30% a Year: The Hidden Secrets of Elite Traders - #246
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Welcome back to the TradeCity Traders Improve podcast. I am your host. My name is Rolf. I am the co-founder of TradeCity.com and also I am the co-founder of the Edgewonk.com trading journal. And in this week's episode, I want to cover a very important concept. It was also sent in as a question from one of the students that I mentor. And he said...

The best traders in the world make around 30% a year. But when my strategy turns out with 6R per month, it would gain more than 30% a year. Do you have some clarification for me? So what this trader actually says for those who haven't quite understood it, he said that his strategy can make around 6R, which is 6 risk multiple per month.

And if you're risking 1% per trade, that means 6R turn out to be 6% a month. And if you would calculate it for a year, that would give you then 72% a year. And he was wondering why with his strategy that might produce 72% a year, why it seems so easily doable to beat the best traders in the world who make around 30% a year.

And I think this is a very important question because it also helps with your expectation management as a trader. And this is, in my opinion, one of the key lessons that traders have to get. And if you enroll in my course, there is a dedicated lesson to expectation management because I think if you get your expectations right, your whole trading will change and you will approach your trading with a completely different mindset.

So I thought about his question and there are three to four parts to my answer. First of all, the best traders trade much lower than 1% per trade. So they don't risk 1% per trade on their trade. Those best traders where you often see the statistics from with a 30% a year, they don't risk 1% per trade. That's just way, way, way too much for usually a large portfolio.

So typically it's around 0.25%, so they only risk a quarter of a percent per trade and many will even risk less than that. So if you look at that with a, let's assume 0.25% risk per trade,

That gives you around 1.5% a month with your 6R and then you're falling short of that 30% a year. You would have to go up to around 0.5% per trade and then with those 6R per month you will make around

30 to 35 percent a year, not taking into account compounding impact. But those big traders, they don't risk 1 percent per trade, usually not even close. Second part to my question is that six risk multiple a month, every month is not sustainable over the long term. You will have losing month, you will have break even month as well.

And the best traders and what really separates them and why this 30% a year figure is so outstanding is that the best traders after two or three or four or maybe even five losing months in a row

they will recover, they will bounce back and their mindset will not take damage. Whereas on the other side, the average trader, the retail trader, maybe the trader who has only been trading for a year, two years or three years, most of the time those traders will not recover as quickly or maybe not even at all after two, three, four consecutive losing or break-even months. They're more inclined to completely change their system

maybe even abandon the system because they don't believe that it's working anymore. Maybe they believe the market has changed and the system is broken and it cannot generate money anymore. And then obviously if you then change your system, you jump to a new one, all of your consistency is lost and all of your previous progress is gone. It's a very important second point.

The third point to my answer to his question was, traders will also have break-even or losing years. And the best traders will be able to come back after a losing year. There are very popular interviews in the Market Wizards and on podcasts where the best traders of all time and some of them, they had two or three losing years consecutively. And the average trader, I can almost guarantee you,

is very, very likely to quit or completely change their approach after a losing year, let alone two losing years. And this is then erasing all of your previous progress. However, the best traders in the world, they understand that

This is not something where you measure your performance necessarily in the span of a year. You are in it for the long term, for the next 5, 10, 20 years. And this is really what differentiates the best traders from the average trader. The average trader after losing year, you can be quite certain that he's going to completely doubt his system and change everything that he has been doing.

Whereas the best traders, they will take an objective look at their performance, their mindset will not take a hit, and they will be ready the next year with 100% focus, clarity, and they will be ready to tackle the market once again, just like nothing would have happened. And when you read about those 30% a year performance, it might not sound impressive at first, but you have to keep in mind that this usually means that those traders are doing this

30% a year over 10, 20 or 30 years. Usually when you look at those statistics and you see they have an average of 30% a year, it means that this has been achieved over the span of a few decades often. And then it's something completely different. Whereas when you look at

a retail trader, over the short term, it might be possible to get a 30% a year, maybe even a 50% or 60% a year return. But to do this year after year after year, so that after 30 years, or let's say just 20 years,

you have an average annual return of 30%. That's something that is very, very hard, nearly impossible to achieve for pretty much anyone. And that's why it's so outstanding. And I hope this little exploration of this question helps you put things into perspective and to get a different view on those performance metrics that you often see from the best traders and also put it into context

When you look at traders who are doing it on social media and you see 100% return in a few months or a year. To achieve those numbers, you need to take extraordinary risk. And then the likelihood that you are able to do this year after year for the long term is very, very slim. Because the higher the risk, obviously, the more likely that the next losing streak is going to hit you very, very hard. And we are not in this...

for a year or two or even five years. You want to create a new income stream that can support you for the rest of your life, take care of your kids maybe even, and provide for you in your retirement. So this is not about something that you're going to do for three or five years. Trading is something that you really have to approach from a long-term perspective because that's what trading is all about.