll have crazy
results—both on the way up and on the way down. Better stick
to your trading system and leverage your skills by trading other
people’s money (see “Going Pro” on the next page).”


“An expert may grab a 100% return in a good year, but trading a serious
amount of money year after year, just staying north of 20% is
a very good performance.”


“The minimum size for a trading account is about $20,000 at this
time. Once you’ve moved up to the level of a serious amateur or a
semiprofessional trader, $80,000 will give you more freedom to
diversify. Once you get your account up to $250,000, you may start
thinking of moving up to professional trading. These are absolute
minimums, and if you can increase them, your life will be easier.
Starting with $50,000, having $120,000 at a semiprofessional level, and
moving up to professional trading at $500,000 will improve your
chances of success.”

“What if you do not have that much? Trading on a shoestring raises the
pressure to a deadly level. A person with a tiny account cannot apply
the essential 2% Rule. If he has only $5,000, his permitted risk is only
$100 per trade, which guarantees that he will be stopped out by market
noise. A desperate beginner swallows hard and puts on a trade without
a stop. Most likely, he’ll lose, but what if he wins, ends up with $7,000,
then puts on another trade and goes up to $10,000? If he is smart, he will
sharply reduce his trading size and start using the 2% Rule now.”

Finally, Elder on daytrading (bold emphasis mine):

"The disadvantages of day-trading include:
You miss longer-term swings and trends.
[B]Profits are smaller because intraday swings are shorter.[/B]
Expenses are higher because of more frequent commissions and
slippage. Day-trading is a very expensive game, which is why vendors
love it.

Day-trading makes several hard demands on its practitioners:
You must act instantly—if you stop to think, you’re dead. With daily
charts you have the luxury of time, but intraday charts demand
immediate action.
Day-trading chews up a great deal of time. You have to ask yourself
[B]whether the hourly pay is better in longer-term trading[/B].
Day-trading plays into people’s gambling tendencies. If there are any
gaps in your discipline, day-trading will find them fast."

good quotes,
i am for 1% per day as a day trader, and compound it. hopefully will work out in the long run, but day trading does take up phenominal time looking at the charts, thankfully i trade the 30/15/5 minute timeframe on the london market with eur/usd and from Australia that opens at 7pm, so i can check it every 5-10 mins during the night to look for opportunities.

I’ve often thought of the issue of compounding and daytrading. The problem is the same as with all trading, your winners need to be greater than your losers. Its perfectly possible to risk 2% on one trade and end up ahead by 3%, if your risk reward ratio is 1:1.5 for example. Do just one winning trade every week, compound, and you will have a fortune in no time. Do ten winning trades in a row and you have your 30% return. Do 30 in a row and you’ve doubled your account.

Unfortunately what I’ve realized is that in all trading you can easily have a string of losers, and you don’t know when that string will stop. For example, you do one good trade, two good trades, then one bad one. Okay, so you’re still ahead of the game. Then another two bad ones come in and depending on your risk reward, you’re probably back to where you started or maybe you’re even in the red. Now you feel like a bum, you lost what you’ve worked hard to earn. Do you continue on with your strategy, or change and take a new risk?

What I like about daytrading is that if you have a strategy that is x% effective, within two weeks you have a good enough sampling of success/failures so that you know where you stand. With swing trading, it can take you at least a month if not two to figure out what exactly is happening, because you have fewer samples. Also, the less often you ring the register, the less opportunities for compounding your positions over time.