First, let me start with a preface stating the following is opinion and not meant to suggest or imply any sort of return as likely– in fact, loss is most likely.
Day trading for 50% returns with barely an edge is very possible: in fact, I used to think that sort of return was “good trading”. Now, I am not here to judge whether or not a return is “good or “bad”.
The real question is whether or not you can trade for a living on a 50% return? The answer for most of us is going to be a definitive no.
I recently shared the following updated spreadsheet in the Quantitative Collaborative which shows what it takes to hit a given yearly income target given theoretical criteria:
The point is that if you want to hit 165k/year then you can do it in various ways but at the end of the day the numbers have to work out. You will see from the calculator that your expectancy is always going to be less then your average win.
If we are talking about day trades and only taking ones best trades then we know we are probably in the 1 to 8 trades per day range, as well.
The “Model Account” is only used in the profit per day day calculation. This takes a 5% and 3% risk of the model account and your average profit per day should ideally be less then your max risk— a fraction in the .2 to .3 is going to be more realistic. You can use this to calculate a maximum advisable return to target given a starting level. On a 25k account, for example, your max 3% risk is $750 and so any goals to return over 160k will be less realistic (750*adjusted trading days). Keep in mind that’s a top end, if we take a return goal of average 30% of your max risk, then we get ~48k.
In a recent post, I shared one should only be taking 7 figure trades. What’s a 7 figure trade though? Well, my point was simply that one should only be taking one’s best trades– highest confidence or with most significant edge. However, running the math, it yields that a 7 figure trade is a trade that is worthy of risking 2k to 4k on.
The math tells us that to make 7 figures per year day trading then your daily loss limit will need to be in the 5k to 20k per day range. Furthermore, if we do keep risk to 3% to 5% of the account, it suggest a model account of at least 160k.
Furthermore, if we assume a 5k per day loss limit and that you want at least 6x to 12x your daily loss in your account then this implies that you will need to keep 30k to 60k in your account.
The lesson here isn’t that one should shoot for a 7 figure return or any return for that matter. The lesson is that if you are to make a 7 figure return then you will have to put some some real risk on your trades. And, for most of us, in order to do that we need a solid edge and that’s the only trades we should be taking. That’s the real lesson.
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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