One of the more common questions you can see on any trading forum relates to profitability and return expectations. New traders frequently ask “How much can I really make trading (insert market/instrument here)?” That, of course, is a very difficult question to answer. There are just way too many variables involved, including risk tolerance, timeframe, and others.
That does bring up a parallel discussion, though. What is your target return?
Do you even have one? If not, you should. How can you judge the effectiveness of your trading if you don’t? I realize that we can’t all pull some specific figure out of the air. A stock trader, for example, might think in terms of a comparisson to an index – like beating the S&P 500. That’s fine. It’s measurable. If you trade for a living you’ll have some kind of periodic (day/week/month) profit objective.
A lot of us, though, don’t trade in a way where we can do a direct comparisson to some objective measuring stick. That means we have to create one ourself, which means a return expectation.
There are two major reasons why this is important.
First, our expectations have to mesh with our risk tolerance. By definition, it requires taking higher levels of risk to achieve higher levels of returns. If a trader has high expectations for returns, but is very risk averse, something has to give. Either the expectations have to come down, or the risk tolerance has to increase.
The second reason is that expectations feed through in to the development of a trading strategy. The system/method evaluation process is largely a look at how a particular trading technique does in generating returns as compared to some benchmark. The trader without that benchmark (expectation) will have no way of knowing whether a particular way of trading will achieve the results that are sought after.
And of course, as I noted, having that benchmark gives you something to look at to help judge the effectiveness of your trading.
So what are your trading expectations?
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About the Author
John Forman, author of this blog, has traded for more than 20 years, is a professional market analyst, and authored The Essentials of Trading. He is an active participant in trading forums, consults for trading related businesses, as published literally dozens of trading articles, and has been quoted in a number of books and in the media.
** See John’s full bio.
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