I once heard a wise quote that sounded like this:
Most people overestimate what they can achieve in one year, but underestimate what they can achieve in ten years.
This is a very good picture of many people’s approach to daytrading.
When I talk to new traders, I often experience a very high expectation of what can be made in return. I understand that really well. Because looking at the options for leverage, investing for borrowed capital makes it incredibly easy to make returns over 100% a month.
What is a realistic return on daytrading?
I know several daytraders who make between 3-6% return per month. I also know a couple of traders that consistently make a nice couple of % above this. But let’s just assume an average of 5% per month in our calculations.
In this context, keep in mind that it usually has taken these daytraders from anywhere from six months to several years to be good enough to remain fairly consistent at this level. Unfortunately, there are also a lot of people who do not have the discipline, the psyche or the motivation to empower themselves and therefore stop quickly.
When I mention 5% return a month for new daytraders, they often wrinkle their nose and think it’s too little.
If you start with a capital of 10,000 DKK, then 5% return is not quite a lot of money. 5% of 10,000 kr. Is sparse 500 kroner a month. If you look at the same time spent sitting 5 hours a day for 20 days a month, we end up with an hourly wage of just 5 kroner per hour. This is also in a ‘job’, where at the same time you risk paying to go to work as you can also lose money.
But you forget an important factor
One of the factors that most people forget or do not have the patience to wait for is the effect of compound interest.
Compound interest simply means the effect it gives when you receive interest or return on your money. Next month you will receive both the return on your subscribed capital and the return from last month, etc.
In the following examples, I have used a simple little calculator online that you can play with.
Let’s just for a moment forget about how to get 5% a month and let’s forget about taxes for a moment. Right now, I just want to demonstrate how big the effect is of compound interest if we have the patience to trade disciplined for 10 years.
5% a month gives – with compound – approx. 80% in return per year.
I know that 80% of 10,000 DKK is only DKK 8,000, and that this barely is enough for a holiday trip. But look at the example below and see what happens to your capital in just 10 years.
And this is only if you do not add more to your capital along the way.
Imagine that you had added 5000 dollars each year, which you could deduct from your personal finances. Then the math looks like this:
Patience is the key to success
The basic idea here is that you can easily get to a point where you can make a living by daytrading. However, it is very few that can do it already after a few months.
My recommendation is that you start by learning the principles, thoroughly testing some platforms, beginning to make sure you can make a fairly consistent return and be disciplined and patient.
Now I have used 5% a month here as an example. But it could also have been 2% a month or 10% a month. And you can play with the number of years and put it to 5, 20 or 40 years.
But, of course, be aware that when you reach a certain size, it is no longer realistic to make the same return as you cannot just place 1 billion or two in the market without moving the market.
But it’s fun to play with the numbers and I hope you can get the feeling that constant returns over a number of years can bring amazing results in the long run.
Below is a video that expands on the article and provides more examples.