The first question you must ask is why did I pick 165k per year as the goal for annual trading income?
Why did I not pick the median of 55k per year or a bigger juicer number like 1 million or even 2 million? The reason I picked 165k/year trading is that most incomes, regardless of what you do, tend to top out in the 150k-250k range and indeed is often lower then that.
My logic is that for trading to be truly viable, and not just a hobby, you need to make more then you would likely be able to make doing any other sort of work– and 165k is going to be around the right figure for most. As for the bigger juicier numbers, less then 1% of incomes are over 750k per year– so why make the goal more difficult then need be? The fact is that most traders would be doing very well financially at 165k per year compared to their current incomes and many let’s get down too it, like myself, want to trade regardless of the money.
As for why I didn’t pick 55k per year, the main reason is that most traders who have the capital to even attempt trading tend to be high earners and more successful then average because without some risk capital– one cannot even trade. As such, we have to set the bar higher for the average trader who has the capital to try the endeavor.
Now, here’s our first problem– I would hazard that even a trader able to make 25k to 30k per from trading, on a small account, is doing better then 75% to 85% of all traders. Trading is not the activity where being better then 80% is good enough.
The expectancy formula tells us how much on average we can make per trade. The formula is: (Win % x Average Win Size) – (Loss % x Average Loss Size).
Now, let’s get to the math, assuming you win 70% of the time, your risk and reward are about equal, and you risk on average $500 per trade then you need to make 825 trades per year to make 165k. You will need to average 3 to 4 trades per day. You will need to make $657 to $774 per day on average.
And, here’s the really interesting part– if you trade systems and your systems are fairly selective averaging only 50 trades per year, you will need ~17 trading systems to hit that.
Below is a screenshot from the Excel sheet, I built, and have shared with members in our Quantitative Collaborative program. But, you can probably build it in a few minutes on your own– the 17 systems considerably more difficult. Clearly, it may be helpful to think of this as a long term goal.
Upping the average risk per trade to $1,000 under the same parameters and decreasing the selectivity to 30 trades per system per year, still yields the requirement for 14 systems. The trades per day does drop to ~2 trades per day.
Granted, I ignored outlier profits but I am not sure that it even makes sense to calculate those. And, yes I ignored the gross vs net question– because this is the 1,000 foot view where those details are less important.
Please note I am not making any claims regarding my performance or my program. In this post, I shared how a logical and rational way to set theoretical performance goals and secondarily looked at the math required to hit those targets.
The author is passionate about markets. He has developed top ranked futures strategies. His core focus is (1) applying machine learning and developing systematic strategies, and (2) solving the toughest problems of discretionary trading by applying quantitative tools, machine learning, and performance discipline. You can contact the author at firstname.lastname@example.org.
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