Why professionals "only" make ~30% anually

First please excuse me for being naive.

It's generally accepted that the worlds best/most successsful traders pull in around say 30 - 60% profits on any average (good) year.

Now on to my actual question: When most people come to forex they imagine huge gains, in excess of 1000%'s gains, which I agree can be pretty far fetched to achieve consistently, but is it really that impossible for someone with a smaller account to achieve much higher than 30%+ consistently with the right psychology and money management?

What I am trying to say is people with huge accounts (10 million+) obviously have enough money to live very well without having to trade consistently. They can take 3 months off and go visit the bahama's, they don't need to make money, and they don't need to risk much money at all to pay the monthly bills and have lots of spending money left over. Even one good trade a week could easily support them and their families. Why in the world would they risk say 4% of their account at any given time, and be hit by a losing streak that could take them out say 15% of their account? They simply don't need to take the risk, 30% year gains would be more than enough to live off of and compound.

A trader with an account of say $10,000, who eventually wants to trade for a living, well if they make 30% a year, that's $3,449 profit compounded, not enough to live on at all. With the right mindset and money management is it that uncommon for a "good" and consistent trader to turn that $10,000 into $40,000 in a year, 400% profit (with compounding). Of course there is a much higher chance of going broke, is what I'm contemplating really not feasible?

Of course this is all just hypothetical, just wondering, what are your thoughts?

In my opinion, those professional traders trade for the love of the game..

If the trader trades his own big money then he probably dont think any more about percents, but about the resulting amount of money. I think $1million sounds good no matter whether it is a result of 10% profit od 1000% profit. So the rich trader dont have to take a big risk if he calculates that tiny 10% annually make with his funds nice $1million which is enough to live well.

If the trader trades the big money of his customers then he cannot take a big risk, since he has to consider that at any time his customer might want to check his account. If he sees +10% he is happy, if he sees -10% he is angry and no matter that tomorrow this can turn to +20% - the trader probably meets tomorrow as a jobless one

Another thing: it is much easier to manage 10.000 as 100.000.000 as with 100 millions the trader might have influence on the market!

Scott, I do not know how millionaires trade, because I am not one of them.

But I know that it is possible to turn a $10,000 account into a $40,000 account.
If by consistent trading you are able to make $100 a day (a profit of 10 pips, not too difficult to achieve), your account will soon amount to $20,000.
With $20,000, you can risk a little more, bringing your account to $30,000 in less time, etcetera. $40,000 really is not that far off......

I started with $10,000 in May 2005. I traded rather profitably, and in December just reached $98,000.
As for today, my balance has dropped considerably, but that is quite another story (I still am in the denial phase... ).

The bottom line is: yes, 300% per year is possible.
Major keyword: money management.

WOW AROON!! 10K to 98K in 7 months is spectacular...might I ask, if you would enlighten us a little bit as to your original trading methods followed by your "money management" problems that must have led to the "denial" phase...please share with us what you have learned in trading successfully and then not so successfully...you can probably help a lot of people avoid the same mistakes and maybe some of us can help get you back on the right track if you aren't already there...still, very impressed with the 10K to 98K in 7 months...would love to here from you on your success and "failure" history.

thx,

drjoe

scott this is a really insightful post. i never thought of it like that... are the pros slacking because they have a lush life?

while its an interesting hypothesis, id have to say no. i think 30-60% is the max reasonable returns you can achieve in the long run (ie without taking excessive risk), and thats why the pros are around that level. there are many who will disagree with this, saying that high returns are achievable without the risk, but when you think about it, thats like shittin' on the whole financial industry. LOL!

Little error: $40,000 are only the profits, with 400% the account was $10,000 and now $50,000.

$10,000 with 100% profit means you doubled the account -> $20,000

Just to say

Hi all,

I'd say that the big traders only trade when a really reliable signal appears on their charts i.e a signal, which in the past has proven to be 100% accurate for their method. They can afford to be patient !!!!

OK, I am somewhat reluctant, but here it goes.....

There is nothing sensational or mysterious about it.
Only just do not read the following as knowledgeable advice. Because it is not.

When I started with € 10,000 back in May, I dutifully checked sites like www.actionforex.com and www.fxstreet.com on a daily basis, to read the opinions and advices of experts.
I combined these with some technicals (fibo, ma, rsi) and fundamentals, and placed my orders. So, no objective system that yields trading signals, just my own subjective interpretation (intuition, if you like) of a combination of factors.
I traded with only one lot per trade, opened only two or three trades, and went for a profit of 30 to 50 pips per trade. I had fixed stop losses and profit limits. Simple, I just cannot explain it with more details, it was just like that.
I made 25% the first month, I made 25% the second month. End of June 2005 my balance was € 15.683.

A little greed crept in......

As my balance grew, I decided to trade more lots than one per trade, 2 or sometimes 3. My usuable margin balance allowed me to. And wasn't I successful..??? And hey, all those losing trades caused by stop losses could have easily been profitable... Had not I noticed that in most cases the trend just reversed after having triggered the stop loss! I decided to increase my stop loss limit (100+ pips).

So I did. I had thus trades that were in the negative for days (I earned interest on the short ones!), but these could nonetheless be closed with profit, after a trend reversal.
This method proved to be profitable, as it decreased the number of losing trades significantly.

I continued trading this way till October. My balance grew to € 40.000.
During these months, having put a lot of time in my trading and in studying the charts, I had seen how simple it is to make a profit of 10 pips per day. Mostly, price moves at least 30 to 50 pips a day.
So, I reasoned, why not try to profit from these intraday movements as well, and make a profit every day, of, let's say, 10 pips minimum? Why performing long term trading, aiming at profits of 100+ pips, but not profiting from the intraday movements? 10 pips a day seem to be easier to achieve than 100 pips. After all, the market is ranging most of the time.

So, I did, and this was the beginning of large profits.

And greed got hold of me.

Starting with 5 lots per trade, I soon opened trades with 10 lots. A movement of 15 pips meant more than € 1.000 profit. Sometimes, it only took me 10 minutes to achieve this. I made € 5.000 per week easily. As rates moved up and down, I tried to profit from every movement. I even started to question the value of stop losses: why using them, if the rate bounces back and forth? In the end, even stop losses fell victim to an increasing greed, I would use mental stop losses instead, I promised myself.....

The obvious back-side of this method (won't call it a system ) is that in each case that the price moves against your trades, the theoretical loss is accumulating fast, very fast. Soon, there was a discrepancy between my gross balance (ultimately 98.000) and my nett balance (40.000). Nonetheless, margin call limits were far away, my long and short positions balanced each other, so I kept my positions.

In fact, I think that I could have continued trading in this way for a very long time. I had already begun to close my most far away open positions, 1/10 lot per 1/10 lot, gradually. I would have had a "balanced" balance soon.


At the end of December, something unpredictable happened, that had nothing to do with the market itself or my way of trading, but with my trading platform.
My trading platform (VT Trader) allows "hedging", having long and short positions opened at the same time, without one neutralizing the other. The only thing you have to look after is to tick the "hedging box" (in the "Open trade" window) when opening a trade.

December 27th, I forgot to do so. Somehow.....the Christmas turkey must have been in the way, or so. I intended to open 10 lots short EURUSD, but - as the hedging box had not been ticked by me - instead I closed down 10 open long lots. The strange thing is, initially I even did not notice, I was in an hurry to do some shopping and got out. When I returned, and looked at my charts, I could not find the trade I had just opened. Only after looking through my open positions, I realized that I had closed some vital long positions instead. Of course, the highest positions (big figures in the red) had been closed. My balance dropped. Moreover, the EURUSD rate started rising. My short positions outnumbered the long ones.
My usuable margin had dropped, dropped with every tick. I really was kind of paralyzed, the flair with which I used to place trades was gone. I could only stare at the screen and see the rate rise against me.
The first week of January, I was forced to close down open short positions to avoid a margin call.

Now, at this moment, my balance is € 36.000.

The funny thing is, I have read a lot about forex, the way to trade ("use a system") and the way to manage your money ("always use stop losses").
Nevertheless, I did think that I could do it my way.
Although I tend to approach Forex seriously, I admit, that I am a bit of a gambler.

Money management counts......

Aroon,

Interesting story. If I understand correctly, you only consider a loss to be a loss when you have closed out the trade?

If so, then I think this is one of the causes of your predicament. Your account balance is = cash on hand + profit/loss of open positions.

If you use this, then you won't have the mentality of waiting for a trade to come back because you will have the mentality that you are already losing money so you should get the hell out of the trade!

Simon

Hi Aaron,

Thank you very much for sharing such experience.
It's just another encouragement for people to prepare themselves when such disasters occur. Or at least be careful when trading..

"Anthing is possible."

Though this should not make traders afraid, but rather, respect the risks that comes with trading...

Although there's no specific way to the road of being a successful trader, I'd like to thank you for putting up a sign on the path you took with a "Danger, cliff ahead!" sign..

Will re-read this again.. Thanks again for sharing, and thank also for those that asked this quesiton..

I know there are different schools of thought. I used to think this way until I kept looking at what was in the trade and always , and i mean always getting out too soon forgetting when my system tells me to. That is ME

So i don't consider it a gain or loss until the trade is done. That is what, IMO, knowing your system drawdown is.

Example is that i am long in the EUR from Friday. If i paniced by looking at the retrace of the breakout bar, i'd be out already. So, i'll just wait until i'm supposed to get out.

I know my weakness when i look at $$. I can't react to drawdown within my system or get excited about profits. I wait until the trade is done getting out at my exit signal.

Thanks...Jim

Jim,

I agree with what you are saying and I certainly am not suggesting that you should jump out of a trade just because it shows a loss. I don't actually take any notice of the account balance at all when I am trading - I just implement my system and the results will follow. However, some people (particularly grid traders and interest carry basket traders) simply don't acknowledge that a trade that is 300 pips down is not a loser until the trade is closed.

Simon

That's for sharing your experience. That wasn't something you had to do. Just wanted to let you know it was appreciated.

Jonathan

Yes, an open position can be reversed.

Thanks, I get your point.
I should have been more strict on stop losses. A negative trade is not something to avoid at all times, but the loss should be limited by a fix stop loss. I just had the experience that rates always turned to my favour in the end.
Also now, I see the EURUSD rates approaching the 1,24 level, the spot where I had my 10 lots long EURUSD placed, before being closed by my own fault.

My conclusion of this story still is that it is possible to turn 10k into 40k within a year. The market offers so many opportunities to profit from price movements, that anyone must be able to steal 10 to 15 pips a day.
Just be careful at your stop losses. Better to lose 500 within 10 hours after opening the trade than 50,000 after 10 weeks.

I am most confident that I can build up my balance again. I see no reason to change my trading style, as it brought me profits. I just have to apply stop losses.
Thank you all for the kind words. I am doing fine, really ...!!

It is achievable merlin.. With a four-leaf clover and a rabbit's foot..

This is an interesting subject and when I first started it puzzled me.
Within the sphere of professional trading there are a few types of traders and of these lets focus on the following two; fund managers and professional independants.
The 30%-40% figure you are talking about, by and large, will find be in the realm of the fund manger. The reason for this is two fold.

One: If you have a fund whose size is measured in the hundreds of millions or billions, you will find that it is much more diffucult to trade short term without moving the market dramatically and therefore your positions are forced to be longer, measured in terms of weeks or months which, in turn, limits the number of trades you can place in a given year.

Two; Fund managers usually trade against some sort of benchmark i.e the S&P 500. The reason for this is that behind every manager are many brokers who have to "sell" the fund. People, believe it or not, get very suspicious of sales people who claim returns of 50% or more and it becomes very difficult to sell these funds to institutions. So rather than trade for "absolute returns" they trade "marked to market", with only one thing in mind and that is to beat the bench mark. The fund manager gets his fees and percentage, the sales people get their commissions and the customer gets his return which pleases his board of directors. Everybody is happy.

Independant professionals on the other hand trade generally for absolute returns because we want the maximum return for our efforts. Now if I have a $100k and I risk 1% on a trade its only $1000. But if I have $10,000,000 and I risk 1% its $100k and although my risk remains the same in terms of percentage, the money does not. $100k is a lot of money just to lose in a morning. So since I can't emotionally handle that type of loss I will decrease the amount down to a level which is more comfortable. This of course limits my returns but stops me from chewing the wallpaper everytime I place a trade. (BTW, no, I do not have a $10,000,000 trading account)

So can you make 30%-40% a month? Yes, but for how long?

Steve

And this is the exact reason that you couldn't handle losing $100k in a morning. I can assure you that if you did have $10mill you would be quite comfortable losing $100k

Simon

If you know that your reward/risk ratio is 3:1, and you have a $10 M account, you will be comfortable losing $100k because you know that your next winner will bring you $300k to cover up such loss and give you a decent profit...


Thanks,

Nader

Yes, logically speaking 1% is 1% and nothing is different but on an emotional level its a different ball game. I'll give it to you that some people can dump $100k or 1% of a 10 million account without a problem but the vast majority do not have the psychological make-up for that kind of hit.

Steve