Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it. – Albert Einstein
I will start this article by asking you to try to forget, for a moment, absolutely everything you have ever read, heard, or watched about trading the markets. Forget it all. Now open your mind and listen because the action of making a living by trading could actually be more realistic than you might think. I’m going to prove it to you.
This is not an article about any trading strategy whatsoever. I will not discuss technical indicators, fundamentals, or anything of the sort. What I want you to focus on, for the time being, is the money management aspect of trading. Money management is a key ingredient in any trading strategy and if you perform the active role as your own money manager, then the following statements may sound an alarm bell for you. That light bulb may just turn on!
Question… If you had $10,000 to invest, what would be your rate of return if you let it sit in a bank account at the current absurdly low rates of 0.70 to a whopping 1%? Well in 20 years, your $10,000 would grow to $12,201.
Um…Helloooo! You would be LOSING money by depositing your money in the bank. At an average inflation rate of just 3%, by keeping your money in a bank would create a net loss of -2% each year. This is your real return.
Ok but you have a bright idea. You want to throw your money into stocks and ride them for an average market return of 8% according to many studies. After all, 8% is 8 times better than your savings account returns. So in 20 years, what will your $10,000 grow to (potentially)? Now it grows to $46,600 in 20 years.
These are still poor returns. You are looking to create income, to retire wealthy, to live the good life. How can you do this with such meager returns on your investment? Well listen closely, because its just about to get interesting.
Nadex, or The North American Derivatives Exchange is a CFTC regulated Exchange in Chicago that offers derivatives on several products. If you are reading this article, I assume you are familiar with how they operate. I trade with Nadex so this is why I am mentioning this particular exchange.
One of the best aspects of Nadex, or any regulated broker or exchange for that matter, is the act of leverage. Leverage will allow you to take your $10,000 and trade it as if you were trading $50,000 or $100,000. Now leverage is a double edge sword but if used correctly, your account has a potential to grow tremendously. Let’s take a look at the math…
Now lets role play for a moment. Lets open our account with $1,000 instead of the $10,000 I mentioned earlier and try grow it by trading with Nadex binary options and see if it would be possible to grow this to crazy awesome levels. The following concept is the same thing I teach in my free trading course, ‘Zero Guess Work’ at joaquintrading.com, by the way. This concept will blow your mind!
If you have a trading strategy that produces results over time, do you think it is possible, just possible to make an average daily profit (inclusive of fees and losses) of $2 from your $1,000 account? I’m dead serious… Can you make $2 per day? This is absolutely all it takes to create $3 million in 20 years. The concept is the same. The math is the same. The ONLY thing that will hold you back is your own, screwed up mind. Anyone can learn a profitable trading strategy. This has been proven time and time again. It is another story when it comes to trader psychology but that is for another article.
So how, on Gods green earth can I make $3 Million by making only $2 per day? Well, let us remember the quote from the beginning of this article… Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it. – Albert Einstein- If you want to understand it, read on!
Here is the math…
A $1,000 account making $2 per day equals how much profit in one year, based upon 250 trading days per year? It gains $500 profit for the year. What is $500 profit, in percentage, of $1,000? That is a whopping 50% profit for the year. Now you must realize that whether you are making $2 per day in 5 trades per week or $20 once every two weeks on one trade, it does not matter because the math is the same.
Now making $2 per trade is just the start. Let us assume you have made your $2 on a consistent basis and your account is now $1,500 after year one. Now instead of creating a profit of $2 per day, now you will need to make a profit of $3 per day. This is still so achievable its almost insane. As your account grows, so will your contract size.
Growing slowly is key. If you are impatient and ‘want it now’, you are more prone to failure than following a plan such as the one I am discussing. The reason many traders fail is that they try to make $100 profit on their $1,000 account instead of $2. They want it now, risk more than they should, and so they fail.
Let’s skip forward a few years to year 5. In year 5, if you are following this plan, your account is now worth $7,500. You still can not live on this but if you continue to perform, you now need to profit an average of $15 per trading day to stay on track. Can you do this? Can you, possibly make $15 per day on an account of $7,500? Of course you can if you have a profitable strategy that works. $15 per day profit is so doable, it’s almost a joke on an account of that size. If you are trading Nadex binaries, depending on what type of contract you choose, even after year 5, you are still only trading 1 contract. I mean, come on, folks!
Let us jump to year 10. In your 10thyear of this 20 year plan, your account should now be at a little over $57,000. At this point, 10 years into your journey, you still only need an average daily profit of $114 to continue to be successful. Your contract size has increased a bit but as you can see, the increment is so small, it is hardly noticed on a weekly basis.
Compounding your returns will begin to snowball at this point. In year 15, your account should be at almost $438,000. Now how in the world did it take 10 years to reach $57,000 but in the following 5 years, it snowballed to $438,000? This is compound interest at work. In year 15, you will need to make an average daily profit of $876. Making $876 per day may sound like a lot to you right now but that is because you don’t have almost a half a million to invest. Once you have $438,000, then making a profit of only $876 will seem the same as making that $2 profit on your initial $1,000 account. The math is the same.
Since the math doesn’t lie, then in year 20, your account is now at $3,325,256.73. You,my friend, are a multimillionaire. So what if you started with $10,000 instead of $1,000? This account, using the same methodology would be worth a mind boggling $33.2 Million!
Now since the math is correct, and I have just laid out how you can grow $10,000 to $33 Million, do you think it is possible to at the very least grow $10,000 to $1 Million? If I just read your thoughts correctly, I think I just heard you say, “ Duuuuuh! Of course it is, you silly rascal!”
I have laid out the math. Can you do this? Of course you CAN, given that you have a profitable strategy. The question is WILL you do this? Most likely not. The vast majority of traders lose money year in and year out. They want it now and so they fail. How bad do you want to succeed? This is the question.
Profitable trading comes down to 2 things… A profitable strategy and trader psychology. I have several profitable strategies for the forex and Nadex markets at http://joaquintrading.com/if you need one. We offer most things for free. If you want a better than average chance for success, check us out. I don’t have a fancy website with bells and whistles because, frankly, I don’t care about all that junk. What I care about is trading profitably and helping new traders succeed. If you want a sneak peek at other profitable traders, go join the facebook group Nadex Trading Ideas and find out for yourself just how profitable trading can be.