I will seldom, if ever, provide straight answers when asked which broker I would recommend or which signals provider is best. It’s not that I’m being unhelpful – quite the opposite.
The most helpful answer I can give to these questions is that the trader must make these decisions for themselves. I can just provide some advice about how to go about making this decision.
Questions such as these at least indicate that the trader realises that there are important operational and strategic decisions to be made. Sometimes I’m faced with questions that indicate that the trader has a lot more to learn.
I was recently asked by someone just starting to trade Binary Options if I could recommend a trading strategy that guaranteed high returns with very low risk.
I queried this trader in relation to what he meant by ‘high’ and concluded that he is doomed to lose all or most of his fund and to stop trading unless he revises his expectations.
High Returns and Expectations
It’s only natural to look for a ‘high’ return. If not then simply put your money on deposit and get a few percent every year. Why bother with trading?
But what does ‘high’ mean? Put another way, what level of return is it reasonable to expect to earn?
Because if you are expecting and aiming for a level of return that is not reasonable then you will fail.
When asked what he meant by ‘high’ the trader did not put a specific win rate on it. I suspected he had not grasped fully what determines returns and the importance of the win rate.
He understood that only winning 2 out of 5 would ensure losses and 3 wins out of 5 did not seem to him to be much better that breakeven. So he appeared to be looking to win perhaps 4 out of every 5 trades.
Have a look at the claims made by many signals providers and implied by many brokers and this seems reasonable. But is it?
Let’s assume you start with €500 and trade about 5 times a day for a month. We’ll say there are 20 trading days in a month. You risk just 2% of our fund on any trade, so your stake at the start is just €10. That seems pretty conservative.
What return would you earn with a winning rate of 80% and a broker payout ratio of 75%?
Are you a Star Trader?
The answer is that you would earn a profit of €440 in a month. Does this seem reasonable? After all, you have put in a lot of effort to implement your strategy on 100 trades.
Before you decide if this is a reasonable expectation, let’s say you just continue to do exactly what you are doing for a year. What will your fund be worth?
If you do the calculations you will see that on the basis of the above you will have turned €500 into over €1 million in just a year.
Does this still reasonable to you? You have multiplied your starting fund 2,000 times. But, even the best, high paid fund managers would be happy with consistent annual returns of 15 to 20%.
You can find out more about the importance of expectatin by clicking on this link.
What have you got as a relative newcomer that means you should expect to be such a star performer? It just won’t happen.
Of course it is possible to achieve 80% wins, but is it probable? After all, if you base your strategy on a possible but highly unlikely objective then you will probably, although not absolutely certainly, fail.
The Danger of Unrealistic Expectations
The problem is that if you are not getting the returns you need, or want, then you will start to take unnecessary risks. After all, the arithmetic would seem to suggest that you could trade less but with higher risk per trade and achieve the same outcome.
So many new traders when faced with what they see as insufficient return take this path. It is the path to ruin.
Your objective is to be profitable. To achieve this you will need to win about 57% of trades. So, 60% wins might be a reasonable target.
Even so, you are unlikely to hit this from the start. What you need is a system that will make this a reasonable expectation.
Until you have developed this system you must resist the urge to take greater risks. The first step is to ensure that you know what is, and what is not, a realistic expectation for the percentage of trades you will win and the returns you will earn.
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