Hi I'm Luke from Disciplined Trader and in this video I want to answer the questions
most trading newcomers have: How much can I make trading the Forex and indices markets?
Unfortunately there isn't a simple answer to this question.
How much money you will make from your trading depends almost entirely on your trading approach.
Fortunately we can break it down to analyse the factors that can effect what return you
may see from your trading.
The factors in question are: Your strategy, Trade Frequency, Account Size and your risk
appetite.
Each of these aspects of your trading can affect the potential returns.
Lets start you're your Strategy
Strategies come in all shapes and sizes.
At the core of each strategy you have two important pieces of information.
The strategy win rate and the average risk to reward for the trades taken with that strategy.
Using these we can make estimations on what returns we could see from trading this strategy.
Lets look at an example to illustrate this further.
Here we have two strategies.
Strategy A and Strategy B Strategy A has a win rate of 65% and an average
risk to reward ratio of 1.5 : 1 Strategy B has a win rate of 30% and an average
risk to reward ratio of 5 : 1 Both strategies will be risking 1% of their
account per trade.
Now we can use these numbers to estimate what return we may get over the course of 100 trades.
But before we do, which do you think will have the higher return?
Starting with strategy A, we need to know how much our winning trades make.
if we are risking 1% per trade, then we stand to make 1.5% if the trade wins as the risk
to reward is 1.5: 1.
65% of trades win so 65% of 100 trades is 65.
35% of trades lose so 35% of 100 is 35.
So if 65 winning trades each make 1.5% we can times 65 by 1.5 to get 97.5.
So we make 97.5% from winning trades.
Now we need to calculate how much we lose from losing trades.
We have 35 losing trades each losing 1%.
So we can do 35 times 1 to get 35.
So we lose 35% from our losing trades.
Now to get our overall return we take our return from winning trades which is 97.5%
and minus the amount we lose from losing trades which is 35% to give us a total return over
the 100 trades of 62.5%.
Now if we do the same for strategy B. Again we are risking 1% per trade so that means
we stand to make 5% on our winning trades as the risk to reward ratio is 5:1
30% of trades win so 30% of 100 trades is 30.
70% of trades lose so 70% of 100 is 70.
So if 30 winning trades each make 5% we can times 30 by 5 to get 150.
So we make 150% from winning trades.
Now we need to calculate how much we lose from losing trades.
We have 70 losing trades each losing 1%.
So we can do 70 times 1 to get 70.
So we lose 70% from our losing trades.
Now to get our overall return we take our return from winning trades which is 150% and
minus the amount we lose from losing trades which is 70% to give us a total return over
the 100 trades of 80%.
So we can see from the overview of both strategies that even though Strategy A has a higher win
rate than Strategy B, Strategy B actually has a higher return than strategy A.
Now let's look at Trade frequency.
Some of you may be asking what is trade frequency and it is simply the average number of trades
taken within a specific time period.
For example a strategy may take 20 trades on average per month.
So the trade frequency for that strategy would be 20 per month, or 5 per week (assuming there's
20 trading days in a month), or one per day.
Etc Following on with our example we know that
strategy A has returned 62.5% over the 100 trades and strategy B has returned 80% when
risking 1%.
However it takes four months to get 100 trades using strategy A and it takes a year to get
100 trades using strategy B. So over the course of a year, Strategy A returns
187.5% and strategy B returns 80%.
So now the tables have turned and strategy A actually gives us a better return as although
the return over a set number of trades is lower than strategy B, it takes three times
as many trades over a year which multiplies it's return potential.
it's important to know the trade frequency of a strategy so you know what sort of time
period you are looking at to get the return you are estimating.
Okay so lets move onto Account size People start trading with accounts of all
different sizes.
Some people may be starting with a few thousand pounds, some with tens of thousands and some
with hundreds of thousands.
But how does this effect the returns you can make?
Lets continue with our example.
So far we know that over the period of a year Strategy A has returned 187.5% and strategy
B has returned 80%.
However the trader trading Strategy A has an account size of £5000 and the trader trading
strategy B has an account size of £30 000.
So if we apply the percentage returns to their respective accounts we will calculate how
much money each has made over the entire year.
Trader A trading strategy A has made 187.5% on his £5000 account.
So 187.5 % of £5000 can be calculated by multiplying 1.87 by £5000 which equals a
return of £9375 Trader B trading strategy B has made 80% on
his £30 000 account.
So 80% of £30 000 can be calculated by multiplying 0.80 by £30 000 which equals a return of
£24 000.
So we can see even though Trader A had a higher percentage return over the year, Trader B
still made more money because he had a bigger account size.
And finally lets look at risk appetite.
Risk appetite is simply the amount a trader is willing to risk per trade.
This is usually a certain percentage of your account.
So far both strategies has been risking 1% per trade.
However, The trader trading Strategy A has decided they are willing to risk 4% on each
trade taken.
The win rate is still the same and the risk reward ratio on the strategy is still 1.5
: 1 so if the 1 on the ratio represents Strategy A's 4% then we need to times 4 by 1.5 to get
their return per trade.
4 x 1.5 gives us 6.
So Trader A now stands to make 6% on winning trades and lose 4% on losing trades.
We know Strategy A takes 100 trades per 4 months, so it takes 300 trades per year (as
three time 4 months gives us 12 which is a year).
65% of 300 trades win which is 195 winning trades.
195 times 6 gives us our return from winning trades which is 1170%
35% of 300 trades lose which is 105 losing trades.
105 times 4 gives us our loss from losing trades which is 420%.
1170% - 470% gives us our new total return for strategy A which is 750%.
A 750% return on the £5000 account for this strategy equates to a £37500 return.
So even though Trader B had a much bigger account, Trader A made more money over the
year because he was willing to take on more risk.
Now I must mention here that I am not saying it's a good or bad idea to risk 4% per trade.
I am merely trying to demonstrate to you how your appetite for risk can affect the amount
of money you can make from trading.
Keep an eye on the YouTube channel as I will be making a video in the near future to help
you decide how much to risk per trade.
I hope you found the example we just went through to be beneficial.
I see a lot of traders that get told that a strategy is successful and just start running
with it.
It usually ends up being thrown away by that trader shortly after as they lose confidence
in it and I'm not surprised.
If you don't know the technical information about the strategy you are using how do you
know if the results you are seeing are inline with your expectations?
How can you have any expectations of it?
The strategies used in the example are not real strategies but lets pretend for a moment
they are.
A trader trading with Strategy B might go through a pretty long streak of losing trades
as it only has a win rate of 30%.
If the trader trading that strategy doesn't know that but only knows it's a profitable
strategy they could very easily lose all confidence in it.
I will make a video on how to calculate the probabilities of losing streaks in the future
so keep a look out for that on the youtube channel.
So hopefully I have demonstrated to you that answering the question how much money can
I make trading is not a simple answer.
You need to consider the factors we looked at previously when estimating any potential
returns from a trading approach.
If you are brand new to trading then I would urge you not to concentrate on the returns
for a while.
Instead focus your efforts on learning about the markets.
Spend time with a trading platform and become competent using it.
Find or develop a strategy that suits you and that you are happy with.
Demo trade that strategy for a while.
Then start with a real money trading account but keep the stakes small and slowly build
your confidence and your discipline to the point where you are ready to progress.
New traders often have unreal expectations from trading but if you set your expectations
correctly, you will find your trading will progress with much less stress and frustration.
UPCOMING VIDEOS - Over the next couple of weeks I will be uploading more videos to the
youtube channel so subscribe to the channel if you found this video useful and you want
to see more.
I will be covering How much should I risk per trade?
How to estimate the potential returns from my strategy?
How to calculate the probability of losing streaks?
Let me know if there are any other topics that you would like me to cover and I would
happily do so
Thanks for watching this video Please subscribe to the Disciplined Trader
YouTube channel for more trading videos You can also visit the Blog where you can
find the Disciplined Trader Academy where I am building a collection of video courses
to help traders of all levels improve their trading.
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Thanks again for watching and I hope you all have a good trading day!