Over the years of trading, training, and coaching I have had the pleasure (mostly) of meeting and working with quite a large number of traders and I am always interested in what results they expect in their own trading. Sadly, most have not even come close to realizing their own expectations. It seems to me that those results suggest one of three things: either their expectations are unrealistically high or their trading is not as good as they think it is or will be or, a combination of both.
I remember when I first began and read a trading book (that shall remain nameless) where the author illustrated a description of strategies with an example of an actual trade or two. The trades were always winners and often in the examples the trades were relatively short term, from a few days to a few weeks. Many achieved very nice percentage returns over the short periods and the author then went on to annualize the results. He would take a trade that had made 30% in a month and then annualize the percentage to suggest that a trader could make 360% a year (12 months x 30%) using that strategy. Annualizing a result like that can be both deceptive and dangerous. Of course those kinds of returns are possible but it is the extremely rare trader who has achieved such great results over the period of a year or more. The simple fact is that almost no one does. The truth is that it is the relatively rare trader who beats the S&P in any given year let alone year in and year out.
Recently I had a discussion with a relative novice trader who has been undergoing long term mentoring with a fellow employed by a brokerage as a paid mentor for the brokerage clients. The trader with whom I was speaking had lost several trades in a row and was somewhat discouraged because the young fellow doing the mentoring claimed that he was making between 200% and 300% a year in his own account. I wondered aloud why the mentor was still working for someone else if he was doing so well. Whatever the truth, the mentor's claim gave rise to very high expectations on the part of the trader with whom I spoke.
Not only do traders often have exaggerated expectations of how well they will do, but they also often have completely unrealistic expectations of how fast they will do it. I often see this type of unrealistic impatient expectation in the subscription services I edit. In $10 Trader, for example, I have closed 15 consecutive winning trades since last October following the close of an exact breakeven trade. Since April 8th of 2009, I have closed 20 out of 23 trades as winners. In spite of those numbers I am often amazed to see subscribers quit after only two or three days or a week of their free trial. I can only conclude that things are not fast enough for them in their learning experience. If they are going to trade with real money it seems that results rather than a lot of action might be more important. If it is action we want, we can find it in any casino in the nation.
I don't mean to suggest for a moment that it is realistic to expect more than 85% winners. In fact, it isn't. Money can be made with a much lower percentage of winners if appropriate cut loss measures, money management, and reward to risk parameters are employed.
The stock market is not the lottery. It takes time and it takes work to become a good trader. However it seems to me that when a trader has unrealistic expectations concerning the time required to trade, the return to be achieved, or the speed in which reasonable success can be expected, or any combination of those unrealistic expectations he is likely to become prematurely disheartened.
If we stop for a moment and consider how much of a return we get from a savings account or from a CD we may have a greater understanding of what a decent or good return is in the stock market. In my latest book, "Smart Investors Money Machine," for example, I discuss a number of strategies to produce income. Among them are covered calls that often return 1.5% to 2.5% a month and MLPs that pay healthy quarterly distributions, some greater than 8% or 9% a year. One might consider an MLP that is optionable, get the quarterly distributions and also sell covered calls. Even if that trader only averaged 1% every other month on the covered calls and also got an 8% distribution over the course of the year he might achieve a 14% or 15% annual return. Certainly that is a much higher return than a CD might offer, but, of course, there is added risk in that the unit price of the MLP will almost certainly fluctuate and could go down over the course of a year. In fact, the company could go out of business (as with any stock) so there is always risk to be considered.
At times I have made as much as 35% or more in a month on a single credit spread, but the fact is that credit spreads may and do lose so it is unfair to say I am making 35% a month on my credit spreads. Some do, many don't. For me they are fine to trade because I don't expect them all to win. In point of fact, I know that some inevitably will lose and when I open one I never know whether that particular one will be a winner or a loser. Through years of trading the markets have taught me that my initial expectations were significantly overly optimistic. Does that mean I quit trading? Definitely not. I now understand and accept that some trades win and some lose and as I wrote in a recent article, a few do really, really well. That is what I expect. I expect to study, to read, to continue to learn, to win some, to lose some, and every so often to achieve a big gain or two. That is what experience (mine and observing others) has taught me. Almost certainly, at least with rare exception, the trader who jumps in expecting to make a quick killing succeeds only in killing his own trading account.
by Bill Kraft, Editor
Copyright 2010, Makin' Hay, Inc.
All Rights Reserved
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