How much money do traders make … really?

There’s no doubt that it’s possible to get rich from investing in the markets.

That’s why we show up every day, right?

But there’s a huge gulf between what the ‘gurus’ tell you is possible … and what successful traders actually achieve. And it’s setting traders up with these unrealistic expectations that means so many of them are set to fail …

I’ll go so far as to say that the single biggest threat to your longterm trading success is unrealistic expectations – that’s what causes traders to risk too much, and to quit too soon.

So, let’s look at the kind of returns on offer …

Can you make just 1% profit a day?

It sounds so easy doesn’t it?

If you’re day trading, placing multiple positions each day, the idea of coming out at the end of the day just 1% ahead sounds very modest and achievable, doesn’t it?

(Let’s say you’re risking 0.5% per trade, on a 2:1 reward:risk – you’d only have to win one trade, and you’d be done for the day.)

But when we dig into what 1% a day really means, we quickly see that – if it really were this easy – we’d have all the money in the world!

Let’s say that we start with £10k

1% profit each day = £100

That’s £500 a week

And at the end of a 50-week year of trading … that’s £25,000

So, 1% a day, equates to a 250% annual return.

Keep that up, and you’ll have made £2.5billion befor the end of your 11^th year of trading!

With daily compounding, you’d have made that first £billion in less than 5 years!

Of course, this is absolute nonsense.

If it was this easy to make 1% profit per day, every hedge fund would have swallowed up all the money in the world!

It may sound like a small ask, but this kind of thinking needs a stiff reality check. You simply cannot consistently make 1% profit per day – no matter how great a trader you are.

So, what IS a realistic expectation of returns?

A good starting place is to look at what the experts bring in … I’m not talking about what trading ‘experts’ tell us they’re making. Instead, we’ll only focus on measurable results.

The Eureka Hedge Fund Index gives a broad measure of the performance of hedge-fund managers. Here’s monthly returns going back to 2020 …

What this shows is that monthly returns rarely push through the 2% level, and the average monthly return is just 0.68%.

It’s a far cry from the 1% per day that traders claim to be ‘easy pickings’

When free of all the constraints that come with investing large sums of other people’s money, there’s plenty of reasons that individual traders can outperform a hedge fund (Heikin Ashi Mountain and HAV Trading are both living proof of this). Retail traders, like you and I, can be more nimble and less risk-averse.

But looking to match hedge fund performance is a good place to start.

“The first rule of an investment is don’t lose.”
Warren Buffett

Long term wealth building is about harnessing two important things:

1. modest gains, and
2. protecting the capital that we have.

The modesty of our gains is a result of our need to protect, protect, protect the fund we have.

Losing days, weeks or months have an exaggerated impact when we are compound investing, so a smooth profit curve (even if it’s a shallow one) will be preferable to a bumpy one.

If you can end the month up by 1% – that’s great.

If you can end the month with a profit of 0% – that’s also great. It may feel like you’ve risked your capital for no tangible benefit, but in fact, you’ve just positioned yourself for potential gains, without losing anything. It’s not as easy to do as it sounds.

Aim to think like an investment manager who looks at profits long-term, not like a gambler counting his winnings at the end of the day …

If you’re seeing large percentage returns at the end of the month, this could be as much a warning flag as large losses – big gains will usually go hand-in-hand with big risks. So consider reducing your risk levels – because you could just as easily be seeing losses on that scale next month.

You could do a lot worse than making +20% or +40% gains per year …

Of course, we can’t expect consistent returns year in, year out – there will always be variation and losses along the way. That’s part of trading. But with steady, smoother returns, we can genuinely expect to see real wealth building.

This is how successful investing works.

 

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