A few days ago, I have a talk with my friend, I asked him how many % he aim for .
He told me he aim for consistently 50% return. He is a FA guy using some TA to enter.
I'm telling him his target is a bit too ambitious. But he thinks is achievable.
We discuss, my opinion is traders may achieve, but FA guys only achieve it after
a collapse. But trading to achieve 50% would be very difficult to achieve. One
may argue, I achieve it before.
Lets have some scenario.
Assuming both traders earn RM3000 per month as a white collar employee.
Scenario 1
Trader A put in RM10,000 as his trading capital. Lets say he set his stop loss at 7%,
with a profit target of 10% for each of his trade . Good risk reward, right ?
He would use RM10k for each of his trade in order to have lesser trades and quality ones.
So, each success trade he would gain 10%.
Say he win 7 trades and loss 3 trades in one year, he would have achieve 49% in
return. A loss of 7% would mean RM700, he is able to absorb the loss emotion, even
he consecutively loss the 3 trade at 1 go in the middle of the year, he would still can
persist his strategy and still very stable on his emotion to focus on each trade. This means
Trader A can go around boasting he achieve around 50% return in 1 year.
Scenario 2
Trader B put in RM100,000 as his trading capital.
He also set the same risk reward as Trader A.
Say he has the same luck & probability as trader A, Meaning 7 win & 3 loss.
In this Scenario 2, he is not able to complete all his 10 trades in a year as emotion sets in.
There is 2 case here,
case 1 , Trader B put in RM100k for each trade.
case 2, Trader B puts in R10k for each trade.
Case 1
Why I say so. Say he win the first 2 trades, then he start losing the 3rd, 4th & 5th.
Remember each trade, he would loss RM7k. The 1st lost would be already hard to
swallow, imagine at the 3rd loss, he is down by RM21k, this big emotion will really
sets in where he would take less than 10 trades in that year, say 7 trades in all.
Say the 6th & 7th trade, he wins but is year end already. So, total 4 win, 3 loss, which
would mean he only gain 10%. See the 50% target becomes far away.
Case 2,
In the same probability calculation, he need to do 100 trade. Why ?
As each win, he only win 10% of RM10k, which is only 1% of his total capital.
Each loss is 7% of RM10k, which is 0.7% of his RM100k capital.
With 70 win, then only he earn 70% minus 30 win 21%, then he would able
to achieve 49%. But the real case is not easy. To have 100 trades a year, he need
to trade 8~9 trade per month, and need to consistently win 70% of his 9 trades.
Imagine sometime the market is in downtrend or volatile, you cant even take 9 trades.
Even he insist to trade 9 trades, his probability would have drop or he may loss in this
downtrend months overall. Say, he is followstrictly, in a downtrend of 3 months he does not trade. So, he left with 9 months.
Meaning he only able to trade 81 trade. 70% win meaning 56 trades win 25 loss.
In overall he win 56% on his win trades and loss 25% on his loss trades of his capital.
All in all he gain 31% which is very very good.
That 31% is only achieve provided,
1) He do not loss focus, and do mistakes.
2) The downtrend and volatile months max is only 3 months,
3) He has a solid strategy able to consistently maintain 70% success rate.
4) He will not be tempted to break his rules and jump into trades during volatiles period.
5) He able to overcome greed and fear.
Each of the 5 criteria normally, will be affected the trader once in a year. thus again the % win will
be less than the 31%.
Thus in conclusion, one is able to win consistently year after year from 20% to 30%, he will be
on his way to the best trader in the world.
Thats really something to ponders on how one will able to achieve our target goal.
