What Does It Take to Make 10% Per Year? (Part 1)

A couple years ago I had an e-mail correspondence with a trader (now coach for a nationally recognized options education company) about annualized returns.  I want to present that here.

Most of the discussion is contained within the thread so I will add little else.  The one thing I will suggest is to pay close attention to the way I analyzed her argument.  When it comes to trading, lots of things sound good with regard to profits.  Because they sound good, we tend to give them a pass.  If we stop and really nail down what these statements mean or imply, though, then the wall becomes a sieve.  For this reason, I have categorized this under optionScam.com.

I wrote:

> I object to your claim that “most of the good traders here make far more than 10%
> per year” because this cannot be verified.  Furthermore, I would argue that the only
> true performance number that matters is what you make as a percentage of your
> total net worth and that is a number few people who even broadcast performance
> statistics seem to be telling.
>
> What would it take for a trader to make 10% per year? According to many purported
> risk-management specialists, no more than 1% should be risked on any trade. This
> means five 20% trades are required to return 1% on the total account. To make 10%
> on the total account I need to have 50 trades. To make “far more” than 10% I need
> 75-100 trades? Remember too, some trades will lose [lots].  Remember too that if
> I keep cash on the sidelines for adjustments, my initial risk will be less than 1%
> and many of my winners will therefore make less than 0.2% of my total net worth.
> Also realize this needs to be repeated every year in order to average “far more than
> 10% per year.”

She responded by saying up to 2% (not 1%) of the account can be risked on any given trade.

I will continue with my response to that in the next post.