When someone gets interested in trading, one of the first questions they want answered is, ‘How much money can I make trading?’
I first got interested in trading after a friend of mine told me about some guys he knew in Africa that were making $300/day trading forex (foreign exchange or currencies). After doing a bit of research, it sounded like a great way to make some extra money.
We can do some basic math to figure out what kind of returns we can make in a given market if we know 3 things: the mathematical expectancy of each trade, the trade frequency, and the average $ risk per trade.
Another word for mathematical expectancy is average profit. As an example, let’s say you had a trade where you could risk $100 with a 60% chance of making $100. Your expectancy (or average profit per trade) would be 20% of $100 or $20. 20% average profit is realistic for a decent trader, although some traders do much better than that.
($100 * 60%) – ($100 * 40%) = $20 or 20% of your average risk.
If you had a trade setup that made $20 of profit per trade and you could find 2 of those trades per trading day, that would be $20*2*5 = $200/wk.
There are many traders that aim for 1-5 trades per day, but there are definitely others who get more like 25 trades/day. For example, the market wizard Mark Cook claims to take 20-25 trades per day on the SP500 e-mini futures. If we assume he has a 20% profit margin and risks $1000 per trade, that means he would make $200*20 = $4000/day. If his profit margin is more like 30% or 40% (which I would suspect) and he risks more than $1000 per trade (which I would also suspect) then he could easily make $10k per day.
Another well known trader is Al Brooks (see my review of his trading room). He claims that he sees 20-30 reasonable trades each day just trading the 5 minute chart of S&P 500 futures. He admits he doesn’t take all of them, but he does take many of them.
New traders especially would have trouble finding 20 good trades in one day, but 1-5 trades/per day is quite reasonable if you’re trading shorter term charts. Even 1 trade at 20% average profit on $1000 average risk would be $200/day which many people could live on. That seems easy, but newer traders will probably not be trading with a 20% average profit because they will make mistakes and they also usually don’t have a methodology that has a consistent edge.