Realistic Expectations (Part 3)

As promised in my last post, today I will discuss some trading expectations that I do believe to be realistic.

I believe that profit potential is directly proportional to time frame.  A trade that lasts minutes will make less than a trade that lasts days; both market movement and option decay occur in larger magnitude over a longer period of time.  I believe position size should be smaller for less consistent trades and for trades with a smaller average-win-to-average-loss ratio.  I believe shorter time frames are more inconsistent due to inherent volatility of the markets.  Shorter time frames should therefore be traded in smaller size, which is also consistent with limited profit potential.

I believe the discussion of reasonable returns should end around 1% per month of my total net worth.  At roughly 12% per year, this would knock the socks off historical stock market returns and make people like Warren Buffett or successful hedge fund managers very proud.  I have seen many educational programs and newsletters that tout monthly returns of 5-10%.  In my opinion, even claims as low as 2% per month should be closely scrutinized.  Are losses taken into account?  How long will it take to recover from a loss?  If I leverage up with that strategy then will I lose everything after consecutive losses?  If I limit position size to 1-2% of my total net worth then will I make enough money to offset the cost of the service?

I am a firm believer that chasing advertised returns can stifle my growth as a trader and/or may completely knock me out of the trading game sooner rather than later.  Advertised returns are usually wildly exaggerated.  I can use my critical thinking skills to figure out why on a case-by-case basis.  The sooner I am able to discern reasonable expectations from misleading marketing, the sooner I will stop wasting time and money likely only to land me in the red.

Finally, I believe I can make a living trading.  I’m not convinced that I can make millions of dollars doing this but I can pay the bills.  The more money I wish to make as a percentage of my total net worth, the more likely I am to fail and suffer catastrophic loss.

I will conclude this blog series with my next post.