First we need to acknowledge that everybody is different and everybody will have a different trading style and different time frames in mind. Some only trade options, others only commodities, whereas you may prefer tech stocks. Bottom line is; as long as you are successful, i.e. make consistent profits, it doesn’t matter what and how you trade/invest.
This article is more focused on trading than investing. We see the latter as a vehicle to long term profitability. You hold positions for years and don’t bother about large price swings. In essence you don’t need to live of the investment. It’s a nest egg. Trading on the other hand is a means to generate income and requires more involvement. Here is where things can get tricky as the daily price swings can be hard on any trader. To assure success we need to first set clear rules, that minimize stress, and obey to those ALWAYS.
Here are a few simple ground rules:
- Fiercely protect your capital at all times: set prudent stops below your purchase price. Either in % or in $ amount.
- Plan the trade, trade the plan: don’t deviate from the plan. If the plan was to go for a 5% gain then sell at a 5% gain. No remorse, even if the asset gains another 5%.
- Trade for winning, not for money: the real kick comes from winning the trade as per the plan (see 2). How much money it generates is less relevant. Entering a trade to make X-amount of dollars often leads to unnecessary stress and over trading.
- When in doubt get out or stay it: Also known as “it’s better to wish you’re in then to wish you’re out”. It is based on rule 1) stops prevent you from staying on the wrong side of the trade, and 2); when things are questionable the plan is to not trade. Simple.
- Accept the fact you can’t win all trades. Don’t take it personal, nobody can win them all. That’s why we have rule 1).
- Team up: two know more than one and it helps set checks and balances.
Let’s take a moment to discuss the impact of consistent profits. You will be amazed how little can quickly turn into a lot. The underlying principle is that a $100 profit 1000 times is more achievable, lower risk, less stressful, and much more rewarding than a $100,000 profit in 1 time. Of course we’d like to have the latter all the time, but it requires a very large portfolio and most of us simple don’t have that. So how large –or small- a portfolio can do well? Assume you have a $10,000 portfolio. That really isn’t much. But, what would it take to double it in one year?
First off, at the end of the year you will have to pay capital gains tax, and although the tax-code is complicated and income dependent it’s often around 15%. That means in order to make $10,000 in profit after tax you will have to generate $11,764 in total profits before tax.
Second, there are around 250 trading days per year, but not all of them will make you money. After all life sometimes gets in the way, e.g. sickness (10 days), vacation (10 days), no market action, losses, etc (20 days). This leaves us on average with around 210 profitable trading days per year. To double your capital after taxes in one year the average profit per trading day has to be: $11,764/210 = $56.02. That’s a mere 0.5602% gain per day of your starting capital. In our opinion $56.02/day is very achievable. Our point is
- making thousands and thousands of dollars a day is not necessary;
- with only small steps, a portfolio can grow 100% in one year;
- you don’t need to trade each day (we assume here you won’t trade 2 months per year!) and can still do very well: less stress;
- you really don’t need to look at the dollar amount of profit generated: $56 is small enough to not worry about it.
Need further proof: if you extrapolate this formula 3 years into the future your trading capital will be $80,000 while still maintaining only a 0.56% average daily gain at a rate of 210 trading days per year and a 15% tax rate. See our free profit generator calculator.
Now if you apply the aforementioned 6 ground rules, and you only have $10,000 to start with, it is very doable to make on average a $56 profit per trading day and to reach your goal of doubling your portfolio in one year. Our example also shows that rule # 1 (setting prudent stops to protect your capital) is paramount in achieving success both financially and mentally. It allows you to focus on winners and cut losers: less stress.
It does require, however, to put in a lot of ground work: first determine your trading style and preferred trading vehicle(s), then either do your research, due diligence, chart analyses, etc yourself or pay for services that (help you) do it for you. Namely, you can’t expect to wake up one day and start trading successfully. It’s hard work, long hours, but nobody got rich from sitting on the couch. If you already are trading, but feel it’s not going as well as it could be, or you think you can do even better, then this article should help you put both your feet back on the ground and allow you to set realistic simple goals.
Lastly, we highly recommend you read our free “trading philosophy” page, which goes into several other aspects of trading and which augments this article really well.