ES Friday 10-31-14 : Hot Topic

The Edge

How long will it take to turn $5,000 into $100,000?

Introduction

It's no secret how winning traders win and take the profits from everyone else. The have an edge and they exploit that edge day in and day out. It's a number game. If you buy a can of beans for 30 cents and sell it for 40 cents you make a 10 cent profit. Do that 10,000,000 times and you've made $1,000,000. Trading is the same. If you make (on average) $50 for each trade you place then you execute 20,000 trades and you've made $1,000,000. Simple isn't it?

This article explores how long it would take you to take a $5,000 account and turn it into a $100,000 trading the ES contract.

Have a look at the six scenarios in the table below: (download the spreadsheet from here: The Edge)

Scenario 1 2 3 4 5 6
Average Win Points 2.50 1.50 0.50 2.50 2.50 2.50
Average Loss Points 2.00 2.00 2.00 1.50 2.40 2.50
Cost per trade 0.10 0.10 0.10 0.10 0.10 0.10
Average P/L per trade 0.40 -0.60 -1.60 0.90 0.00 -0.10
Number of trades 100 100 100 50 100 100
Expected Profit (in points) 40.00 -60.00 -160.00 45.00 0.00 -10.00
Num contracts traded 2 2 4 6 2 2
Value per contract $50 $50 $50 $50 $50 $50
Total expected profit $4,000 -$6,000 -$32,000 $13,500 $0 -$1,000

Those who trade the ES will see that I've based the calculations here on the emini S&P futures contract. Take a look at the table and at scenario 1. The other scenarios use the same calculations but are based on different figures.

Under scenario 1 our average winning trade gives us 2.5 points and the average loosing trade is 2 points and our commissions are $5 per round trip which costs us 0.1 points per trade. Given those figures we end up with an average expected return of 0.40 points per trade.

Now it's just a numbers game. If you place 100 trades then you would expect to receive a net 40 points (after commissions) and trading at 2 contracts per trade and a contract value of $50 it means that you will make $4,000 on average for every 100 trades that you execute.

If, as in scenario 4, you're making on average 0.9 points per trade then after 50 trades you will have netted $13,500. Scenario 5 shows that even if you do have a slight edge it's still not good enough because commissions will take you down to breakeven in that situation.

Download the spreadsheet (The Edge) and stick in your own figures and see how much money you expect to make every 100 or 50 trades.

Starting from a $5,000 base

So how long will it take you to make $100,000 trading the ES futures contract and starting from a $5,000 base?

We are going to base our calculations on scenario 1 which gives us on average 0.40 points per trade executed. Here is another table giving the different options that face us. This table is in the same spreadsheet mentioned above and you can manipulate the figures yourself to see how different scenarios would work out. I've assumed the following fixed parameters/assumptions. What we are stating here is that we will trade 1 more contract for each $5,000 that we have in our trading account. So once we reach $10,000 we increase our trading size from 1 to 2 contracts. We also assume 20 trading days in the month.

Value per contract $50
Average P/L per trade (in points) 0.40
Increase contract every $5,000
Trades per day 5
Trades per month 100

Based on these figures we can produce the following table which shows us that it will take us around 9 months to generate $100,000 from a $5,000 account.

Cumulative Income Number of contracts traded Average expected P/L per trade Number of trades required to reach goal Months to target Cumulative Months
$5,000 1 $20.00 250 2.50 2.50
$10,000 2 $40.00 125 1.25 3.75
$15,000 3 $60.00 83 0.83 4.58
$20,000 4 $80.00 63 0.63 5.21
$25,000 5 $100.00 50 0.50 5.71
$30,000 6 $120.00 42 0.42 6.13
$35,000 7 $140.00 36 0.36 6.48
$40,000 8 $160.00 31 0.31 6.79
$45,000 9 $180.00 28 0.28 7.07
$50,000 10 $200.00 25 0.25 7.32
$55,000 11 $220.00 23 0.23 7.55
$60,000 12 $240.00 21 0.21 7.76
$65,000 13 $260.00 19 0.19 7.95
$70,000 14 $280.00 18 0.18 8.13
$75,000 15 $300.00 17 0.17 8.30
$80,000 16 $320.00 16 0.16 8.45
$85,000 17 $340.00 15 0.15 8.60
$90,000 18 $360.00 14 0.14 8.74
$95,000 19 $380.00 13 0.13 8.87
$100,000 20 $400.00 13 0.13 8.99

If we change the number of times that we trade per day from 5 to 1 then we discover that it will take us 45 months to reach our target. Conversely 10 trades per day brings the figure down to just 4.5 months.

What if our edge was 0.6 points per trade instead of 0.4 points per trade. That too will reduce the time from 9 months to 6 months. An edge of 0.2 points per trade will increase the time to $100,000 to 18 months.

The realism factor

Are we being realistic?

This is a hypothetical example and no suggestion is being made that you will be able to do this. What I am giving you here is a framework around which to calculate your expectations. The reality of the situation is that most traders do not have an edge or if they do have an edge they are squandering it by trying to second guess their system and make more money more quickly.

There are many assumptions in these figures. We have not discussed the possibility of having 20 losing trades in a row followed by 20 winning trades in a row. If you used a stop of 2 points per trade and the first 20 trades you placed were all losers then you will have lost 40 points which (based on trading 1 contract) is $2,200 (including commission of $5 per trade) and your account is down to $2,800. This is a devastating way to start but nonetheless is a possibility and a reality that you should plan for and not ignore.

We also assume that no money is drawn out of the trading account during this time period.

Article Criticism

Linear assumption by nononsense

Nononsense points out that the mathematics is linear and that the equity can become negative. He points out that you should figure out your risk of ruin. Instead of addressing this here I have decided to dedicate a separate article to it as I feel this deserves more attention: The Risk of Ruin

Conclusions

Don't be unrealistic. Take a look at the spreadsheet and punch in the numbers and figures that you are achieving in your daily trading using your system. You will probably be surprised to see that it's going to take you a little longer than you thought before you can buy that Porsche.