How much can you earn in Trading? (Let's talk numbers)

Updated: Jun 8, 2019

The expectation that you bring with you in trading is often the greatest obstacle you will encounter - Yvan Byeajee

Ahhh... You’ve seen how people flaunt their trading results on YouTube and living the life of the riches – driving Lamborghini, sipping champagne at some posh hotel.

You’ve seen on adverts how investing brokerages/ trading courses promise HUGE returns if you trade your money with them.

Pause and ask yourself what they are trying to achieve…

No doubt, there is some truth to making money in trading … there is no cap on the money you can possibly make. You can make $100 a day, $1,000 a day… heck even $10,000 a day,

But of course, there is a catch.

What most people don’t realise is that trading can be the fastest way to make money, but it can also be the fastest way to blow your account, if you don’t learn the basics.

That’s why I advocate/urge/implore/beg/plead you to apply stop losses and proper risk management in your trading (I will cover risk and money management in future posts).

With that in mind, let’s dive right into today's main topic.

I am going to break down the numbers for trading the US stock market. The reason why I trade this market is because of its volume, ease of entry, low commissions and lastly the beauty of trading - volatility. Without volatility and market inefficiencies, trading will cease to exist.

The average % return of the S&P 500 held over the long term is about 8 to 12% a year. However, a typical daily % price change of the S&P 500 (a basket of top 500 US companies based on market capitalisation) is about +/- 1% and the FAANG (Facebook, Amazon, Apple, Netflix, Google) stocks move about +/- (1 to 3%) a day, based on my trading experience in the past 2 years.

There are fundamentally 2 factors that determines how much you can earn in trading.

1) Percentage Return

Let’s be honest, it is very optimistic for any beginner trader to be able to make 5% every month consistently. (If you can prove that you make 5% returns every month for the past 3 years, I will personally be your slave mentee). In fact, hedge funds that make more than 20% annually (~2% per month) are considered excellent. The key word here is consistent. Everyone can win the lottery, but it doesn’t mean you will win one every month. Depending on one’s risk appetite, consistency and trading strategy (win rate, risk reward ratio, expectancy), everyone will make a different monthly % return.

2) Capital

No money no talk. We live in a capitalist society, and we have to accept this fact that the rich can get richer in trading.

If you set aside $1,000, chances are it will take you forever to reach the desired monthly income you wish to get from trading. If you want to make say $1,000 a month in trading, that is a whopping 100% return a month - good luck with that.

(PS: If you lack the capital, there is another way around it. You can use leverage by trading a margin account or to trade financial derivatives that leverage the underlying stock. For instances, some brokerage such as Interactive Brokers are willing to provide u a 3X leverage for its margin account, meaning the brokerage lends you 3x your capital to trade i.e. buying power of $4,000 for your $1,000 of capital in the account. Another way is to trade leverage instruments such as options, or leveraged ETFs etc. Leverage is a double edge sword. Until you have learnt the basics, I suggest you trade with your capital first to train yourself up.)

Now, let’s play these scenarios.

a) You wish to make $1,000 monthly side income in trading. How much trading capital do I need?

Monthly return: 2% (Conservative and good)

$1,000 / 2% = $50,000

b) Maybe you wish to make $5,000 monthly income to replace your job income. How much trading capital do I need?

Monthly return: 2% (Conservative and good)

$5,000 / 2% = $250,000

c) How about you wish to make $20,000 monthly income to live like a rich. How much trading capital do I need?

Monthly return: 2% (Conservative and good)

$20,000 / 2% = $1,000,000

d) Suddenly blessed with the hand of the god, you got better at trading and your percentage monthly return goes up to 5% You wish to make $20,000 monthly income to live like a rich. How much trading capital do I need?

Monthly return: 5% (Incredible)

$20,000 / 5% = $400,000

I have shown these simplified and somewhat trivial calculations to demonstrate a point. You need to have sufficient capital and manage your expectations for the percentage monthly return.

Instead of wowing and asking how a person make $20,000 a month from trading, what you should be asking him is what percentage return is that and what is his capital?

If someone has 10 million dollars and he makes $20,000 a month, he is actually only making 2.4% return a year. Some fixed deposit/ regular insurance plan with the local bank can do that and the person don’t even need to trade.

With that, I hope you have a clearer idea and more realistic expectations on how much you can make in trading. You can always start with a small trading or demo account, train yourself to make small consistent returns with that account. At the same time, set aside a comfortable amount of your job income to fund your trading account. In due time, once you've found your edge in the market, and with sufficient capital in your trading account, your returns will compound.

Do subscribe to my blog for the latest blog posts and follow me on my social links in my website. I will be writing another blog post to discuss the science of achieving the percentage monthly returns as well as risk and money management in trading.

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Enjoy your Sunday, fellow Millennials and keep hustling.

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