What’s Realistic to Expect on Returns?
Updated by Jonbert Davidsen ∴ Thursday, February 23, 2017
Someone asked me once “what is the most important piece of advice you've received in your trading career?” I avoided an answer on the spot. The question kept coming back to me. Now I’m ready to address it. I share my answer with pleasure and hope it'll inspire other retail forex traders. If you're looking for a step by step forex trading guide other websites are better than mine. In this blog post, I look for what's the best way to trade forex profitably.
1. The most important advice I’ve received about trading
The most important advice I’ve received about trading is:Find your personal answer. What's a realistic return on investment (ROI) in your situation? If your initial answer is wrong, seek for a new solution. An answer that aligns better with reality.I believe we all have a potential edge in the markets. That’s why I write about forex trading. I love to watch the markets and trade them. I've changed my approach many times since my first trade. But I have never been close to saying “I stop, too complicated!”We can do it. We’re retail forex traders. We are proud of it, and see it as a positive attribute. Despite losses and struggles, we’re still around.It’s an achievement to remain in the retail forex industry for more than 1, 2, or 3 years. The forex trader millionaire dream is intact. Now better planned than in the beginning. We wake up every day and take our leap of faith. We're right in the middle of the process understanding the question “what is a forex trader?”
2. What is a forex trader?
We have a point asking this question. What a forex trader is lacks a clear definition...Appart from the obvious, someone buying and selling currencies, there is no clear definition. What we add to the definition, varies for each person. Next time we see a serious person with a suit and tie define in YouTube what a forex trader is, we remember his definition. But it's one among others. Let's add one question at this point: “What's a realistic expectation due to returns trading forex one year?” Asking our trading fellows; they'll doubtless head in different directions.Take Away: We allow ourselves to define what a forex trader is and what to expect in returns.Definitions of 'Forex trader' and 'expectation on returns' depends on our personal answers.Why? If we allow other people to define these two concepts, we will always face disadvantaged situations. Disadvantaged situations where people try to convince us to buy a trading strategy. Or persuade us to believe the forex industry is a scam.
3. What Affects our Expectation on Returns?
The CommercialsAll have personal reasons to trade. Few people wake up one day, realizing they like to be traders. Maybe we saw a trading commercial while surfing the internet. Perhaps combined with knowing someone who is already trading. Enough to trigger a sign-up.The fuel of all trading commercials is ‘UNREALISTIC EXPECTATIONS’. The market gurus know the majority of the middle class lives under tremendous financial pressure. But we avoid jumping to conclusions. We avoid labeling the industry as a scam. We come to terms with what’s possible in this industry with controlled risk.We all want to enjoy life and take good care of our families. If given a choice, many dream of letting go of their 9-5 working-life. Everyone wants to give their family an exciting holiday? A surprising gift for our parents? At heart, we wish more time and wealth to live a good, fun life with the ones we love.Social MediaSocial media platforms and online forums are goldmines. Everyone we observe is on social media platforms and online forums. The market guru fishing is there. The man with a 9-5 job who saw a trading commercial yesterday is there. The desperate family man who blew his trading account is there. These gold mines have it all. We can use them finding stories of successful forex traders.One story is Bondos. Bondo began trading in 2014. Two years later he was suffering, already blown four accounts, 50£ left of his current account. His family had left him. He was about to lose his house. In desperation, he asked on an online forum. His headline was: “Help Me Grow My Account!! I'm about To Lose My House :-(“Bondo's story is one of many. Bondo is victim of the false advertising. They have fueled his unrealistic expectation, in the end splitting his family. Take Away: We need to know what got us into trading, and why.Look up stories on social media platforms and online forums from traders in trouble. Then we ask: what whet wrong here? Could this happen to us?Why? If we believe the trading commercials unrealistic claims, it brings frustrations when expectations aren’t met. Next, we face the problem of overtrading, which will wipe out our accounts in no time.
4. Different Expectations on Returns
Fund ManagersOne topic we notice in most articles and books involving Fund Managers is their focus on risk. When asked questions about retail traders, they stress the importance of embracing the inevitable. Traders have bad days. Traders have bad weeks. Traders have bad months. Fund Managers are great study-objects when we want to learn more about risk management. A 15-20% return per year is better than the average Fund Managers performance. We avoid intimidation by the professional trader's expectations because we see many differences between their ways of trading and how retail traders do it. It's common for Fund Managers to aim for a return of 10% per year with low drawdowns. If they have billions of assets under management, 10% is a lot of money. Since Fund Managers have a lot of assets under management, they have strict rules on how to handle drawdowns. A 5% drawdown on an investor account requires attention. If the drawdown continues and reaches 10%, the professional trader goes into damage mode, reducing risk.The traditional approach of Fund Managers are to build significant positions when they are right. When they are wrong, they reduce risk and take small losses.Retail Forex TradersAleksandr started his trading in 2012. He traded the outcome of Britain's referendum June 23, 2016. On this night Aleksandr earned 13.000 £. He studied foremost by himself and read a lot of materials while exploring the markets. EUR/USD and GBP/USD was the only pairs he traded. Before the British referendum, progress was slow. But as he continues “I gained something more valuable than money – experience.” A great attitude. But it’s also a story of an atypical trader in an atypical situation. Education was the primary goal. Andriy Moraru, forex trader since 2005, manager of EarnForex.com divides the retail forex traders into two groups: The Battlers and ‘The More Passive’ traders. And as Andriy continues, “there is no clear border between those groups. Some currency traders may demonstrate the behavior of both groups under different market conditions.” The battlers set fixed goals for pips per week or pips per month. The more passive traders wait and see what possibilities the market presents.Let’s take a closer look at the implication of these two approaches. But at the same time, we're open-minded.The battlers approach urges us to trade. We have a goal of pips or money. We hear the battlers say, it's just a benchmark that shows how far we're from our long-term goal. We respect this idea. For our part, we consider three issues as component of the battlers approach:1. What precautions have we taken, so we prevent closing trades too soon?2. What action do we take avoiding riding trades too long losing all the pips?3. Do we create an unnecessary need to trade with financial goals?The battlers often have a more active trading style than the second group.The more passive trader, for example, Rob Colville at TheLazyTrader.com need ten to fifteen minutes reading the charts per day. It's enough to see if there are any tradable setups. We guess Rob Colville would say it's good to eliminate the need to trade as much as possible. The more passive trader would perhaps also say he has another advantage more than the first group. He controls his feelings better because he watches the markets fewer minutes per day. If the trader avoids emotional situations (for example while reading the charts,) he reduces the risk of bad decisions. If the battlers have a bad trading day, it’s easier to get into bad thinking. ‘We sacrificed already. Now the markets owe us.’The more passive traders position does involve three aspects to consider:1. Are we traders, if we just spend 15 minutes looking at charts per day?2. Can we stay away from the charts 1425 minutes every 24 hours?3. How do allow our trade to breath with a proper stop-loss?Take Away: It's good for us to learn the pro and cons both the Battlers approach and the ‘more passive traders’ approach.Why? The more we know about the limits of our trading style, the better we can define our edge.
5. Trading is Just One Part of Life
The markets fascinates us. Sunday evenings have a new meaning. It's exciting to see if the price jumps when the Asian session opens. We watch, think about why it moves. It amazes us to see the markets adhere to the technical formations on the charts. Traders use hours upon hours staring at the screens.We’re passionate.Jerry Olson, a trader involved in the markets for more than 30 years, from JOG Group LLC in Philadelphia says: "Trading is like 'Demons on our Shoulders' and “once you commit to this, it will control your entire life, in fact, life as you now know it will cease to exist for you and your loved ones. Your family and friends will not recognize you in short order…In fact, you won’t know yourself either.”We think Bondo in our story above can agree with Jerry on this one. But trading changes us. We've improved life, because of what we have learned about trading. What we're most grateful for, is the gift of being much better at seeing the big picture for our future today. We're more sympathetic, more humble, more realistic.Moritz, a trading-blogger from Germany, founder of Tradeciety, points out trading just amplifies the situation we’re already in: “You will want to keep your work-life balance, but on the other hand if you don’t live and breathe the charts, there is no way you will make it. It is a fragile line between love and hate in this game.” and “You are NEVER going to make it as a trader if you are unhappy with your current situation. If you need money, trading is going to make it worse. If you are unhappy, depressed, have no respect for yourself or no self-esteem – trading is going to make it worse. If you cannot follow your dreams, hate your day job – trading is going to make it worse.Trading will make everything worse if you see it as a solution to any problem. But yes, it's why 99% of people come into this business – to solve a problem, whatever that might be for them.”We have to love our life and ourselves and the people around us, because trading acts as an amplifier of our psychology.We agree with Moritz.Take Away: Traders need a balanced life. Trading magnifies any problem we have.Why? By solving all our other problems first, we trade as a natural way to grow our money with long-term-goals.
6. What’s in our Control?
A positive mindset takes controls many trading aspects. When we approach the markets, we do it with caution. We can adapt to the price moves and the outcome of our trade. We decide:When we tradeWhen we not tradeWhat we tradeWhen we exit a tradeWhat risk we allow on each tradeWhat tools we useOur feelings towards the outcomeThese 7 ways of controlling our trading enable us to know the worst-case scenario in every situation. They help us to be responsible. If we put safety first, the profits will follow. Fast money and instant gratification are why gamblers trade.Take Away: When we learn what’s within our control, we can determine how to take advantage of it. We set goals we can control.Why? Because this approach commits us to evaluate every trade, with lesser focus on win-lose, and more focus on if we adhere or break rules.
7. Two Approaches
When we trade, we have two possibilities as Rolf from Tradeciety points out. We can focus on the process, (did we enter/exit according to the rules?) or we can concentrate on the result (did we win or lose the trade?) The traders who focus on the result think ‘good’ every time they win a trade and ‘bad’ every time they lose a trade. There’s no learning in focusing on the outcome alone. Traders are better off concentrating on the process. It's superior to think ‘did we follow our rules?’ The advantage for us to follow the process-oriented method is we can improve our trading. We do the same in every trade, it allows us to measure what we’re doing. If we stop measuring or change the system in the middle of the process, it skews system expectancy.Take Away: We focus on executing our trades with consistency because what's measured, can be improved.Why? To get positive mathematical expectations on returns, we need to have somewhere between 100 and 1000 trades. These 100 to 1000 trades must all be executed with consistency.Doing so, builds our experience and positive feelings towards our future in trading.
8. The Mindset
Beliefs play a huge role. The reason we talked about rules and control above, is they guide us in the right direction towards the feelings we want. Bit by bit we develop positive feelings, based on positive experiences. Positive feelings and experience are the futures goals building blocks.We need to do the following to get consistency into our trading:Use a checklist before we enter trades.Journaling all trades we took.Evaluate finished trades once a week or once a month.Create plans what to be aware of for the next trading week.While building a strong trader-mindset we’ll recognize and focus on the progress.We do a great job. We focus on our education by reading blogs and books. We have an advantage over those who spend all their time watching Netflix or surfing Facebook.We’ll practice for years and plan for a bright future. We’ll experience challenges on the way. There’ll be moments of different kinds of fear. Rob Booker, a trader for 16 years, describes three different kinds of fear, we’ll watch out for: Fear of failure. Fear of success.Fear of the unknown. Fear of failure can affect our trading in a way, so we stop trading without warning. Perhaps after we have taken a row of losses. We fear if we trade again, we’ll just keep losing. It's a typical situation for traders.Fear of success is more subtle. It can also cause us to stop trading all at once because we think we might face too many losses and be unable to deliver if we reach a certain point of success in our trading. Traders with a fear of success feel it's hard to live up to what they expect from themselves, or other people expect from them.A trader with fear for the unknown has a tendency to avoid what seems unfamiliar, instead of seeking information and become familiar with the unknown.As Rob Booker says, “Fear is the first enemy of discipline...Understanding the different kinds of fear is an excellent way to identify, which we struggle with the most.”We like to add from The Practical Guide to Trading Psychology by Vladimir Ribakov.Fear of losing money (appears every time we trade with money we can’t afford to lose.)Vladimirs solution in this situation is simple. Don’t trade with money we can’t afford to loseBecause as he says. Remember trading means sometimes losing money and sometimes making money.Vladimir has an excellent story in the book, how he lost his parents money because he took a wrong approach to failure. It felt bad. They lost their belief in him. He looked at the floor. He looked at other people.He was lucky to be able to pay them back later. Many people are too weak to stand on their feet after a failure. We like Vladimir's point, when he says, “The way to success is to go through failures. There is NO other way. If you can't allow yourself to fail, because of your reasons, don't trade. But if you do want to become a real trader, then be ready to suffer. Be willing to lose. Be willing to fail several times, before it comes to you.”Take Away: Get consistency into our trading. Fear in different forms is normal, but traders need an understanding of fear in different forms.Why? Without the right mindset, our trading falls apart.
9. Trading Systems
Instead of asking, what are the components of a successful trading system, we avoid the common traps, to get better returns:Too much riskDrawdownsToo much risk magnifies the chances of blowing the trading account. We like to understand how difficult it is to recover from a drawdown because it prevents us from experience such situations. In our example we see risk as % of the total trading account. Since the definition of a percent is ‘one part of every 100’, we fend off any conclusion on our trading performance with less than 100 trades. A number of trades between 100-1000 on timeframes daily charts or higher shows us if we trade with an edge.We’re interested winning the war, one battle is too narrow-minded.The stop loss is the risk. To approach trading as other businesses, we calculate the risk in percentage instead of pips or money. We risk max 1% of the total trading account per trade. This lowers the chance of blowing our trading account.With a reward to risk ratio of 1:1 we’ll generate money if we win 60% of the trades. The percentage is higher than in most online examples because we have put 9% aside for trading costs. We exclude bad surprises from our example. We stay away from unrealistic examples leaving us with frustration because it only works in a fantasy-world. Retail forex traders pay to trade, It's a component we need to include in our trading strategy.With a reward to risk ratio of 2:1 we’ll get money if we win 40% of the trades. Again this percentage is higher than we'll see in other online examples. We prefer conservative numbers when it comes to costs.With a reward to risk ratio of 3:1 we’ll produce a surplus if we win 35% of the trades, again, leaving a couple of percentage for the spread.With a higher reward to risk ratio we create gains even if we are wrong more than 50 percent of the time. We control the drawdowns as long as our trade-size are below 2% of the total trading account. Since we set stop-loss after % of the total account, we take a smaller risk in periods when we are wrong, and bigger risk in periods when we are right.As long as we trade like this, we trade with a positive mathematical expectation.Drawdowns bigger than 10 % are problematic. If a trader loses 20% of his portfolio, he needs 25% gains on what’s left to get back to break even. If the trader loses 50% of his portfolio, he needs 100% gains on what’s left to get back to break even.Therefore, if we see a drawdown on our portfolio bigger than 10% we reduce risk and evaluate what’s causing the drawdowns.Take Away: We want to trade with a positive mathematical expectation, and we reduce risk, perhaps we stop trading if we face a 10% drawdown on our portfolio.Why? We understand how difficult it is just to come back to break even if we face bigger drawdowns.
10. The Beauty of Compound Interest
One aspect boosts our returns if we use long-term goals:We forsake to withdraw from the trading account.Let's say we trade with a positive mathematical expectation and aim for 5% returns per month on average.In the example it will take 8 years to grow an account from $10.000 into $1.000.000.We're happy to hear when a fellow trader manages to double his account in months or overnight as Alexandr did on the Britain's referendum June 23, 2016.Few face situations like Alexandr, so we prefer a more secure path. The most successful forex traders in the world put security first, so do we. Here are the numbers if we managed to grow it with 5% per month. Year 1: $10.000 growing 5% per monthFebruary$10.500March$11.025April$11.576,25May$12.155,06June$12.762,81July$13.400,95August$14.071September$14.774,55October$15.513,28November$16.288,94December$17.103,39Year 2: $10.000 growing 5% per monthJanuary$17.958,56February$18.856,49March$19.799,31April$20.789,28May$21.828,74June$22.920,18July$24.066,19August$25.269,50September$26.532,98October$27.859,63November$29.252,61December$30.715,24Year 3: $10.000 growing 5% per monthJanuary$32.251February$33.863,55March$35.556,73April$37.334,57May$39.201,30June$41.161,37July$43.219,44August$45.380,41September$47.649,43October$50.031,90November$52,533,50December$55.160,50Year 4: $10.000 growing 5% per monthJanuary$57.918,53February$60.814,46March$63.855,18April$67.047,94May$70.400,34June$73.920,36July$77.616,02August$81.496,82September$85.571,66October$89.850,24November$94.342,75December$99.059,89Year 5: $10.000 growing 5% per monthJanuary$104.012,88February$109,213,52March$114.674,20April$120.407,91May$126.428,31June$132.749,73July$139.387,22August$146.356,58September$153.674,41October$161.358,13November$169.426,04December
$177.897,34Year 6: $10.000 growing 5% per monthJanuary$186.792,21February$196.131,82March$205.938,41April$216.235,33May$227.047,10June$238.399,46July$250.319,43August$262.835,40September$275.977,17October$289.776,03November$304.264,83December$319.478,07Year 7: $10.000 growing 5% per monthJanuary
$335.451,97February$352.224,57March$369.835,80April$388.327,55May$407.743,93June$428.131,13July$449.537,69August$472.014,57September$495.615,30October$520.396,07November$546.415,87December$573.736,66Year 8: $10.000 growing 5% per monthJanuary$602.423,49February$632.544,66March$664.171,89April$697.380,48May$732.249,50June$768.861,97July$807.305,07August$847.670,32September$890.053,84October$934.556,53November$981.284,36December$1.030.348,58Please remember to share this post with your friends on social media sites!