When someone gets interested in trading, one of the first questions they want answered is, ‘How much money can I make trading?’
I first got interested in trading after a friend of mine told me about some guys he knew in Africa that were making $300/day trading forex (foreign exchange or currencies). After doing a bit of research, it sounded like a great way to make some extra money.
We can do some basic math to figure out what kind of returns we can make in a given market if we know 3 things: the mathematical expectancy of each trade, the trade frequency, and the average $ risk per trade.
Another word for mathematical expectancy is average profit. As an example, let’s say you had a trade where you could risk $100 with a 60% chance of making $100. Your expectancy (or average profit per trade) would be 20% of $100 or $20. 20% average profit is realistic for a decent trader, although some traders do much better than that.
($100 * 60%) – ($100 * 40%) = $20 or 20% of your average risk.
If you had a trade setup that made $20 of profit per trade and you could find 2 of those trades per trading day, that would be $20*2*5 = $200/wk.
There are many traders that aim for 1-5 trades per day, but there are definitely others who get more like 25 trades/day. For example, the market wizard Mark Cook claims to take 20-25 trades per day on the SP500 e-mini futures. If we assume he has a 20% profit margin and risks $1000 per trade, that means he would make $200*20 = $4000/day.
New traders especially would have trouble finding 20 good trades in one day, but 1-5 trades/per day is quite reasonable. Even 1 trade at 20% average profit on $1000 average risk would be $200/day which many people could live on.