When people first step into trading with their first trading account they overestimate what they can achieve in one year and underestimate what they can achieve in 5 years.
What you will notice in trading or investing as you step further into this industry is that professional traders don’t really look at how much money they have made from a single trade, how much they have made in a month or even a year. The reason for why is because professionals instead focus on the % return of the trading account or funds they are trading with.
By focusing on what one would trade equate to in terms of a loss or a win also makes the process of trading easier as instead of focusing on the monetary value of the trade or trading account you are instead looking at what % of your trading account that one trade would equate into.
Now most new traders when they first step into trading would start with a modest trading account for example £10,000 which of course is still a large amount of money but to the size of some trading accounts it’s not a lot in comparison.
So, if you was to make 3% return consistently every month that would of course only equate to a £300 ROI and that would make an annual return of 36% also totalling a £3,600.
This presents a problem for most as that doesn’t seem like a lot of money for a year’s worth of work and depending on what they might have seen on social media with the showmen’s portraying that you can make huge returns from small amounts. Which in some cases you can but that requires a much bigger appetite for risk?
But if you were to compare trading to another investment such as bank accounts that provide an annual 3%return through interest that would total £300. I think trading is a far better option as you can make in a month through trading what would you take you 12 years if you were to leave your money a 3% interest bank account. Which if you adjust inflation which is average 3% that means in terms of value you aren’t making any money when you leave your money in the bank.
Now the problem with new traders is that they get frustrated with what seems such little returns of £300 per month and if they were trading with a £1,000 trading account then each month your returns would be £30. So of course this could seem to be underwhelming but trading is a long term investment vehicle not a way to make quick cash or get rich quick.
Traders make a huge mistake of thinking that in 5 years they will still be trading with the same amount of capital with they did in year 1 and the reason this is a mistake is because traders don’t treat their account with the needed respect. They will trade recklessly, make avoidable mistakes and most damaging create bad habits.
Your aim should be to grow your trading account by any means whether that be through trading profits, adding money into your account through other investments or cash deposits.
The aim should always be to grow the account into a larger amount because the bigger amount of capital in your trading account the bigger your potential returns will be as well.
Now if we stick with the exact same monthly return of 3% but instead of trading with an account size of £10,000 but now use an example of £100,000 a 3% return now becomes £3,000!
Which we can agree is a much more substantial amount of money, but the percentage return is exactly the same in both examples, so we still do the exact same work and follow the same process to make a 3% ROI but the monetary value has increased x10.
This is the glorious thing with trading as we don’t need to do any other work but just by follow the exact same processes and principles to consistently make 3% and by growing our trading account we can make a far greater return.
If we then consistently make 3% each month trading with a £100,000 account, our annual ROI would equate to £36,000 which is more than what most typical jobs pay in a year’s salary.
Now 3% seems like a small return to be making each month if we consider that in certain trade setups we could actually make 3% or more from one single trade but by professional standards if you can make 3-5% per month consistently you are considered one of the best traders in terms of performance across the whole industry. The reason 3% isn’t easy to achieve every month is we need to consider losses and drawdowns, so it takes a very skilled trader to be making a positive return every month. You must also consider the bigger your trading account the harder it is to trade with due to the psychological changes and developments it takes to trade with a bigger amount of capital!
So do not focus on the monetary return of your trading account but focus more on the % return instead as by focusing on the percentages you can continue to follow the exact same process and principles that will lead to a 3% month ROI. By doing this if you start with £1,000 but eventually build your account up £100,000 then you are doing nothing different other than managing a bigger account with more capital as you will still be following the same process and principles along with aiming to make 3%. But the difference being you can make x10the returns just by following the exact same process when trading with £1,000 and still aiming to achieve that 3% monthly target.
So do not think short-term but think of the longer term perspective of your trading career, also think of what you are doing now and would you be doing that if instead you was trading with x10 trading account? Just because you might not be trading with a large amount of capital does not justify you treat a small trading account with any less respect, it all comes down to how you manage money.
Don’t be limiting yourself through limited self-beliefs just because you might not be trading with £100,000 or £1,000,000 right now doesn’t mean one day you won’t be but if you start acting and trading like you already are in terms of treating your trading account with the same respect as though it was worth £1,000,000 then you will get there much quicker! Think of the decisions you make and you would make them same decisions if the account was x10 because most traders wouldn’t. The reason why is because they don’t think it’s a lot of money when they trade with a small account but the % always remains the same big or small. That is why trading using % is a far superior way to trade rather than just judging everything on a monetary value.
Next week, I am going to be expanding on this topic slightly further by discussing how once you have the correct process in place and you can consistent % returns how you can grow your account through compounding the gains from trading.
Until then take care,