You’ve seen the MTM’s of traders making lakhs. But here’s the thing, You can’t compare yourself to them :)
Because you’ve got different account size, risk appetite, Risk management, Strategy, and mindset.
If you do so, it is like comparing a Banana with Mango.
That’s why I am writing this post to explain how much money you can expect to make from trading with objective aspects. No more guesses. No more ridiculous projections. No more illusions.
Just statistics, numbers, and the naked truth.
Ready? Let’s Begin,
An essential aspect of a trading career.
You can have a 1:2 RRR (Risk to Reward Ratio)on your trades. But if you only win 25% of the time, Will you win consistently!?
Obviously, NO, right!
Now clearly, your risk to reward is not the answer. Then what else? Your win rate?
Perhaps you have a 90% win rate. But if you lose 10₹ for every 1₹ you risk, you will also be a consistent loser.
So, Clearly, your risk to reward and win rate are meaningless on their own.
What is the solution?
Well, the secret is this,
You must combine your win rate and risk to reward to determine your profitability in the long run.
And this is known as EDGE or EXPECTANCY.
Your EDGE will give you an expected return on every penny that you risk.
Mathematically it can be expressed as:
EDGE= ([1+ (W/L)] * WR — 1) * 100
Where: W means the size of your average wins L means the size of your average loss WR means the winning rate
Here’s an example:
You have made 10 trades. 5 were winning trades, and 5 were losing trades. That means your percentage win ratio is 5/10 that equals 50%. If your 5 trades brought you a profit of ₹ 5,000, then your average win is ₹ 5,000/5 = ₹ 1,000. If your losses were only ₹ 4,000, then your average loss is ₹ 4,000/5 = ₹ 800.
Now, let’s apply these figures to the formula:
EDGE= ([1+ (1000/800)] x 0.5–1) x100 = 12.5%.
In this example, the EDGE of your trading strategy is 12.5% (a positive EDGE). This means your trading strategy will return 12.5 paise for every Rupee traded over the long term.
Let’s move on…
You must trade more to WIN more 💰
Have you realized this?
The majority of casinos operate 24 hours a day, 365 days a year. Why? Because the more they play, the more they make — and it’s the same for trading.
You might be wondering!!!
“How does this relate to trading?”
This means the frequency of your trades really matters. The more trades you put on, the more money you’ll make (provided having a positive edge).
Imagine this: You have a positive edge strategy that wins 70% of the time, with an average of 1:3 RRR.
But here’s the thing,
it only has 2 trading signals a year.
How much money can you make from this strategy?
Not a lot, right?
You might even lose in that year since there is a 9% chance of losing two trades in a row.
Can you see how important this is?
Now: Your trades' frequency is important, but it’s not enough to determine how much money you can make in trading.
There are still a few more factors that play a major role. let us see…
🤑 Money makes money in the trading business
You’ve probably heard this before,
“The bigger you risk, the higher your returns.”
So is this true?
Well, the answer is YES and NO.
Here’s why I said YES,
Let’s say your trading strategy has a positive EDGE and generates a return of 20R (20 Rewards) per year. Also, you have a decent size 100,000 lakh trading account.
So, how much can you make from your trading?
Well, this depends on how much you’re risking per trade.
If you risk ₹ 1000/trade, you can make an average of ₹ 20,000 per year.
If you risk ₹ 3000/trade, you can make an average of ₹ 60,000 per year.
If you risk ₹ 5000/trade, you can make an average of ₹ 100,000 per year.
Note: This is the same strategy, same account size, and the same trader.
The only difference is your bet size (or risk per trade). The bigger you risk, the higher your returns.
Here’s why I said NO,
If your bet size is too large, the risk of ruin becomes a possibility. This means you have a higher risk of blowing up your trading account — and it reduces your EDGE.
So, the Risk amount on every trade also matters the most; There are other factors we need to understand.
Withdrawal or Compounding💸 the returns?
If you make an average of 20% a year with a ₹1,00,000 account, after 20 years, it will be worth … ₹52,82,754.00
But what if you withdraw 50% of your profits each year?
This means you will make an average of 10% a year, and after 20 years, your account will be worth ₹7,32,807.00.
Now clearly, compounding your returns will generate the highest return.
But whether it’s feasible or not depends on how you manage your trading business.
If you’re a day-trader, then chances are trading is your only source of income. You have to withdraw from your account to meet your living needs.
But if you have a full-time job and you’re trading on the sides, then you don’t have to make any withdrawals and can compound the returns in your account.
There’s no right or wrong to this. Ultimately, you must know what you want out of your trading business — and understand how withdrawals will affect your returns over time.
So, how much money can you expect to make from Trading?
Now that you’ve learned the key factors that determine how much money can you make from trading? Next, let’s see how to use this knowledge and calculate your potential earnings.
Here’s an example:
Trading EDGE — 30% Number of trades — 200 trades per year Account size — ₹1,00,000 Risk per trade — ₹1000
Once you know your numbers, plug and play them into this formula.
Trading EDGE * Number of trades * Risk per trade
And you get: 30% x 200 x ₹1000 = ₹60,000
This means you can expect to make an average of ₹60,000 a year.
Now, if you want to convert to percentage terms, then use this formula…
([Trading EDGE* Number of trades * Risk per trade] / Account size) x 100
And you get:
30% x 200 x ₹1000 / ₹1,00,000 = 60%
(Note: This calculation is without withdrawal)
This means you can expect to make an average of 60% a year.
So, how much money can you make from trading?
Well, there’s no one factor that determines how much money you can make in trading.
Instead, you must look at these 5 important aspects:
Number of trades
Risk per trade
Withdrawal or compounding
Then apply this formula… ([Trading EDGE* Number of trades * Risk per trade] / Account size) x 100
And you’ll have an objective measure of how much money you can actually make in trading.
Happy trading 😎
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