The very brief answer I gave you above is really comprehensive, And any attempt to go into extra details would be the same as explaining the obvious.
A single-word article could be unpolite and strange, so even if I think that it has a lot of Zen elegance, I am writing a bit more on the topic because I am assuming that, if you are reading this article, you are probably waiting for a train or queuing somewhere. This is why I will give you something to read for the next few minutes.
Do you know someone who has doubled his trading account every year for ten years? If the answer is affirmative, I have a question for you: is he richer than George Soros? Or is he just a billionaire?
If he is not a billionaire, or not even a millionaire, then he is just a liar.
In fact, if someone doubled his account, starting from $50,000 USD, and he reinvested his gain every year, after only 15 years, he would have more than $1.6 billion USD. After another five years of doing the same, he would have $52 billion USD.
On the Forbes billionaire list, he would be at the same level as Mark Zuckerberg.
This proves that the event we are discussing is so unlikely that, in all of human history, it has never happened—not one single time.
If your train has not yet arrived and you still want to kill time, I can explain why in the last 60 million years, we have had dinosaurs but not traders doubling their accounts.
We have said that based on the evidence, the event we are discussing is impossible because it has never been observed. However, we have not yet said why it is like that, so we have to give some proof.
To obtain proof, we need a set of events that necessitate a conclusion that no one can consistently double their account for so many years.
Once we know it, we reach absolute truth that is not dependent upon our observation because it is evidence. We can also exclude the very unlikely event that someone could make $50 billion USD by trading, but not want to let anyone know about this.
If you wanted to trade $50,000 USD to become richer than Zuckerberg in twenty years, you would need to start trading by taking a lot of risk—risking say 3% of your account per trade. We can start with this assumption without any need to give further proof. This is really self-evident.
Another assumption is that you might have at least 15 losing trades in a row, which in twenty years of trading at least twice a day, is another self-evident truth.
We can also define a threshold, beyond which your account cannot recover. This is 50 % In fact, you need to double it just to get back to the initial value of your account.
On an Excel spreadsheet, without any necessity to be a finance expert, we can simulate how quickly your account would go downhill when running a lot of risk.
Setting a number of years, initial account value, and using the solver, you can have fun solving the problem for different variables and answering questions like how many losing trades do I need in order to lose more than 50%?Or how much do I have to risk in order to burn the account after ten trades?
It is not necessary to calculate how much time we need to wait before someone, by risking too much, would burn his account. But it is possible and fun, as long as you are not math-phobic and are curious. Send a mail here , I will send you a quick guide on how to calculate it.
In no more than 15 losing trades, risking a bit more than 3% per trade, your account is almost50% down.
At this stage, one can argue that starting with different assumptions (using unrealistic ones), the outcome of the simulation above would be different.
This could lead to anything being possible, even making 50 billion starting from $50,000 USD and risking 0.5% per trade while only having two consecutive losses—and all of that for twenty consecutive years.
At this point, if someone is really considering this scenario to be possible, there is not much room for any conversation.
The three minutes you have spent reading this article could have been useful for you to think about two different and apparently not related things.
First: Who ever tells you that there is a strategy that allows you to make 100% a year is not just naïve but is actively lying to you. Do not speak to him again, even if he is your best friend. Not ever.
Second: To make money by investing, because it is reasonable to assume a consecutive set of losing trades, having too much risk would get you to the point where recovery is no longer possible.
You might be wondering how much should you risk per trade? There is not a single answer, but implementing a model to simulate a portfolio with different parameters for risk per trade and number of consecutive losses can be done easily in Excel.
Whatever your strategy is, risking more than 3% per trade, whatever you are doing, will certainly lead to a disaster.
What is possible instead is to make a yearly performance, if you are very talented, in the order of 10% or 20% over a long period of time.
Investing by running low risk is not just one of many ways to do this job, but it is a necessity. Without that, for clear mathematical reason, you won’t last long.
Try to imagine different paths. Each one represents how a portfolio is moving in time, according to the same winning trading strategy (it does not matter how good the strategy is, as long as it is not losing money or is winning all the time). The only portfolios that after twenty years still have a value bigger than zero are the ones with very little risk.
Of course, if you want to know how little this risk should be, we need a bit of math, as the answer would be a boundary of values and never a single one.
Without being precise, I can say that, most of the time, the risk should be in the range of 0.1% and 1% per trade.