What is a Realistic Return on Investment?

It is truly laughable when I see forex promotions that pain this picture of a little money being able to produce 1,000% or even 10,000% returns. I give you an example below taken from a forex online forum:

ea profit

Of course the fellow’s membership was revoked by the owners of the online forum who did not want some scammer tainting their image.

$35 to $10,000 in one month? Wow!

Usually, the products used to advertise these ridiculously high returns on investment are expert advisors. Due to the fact that these forex robots open positions using strategies and risk percentage levels not known to the traders who buy these products, the vendors pitching these products are able to mask the true risk profile that these products subject the trading account to, and it is not long before such accounts get blown as this testimony here attests to:

This brings us to the question: what is a realistic return on investment? I have done a lot of research in this area and I have come to the conclusion that returns on investment in forex or any other financial market for that matter are not usually too far-fetched from what obtains in any other offline investment vehicle. Of course, there will be individual variations in the figures, but the results will tend to cluster within a range.

Professional traders who work in hedge funds and investment banks know this. Indeed, the only times when there are really huge returns is when there are contrarian trades that go against the general market trend, such as those set by John Paulson and Michael Burry when they bet against the subprime housing market with huge returns. But even Michael Burry will readily tell you that his hedge fund had to endure a terrible period of drawdown in which his co-investors readily questioned his decisions and tactics, before things turned around. But the fact is that such opportunities for huge returns are rare and come by only once in a while.

What are Realistic Returns on Investment? Let’s Look at Some Examples…

So realistically speaking, what returns on investment should traders pursue in forex? To get a proper answer to this question, let us review the returns of investment from some hedge funds which are active in the forex market.

–       Soros Fund Management, the hedge fund owned by George Soros, made 22% returns in 2013.

–       Ex-Goldman Sachs trader David Tepper made 42% annual returns from his biggest hedge fund.

–       The S&P500 stock market rose 32% in 2013, fuelled by the Fed’s tapering program.

–       Steven Cohen’s SAC Capital made just 19% in 2013, but at a value of close to 2.3billion US Dollars, his relatively low return outperformed most other hedge fund traders in the market.

–       John Paulson’s Recovery Fund earned 63% last year, even though some of his gold-based holdings took a hit due to a fall in gold prices.

–       Carl Icahn’s investment fund earned 31% returns in 2013.

–       James Simons made 19% from his holdings in Citadel.

–       Larry Robbins’ Glenview Capital hedge fund returned 43% net in 2013.

From the results we see here, we can see that returns on investment from hedge fund traders, who typically represent the institutional traders in forex, range from 15% to 50% annually, with majority being clustered around the 25% to 35% mark if we follow the Gaussian distribution pattern.

If these are the kinds of returns on investment made by hedge funds, why would individual traders get sucked into these unbelievable headlines which promise traders returns of up to 10,000% on small amounts of money? Surely this is not possible.

Factors Affecting Returns on Investment

Returns on investment are affected by:

a)    Account Size

b)    Risk assumed per trade

Account Size

Hedge fund traders typically command large amounts of money. George Soros has over $29billion in his hedge fund, and his returns on investment for 2013 earned him $280million. The larger the account a forex trader has, the more that trader is able to cut his risks to the barest minimum as to be able to command good returns in the market.

Risk Profile

Trading is all about assuming risk. The trouble has always been: how much risk is safe to assume? A risk profile of 2-3% exposure for all trade exposure in the market is generally accepted as the standard which promotes safe returns. The lower the risk, the more assured the returns.

Conclusion

So what is the realistic return on investment in Forex? Traders should realistically aim for returns between 25% and 35% per annum. This is assuming that they employ the same long term investment goals that the hedge fund traders adopt.

I personally advocate two strategies to this:

a)    If you are targeting to pull money from your account every month, you can get more aggressive by using few trades (not more than 6 or 7 trades) on a daily chart, picking out trades that have a risk-reward ratio of 1:3 minimum. Aim to start trading with at least $10,000.

b)    If you are going to be compounding for the long term, then you should ideally aim to compound your profit and capital by a rate of return of 15% monthly, stepping down to 10% in year two and 7.5% in year 3. Starting capital for this venture should not be less than $10,000.

If you do not have as much as $10,000, then your goal should be to work offline to raise this amount. Reserve your micro accounts for training and re-training yourself on a live account.

Adam

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Adam is an experienced financial trader who writes about Forex trading, binary options, technical analysis and more.

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