Let us get “real” for a moment when it comes to investing/trading in the stock market. How much can you honestly make and what do you need to “live” off your earnings?
If you are new to the market, or even been playing around and are starting to get serious about investing. There is one major thing you need to wrap your head around. You are not going to go from $0 to $1,000,000 over night and when traders have, they did not do it without taking extreme amounts of risk where they could lose everything. That risk coupled with years of research on their particular investment method.
But what can you honestly do? Not every company is a Netflix or Amazon. Even those companies have reached potential ceilings and took years to go from $5 to $1000. But, there is a method of trading that can assist – and in order to fully appreciate that method, we need to get a deeper understanding of some return on investment values.
So, let’s do a basic (mathematical) assessment of the DJIA (as of close April 30th, 2021)
The average monthly traded range (from low to high) for each company in the DJIA for the last 12 months. Taking that value, what percent of price is this average movement. Why is this important? It provides you of an idea if you enter into a trade at the low (good luck), approximately what percent return you could earn if you sold at the high (again, good luck). However, even if you entered in the middle. It is possible that you could exit at this percent the following month.
So, what are we looking at?
| Symbol | Monthly Ranging % of Price | ~60% of Ranging % of Price |
| AAPL | 13 | 8 |
| AMGN | 12 | 7 |
| AXP | 12 | 7 |
| BA | 19 | 11 |
| CAT | 9 | 5 |
| CRM | 15 | 9 |
| CSCO | 10 | 6 |
| CVX | 13 | 8 |
| DIS | 12 | 7 |
| DOW | 12 | 7 |
| GS | 10 | 6 |
| HD | 9 | 5 |
| HON | 9 | 6 |
| IBM | 10 | 6 |
| INTC | 15 | 9 |
| JNJ | 8 | 5 |
| JPM | 10 | 6 |
| KO | 8 | 5 |
| MCD | 7 | 4 |
| MMM | 8 | 5 |
| MRK | 9 | 6 |
| MSFT | 9 | 5 |
| NKE | 11 | 6 |
| PG | 7 | 4 |
| TRV | 10 | 6 |
| UNH | 9 | 5 |
| V | 10 | 6 |
| VZ | 7 | 4 |
| WBA | 13 | 8 |
| WMT | 8 | 5 |
| Average | 10.46 | 6.23 |
The average percent of price that the trading range for the companies in the DJIA per month makes up is ~10.46%. If consolidating that particular month, an average return of ~6.23 could be achieved.
The mean of the two averages is 8.345%.
So, if you were to buy/sell stock on the short term, you get an idea of what your average gains might be.
What are your living expenses?
This is the point where you need to have a good understanding of your monthly budget. How much per month do you absolutely need in order to survive? This does not take into account a large entertainment budget. This covers general expenses of rent/mortgage, car payment, insurances, fuels costs and meal costs.
If you NEED $25,000 a year to survive ($2083.33/mo) and your portfolio is returning 10% per month, your minimum portfolio size is ~$23,100 before your first withdraw ($21,000 portfolio + $2100 withdraw.)
However, the problem with that portfolio size is that you are not compounding your returns and every month you are withdrawing ~$2100 and resetting the portfolio value to $21,000. IF you are not able to get the full 10% one month, you then have been set back. The market does tend to consolidate some months of the year.
However, if you earned the mean of the two averages (average of the two values), which in the case is 8.345%, you would require a portfolio size of ~$27,264.77 (before first withdraw).
IF you only get 60% of the overall possible range return. You would be getting 6.23% and in order to earn the same $2100 a month, the portfolio would need to be ~$35,807 (before first withdraw).
Again, that is if you don’t allow the portfolio to compound past these values. SO. How long would it take?
In the beginning, you would be required to allow the portfolio to compound. So, let’s for arguments sake say that you started a portfolio from your $10,000 savings.
It would take ~10 months to compound to $23,100 if you managed consecutive 10% returns per month.
It would take ~15 months to compound to $27,265 if you managed consecutive 8% returns per month.
It would take ~23 months to compound to $35,807 if you managed consecutive 6% returns per month.
But can you rely on a monthly gain? During the beginning of the COVID correction, I personally was out of the market for three months until the market showed it was ready to begin recovery. Also, I don’t trade in short sales. I use other methods to go “short” in a cash only account. I am not referring to options, I am referring to short side ETFs.
What about yearly? What if you allowed to compound year over year until you reach a portfolio size in which you can remove a lump sum at the beginning of the year to cover these living expenses.
Well then, that is a different story.
A withdraw of $25,000 once a year when you are consistently earning 10% per month and allowing it to compound would require a portfolio value of ~$58,000 (before first withdraw) and ~20 months to compound to this level.
If earning 8% per month and allowing it to compound would require a portfolio value of ~$59,927.75 and ~24 months to compound to this level.
If earning 6% per month and allowing it to compound would require a portfolio value of ~$62,424.21 and ~33 months to compound to this level.
10% per month compounded annually is 313.84%
8% per month compounded annually is 251.82%
6% per month compounded annually is 201.22%
Again, all of this is if you would compound the portfolio and only trade four stocks per month.
Also – Please keep in mind this these percentages are subject to change (monthly) and are subject to draw downs during corrective market periods. In other words they can go from 10% to -20%.
That is where building a successful strategy comes in.
But before you build a successful strategy, you need to come to terms with a few things.
I know there is a book out there by a famous trader about how he made one million in one year. Yes, he did! His name is Larry Williams and he is a very successful commodities trader and his daughter is the famous actress Michelle Williams. Both Larry and Michelle have won commodities trading contests by making millions in a year.
However, the instrument they are investing in was very high risk, very high reward, very high loss potential if not fully understood. I honestly mean the loss of everything. They trade commodity future contracts. These have “expiration” dates where they can expire to a value of $0 and if you are on the wrong side or do not time your trade correctly, you lose everything.
Also, if you have read the WallStreetBets reddit pages. Many of traders there are making huge gambles in the options market. Similar to future contracts, they can expire to $0. Some win big, some lose their entire savings.
What I deal with are specifically stocks and what I will be discussing is solely based on stocks.
While there is still a risk to stocks, you are not dealing with calculations reducing the value of the option/futures contracts that involve time and value and have the ability to expire to $0 in 30 days.
I use averages when trading. By averages I mean that in the last 21 days (1 business month) the average daily range (High Price – Low Price) is $X.00 per day and $X.00 per day is Y% of price.
I also examine these same averages on the weekly and monthly charts.
From here I am looking for stocks that have the constant ability to move a minimum of 8% per month.
This helps build the portfolio list.
Next is the investment criteria. How much do you invest? First thing is that I would not suggest “all in”. This is a foolish investment strategy.
The calculation is fairly simple.
What percentage of winners is your strategy? No, the answer is not 100%.
My strategy wins 80% of the time and thusly loses 20% of the time. The losers are not that large because I have an exit strategy (stops at 10% below the low of the entry day).
If you are earning 8% return on your investments per month and have a $10,000 portfolio. The calculation begins as such:
Return % * (W% – L%) = Estimate Position Size (EPS).
EPS * .33 = Adjusted Position Size (APS).
Portfolio Equity * APS = Investment Amount
Portfolio Equity / Investment Amount = Number of different stocks to invest in.
1.08 * (80 – 20) = 64.8
64.8 * .33 = 21.384
10000 * 21.38 = 2138.4
10000 / 2138.4 = 4.6
The results. A single stock should have no more than 21.384% of your capital. In a 10,000 that is $2138.40. This amount will grow as the portfolio compounds.
This than translates into you should have ~5 different stocks in your portfolio.
Allowing these to all compound as the portfolio grows. This calculation is a variant of the Kelly Criteria. A calculation utilized in gambling and sport betting by professionals about how much of their capital to bet.
If everything goes well, you will hopefully be in a stock and out in less than 30 days.
Rinse, Wash, Repeat.
With this pattern, how long would it take to reach one million dollars?
If you can successfully maintain 10% – 5 years.
If you can successfully maintain 8% – 6 years.
If you can successfully maintain 6% – 7.5 years.
This is part of the method Nicolas Darvas used to make $2,000,000 in the stock market in the 1950s.
23% of his portfolio invested (I use 21.38%)
10% stop loss (I also use 10% stop loss)
The other part was he picked stocks that were trending. This method of trading is known as “Trend Following” and there is specific criteria for this and detecting breakouts.
Using “trend following”, I look for break out trends that have a monthly average of 8 – 10%
So, let’s get serious about trading for moment.
- It is a job.
- You must do research.
- You must know what the expected average monthly/weekly/daily returns are out of the stock you are interested in and you must know if it is in a trend or out of a trend.
- You must protect your money by using stop losses and while many traders have different percentages they put their stops at – it appears the average is around 10%.
And this is just the beginning…
** EDIT: I may not have made it entirely clear. When I say 10%/8%/6% per month. I am discussing each trade. If you trade 5 stocks, you need to make 10%/8%/6% per month per trade to reach the goals I am discussing. NOT 10% total for the entire month.
Now, I realize and frequently do it myself, capture in one trade in the first two weeks my target percentage and enter a new trade for the remaining days of the month. Some months I am lucky and get 10 complete trades in. Others I get 5 – 7 trades in with mid-month entries moving into the follow on month.
Orion Price Prophet 