Keep reading. Here's a scenario, and let me know if I made a mistake anywhere. I'm trying to keep the premise simple. I wish I did this calculation years ago when I first started trading.
If the outcome of the very next trade (instance) is 50%, then let's assume the outcome of the all trades (average) is also 50%.
If the outcome of winning is just a coin flip, 50/50, then what would happen if a trading strategy was used with the same odds and at an R (risk/reward) of 2:1?
Here are the parameters:
- Trade a strategy that has as good odds as a coin flip.
- Each profit target must be 2x stop loss.
- Do not risk more than 10% of your account per trade. This means 10 bad trades in a row will wipe you out.
- I included a scenario where you do not risk more than 1% of your account per trade. This means 100 bad trades in a row will wipe you out.
Over a long enough time horizon, your daily profit will converge to your expectancy value.
Here are the results:
If you risk 10% of your account per trade:
If you risk 1% of your account per trade:
So the next question to ask yourself is, what markets can I trade that fit these parameters?
Well, truthfully, to trade with these parameters (of 1% per trade risk) on a volatile futures contract (almost any e-mini basically, especially NQ), you need an account size of $200,000+.
So what's the solution for people without $200k accounts? One solution is trading micros. On a 20k account, assuming profit and expectancy converge on a long time horizon, you would be making $100/trading day.
So you might be thinking that's not a lot. How can someone become a millionaire trading? Well, let's see. You would need to make $4166 each 240 trading days (there's 253, but let's keep it at 240).
Here are the results:
If you risk 10% of your account per trade, you would need an R of 6:1.
If you risk 1% of your account per trade, you would need an R of 5:1, but your account must be over 200k to begin with.
So what are the magic numbers to becoming a millionaire?
Here's the minimum requirements that I found. Obviously this can be adjusted.
- Account size: $30k
- Max risk per trade: 5% (20 losses in a row will wipe you out)
- Profit must be 5x your stop loss
- Probability win rate: 70%
All information is for educational use only and is not investment advice.
There is a substantial risk of loss in trading commodity futures, stocks, options and foreign exchange products. Past performance is not indicative of future results.