A reader by the name of Kevin brings up a question that I know a lot of traders have:
I have been paper trading for one month now in a day-trade time frame. The past 3 years I have dabbled in swing trades (10 – 20 per year). I have been using $25,000 in paper money to trade with and have a $2,400 profit. Is it unreasonable to expect that rate of return? I see many sites saying that 40% is what should be expected.
The first thing I need to say here is that you should never compare your trading to anyone else. Everyone is different. Unless two people trade exactly the same methodology in exactly the same timeframe and such, what they each do isn’t really directly comparable – at least when you’re just talking about rates of return. If you’re talking about risk-adjusted returns, then that’s a different story.
As for whether a roughly 10% return, it’s very difficult to say (and I’m not sure if we’re talking over the month first or three years). No one can evaluate a trader’s returns without also being able to look at the risk side of the equation. A 10% return over a month’s time might seem very good, but if it comes at a very high risk level then it might not be. Actually, in some cases it might be too small if the risks taken are lower than they could be.
This might sound like a hedged answer, but it’s not. New traders very often get caught up in thinking in terms or returns. They often fail to consider the risk side of the equation. It takes both sides to gain any clear understanding of someone’s performance.
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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.
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