The first step in understanding and building a solid money management plan, the key component in successful trading strategies, is setting realistic profit expectations. All too often I see people open trading accounts with balances of $10,000 or under expecting to make enough money to support themselves from their trading profits within a short period of time. After seeing all of the hype that is out there surrounding most trading education, trading signal services, etc it is no wonder that people think this is a reasonable goal, but that does not make it a realistic one.

As most any truly successful trader will tell you, the stock market has averaged somewhere in the neighborhood of 10% a year over the last 100 years. What this basically means is that if you would have invested in the 30 stocks that make up the Dow Jones Industrial Average, the index which is designed to represent the overall market, you would have earned about 10% on your money on average over the last 100 years. With this in mind, what most any truly successful trader will also tell you, is that if you can consistently double that return, on average, over the long term, then you will be considered among the best traders out there.

So does this mean that if you are a new trader starting with a small account balance that you have no chance of earning a living or even becoming rich from trading? No it does not. But what it does mean is that in order to be successful your expectations need to be in line with reality, so you can develop a stock, futures or forex trading strategy that will allow you to succeed over the long term, instead of following the path of most small traders who swing for the fences on every trade until they eventually blow their entire account up.

With this in mind lets look at a couple of scenarios. What most successful traders will also tell you, is that as a small trader you have much more flexibility regarding what you can put money into as your small trade size is an advantage in the sense that you do not move the market or catch the attention of other traders who may try to profit off what you are doing at your expense. With this in mind I think that most successful traders will tell you that it is not unreasonable to target 30% a year while you are small. Now, assuming you left your profits in your trading account at the end of each year so that you could compound your returns and averaged 30% each year (with obviously some years being worse than this and some years being better) your returns and account balance would look something like the following assuming you started with $10,000.


Now depending on where you live and what your financial requirements to live are, you may be satisfied with this. If you are not however does this mean that you are doomed to never live your dream of being a professional trader? No it does not. If you can produce those types of returns consistently what most successful traders will also tell you is that there will be people lined up at your door to offer you money to trade, and after the 3rd year or so with a successful track record, you should be able to raise enough money to make a very good living trading other people’s money.

Most successful money managers charge management and performance fees somewhere in the neighborhood of 2 and 20 (that is 2% of assets under management yearly and 20% of net new profits) as their compensation for managing other people’s money. With this in mind if you were able to produce a track record similar to the one above for two to three years running and then raised $5 Million (what should be an easy feat with that track record) then your yearly management fee would amount to $100,000. On top of this if you were able to return 30% on that $5 Million then your performance fee would be $300,000 earning you a total compensation of $400,000.

With this in mind, contrary to popular belief which is if you have a small account the only way to be successful is to swing for the fences at first and then scale back when you are large, a much higher probability and most likely faster way to success is to focus on building a consistently profitable trading strategy and then taking on capital from others in order to earn your living trading.

That completes our lesson for today. In tomorrows lesson we are going to look at different ways of protecting one’s capital while trading so we hope to see you in that lesson.

As always if you have any questions or comments please post them in the comments section below so we can all learn to trade together, and good luck with your trading!

Hi Dave
I enjoyed your videos very much. Very informative indeed. Very educational.
Thank You!
So based on your experience, you meant it is very difficult for the small daytraders with $10,000 trading account with 20:1 or 30:1 buy power is to average $300/day profits consistently assuming one has a "reasonably good money management" & trading plan? Understood 95%+ failed mainly due to trader trading psychology (not Exiting the trade correctly).
Let the lossers run & cut the profits short. IMO Exiting a trade as correct as possible is the KEY to success.
So making a living as a small prop trader is just an illusion then?
In your opinion why is that so hard for traders to overcome this psychological barrier beside placing stop loss? why is fear of trading loss so different from fear of danger?
Fear of danger = we stay away or run away asap (don't care to be a loser).
Fear of trading loss = get brain freeze and riding in the losing trading.
Thanks for you time
Best Regards,
Warren

Hi Warren,

Thank you for your comment I am glad you like the videos.

Yes I would say that it is very difficult for someone with a $10,000 account to average $300 a day in profit. If you think about it this way that is a 3% gain per day that you would be shooting for there. As the average trading month has 22 trading days in it that would be a 66% return per month.

Most professional traders that I have seen rarely go over 4 to one leverage even in the less volatile markets like currencies as well so 20 or 30 to 1 leverage is in my opinion pushing the envelope as well.

I think the fear of trading loss is different from the fear of danger because the fear of trading loss in my opinion comes from the need for people to be right or from the ego side of things where the fear of danger comes from people's desire to be safe.

If there is any other input on this one for warren or any other questions please feel free to post them below.

Best Regards,
Dave

Hi Dave

Now I understand why you mention about the hype that that is all around about this business. It does all make sense now after I listend to this lesson a couple of times and tried to digest it. What you are covering here is totally different with how day trading is visualized by some companies or individuals in the web. I would suggest to discuss this more in depth as I think for people like me new to the subject there should be more weight given to this topic. At the same time how do you suggest someone with low capital realistically approach this business given the fact it is impossible to make a living at this rate of return at least in north america.

Regards.
mnfard

Hi mnfard,

Welcome to the community.

Thank you for the recommendation to make this topic more prominent. I agree that it is not given the attention that it should be and will make it a point to highlight some additional resources related to this in the coming days in the "shared stories" section of the site which you can find on the homepage of the site.

There are really three options a trader with a small amount of capital has in order to try and make a living off of trading.

1. Swing for the fences while they are small and put on larger position sizes than proper money management techniques would call for to try and trade the small account size up to a reasonable level. If they are able to do this then when they had enough capital to make a living without swinging for the fences then scale back and use proper money management techniques.

Most people with small account swing for the fences and the large majority lose most if not all of the money in their trading account as a result. For the few that do make it to a large enough account size most of these people from my experience, because they have not been excersizing proper money management, continue to trade position sizes which are too large, and eventually give all their gains back as well.

There are however a very few who make enough money using this method to trade for a living using proper money management tequniques once they get to the larger account size and then have the disciplin to make the switch. I think most of these people will tell you however that there was a heavy dose of luck involved with getting to the point where they could do this.

2. Trade the small account balance using proper money management, develop your skills correctly, and supplement your account balance with money from your day job until you have enough money to quit your day job and trade for a living using proper money management techniques. There is a good discussion of what it takes to trade for a living using this method here.

3. Trade the small account balance using proper money management, develop your skills correctly, and once you have a profitable track record raise money off of that track record and get the capital you need to earn enough to trade full time that way.

Those are basically the only three ways I can think of that it can be done with a small account. If there are any other ideas or questions on this one feel free to post them below.

Hope that helps.

Best Regards,
Dave