How Much Money Can You Make as a Trader?

"How much money can I expect to make each year from trading?"

That's a question I'm asked quite often. In most professions, it's fairly simple to answer. If you're in accounting, you have a fairly reliable range. Engineering? Same thing. Trading? It gets unwieldy very quickly.

Here's why.

First, you can lose. In most other jobs, you're usually guaranteed to be paid. In trading, there is no such guarantee. On the upside, there is no limit. In 2007, three hedge fund managers earned over $1 billion dollars. Even the Yankees don't pay their employees this type of money.

But once you get past that point (most people already know this ahead of time) the possibilities of the many potential returns become endless. Let me give you an example using only one trade made during the year.

Let's say you went short the market at the closing top so far of 2009 made on January 6 at 934.70. This is a fairly good assumption if you are a Battle Plan subscriber and took the sell signals the Battle Plan triggered. Everyone who took the trade made money, right? For this example we'll assume so.

Let's now say that everyone who subscribes to the Battle Plan has a $500,000 account. Would everyone have achieved the same return shorting and then covering at the same price?

At first thought, you might say yes. But then you realize the answer is absolutely not.

Why not?

Because even though everyone took the same signal on the same day at the same price, there are two driving factors to the returns people achieved.

The first is position size. The second is vehicle selected.

Let's look at position size first.

If someone was extremely aggressive they might have put their entire $500,000 in the position. If they did, their account would have risen by about 3% if they exited the next day on the close which was the signal day to exit.

Someone else might have been 1/2 as aggressive. They would have allocated $250,000 of their $500,000 and earned half as much which is 1.5%.

Someone else could have been more conservative and placed 20% of their account in the position. Their account grew about 0.60%. A good return for the day but 1/5 what the person who was fully invested earned. On the flip side, this same person had the peace of mind knowing that if the position moved against them the loss would have been 1/5 the loss of someone who was fully invested. Returns and Risk usually go hand in hand.

Now let's go further and take number two which is vehicle selection.

We'll look at the same signal and then look at the very different returns based upon the investment vehicle selected.

A more aggressive trader will take the signal and use the e-mini market to trade. And on this trade, for each contract they sold short, they made about 28 points or $1400 per contract. With a $500,000 account they can potentially trade many many contracts. Their returns would have been substantial (as would their losses have been if they were wrong).

Someone else who is aggressive may take the same signal and buy the SDS which is the 2x inverse ETF of the S& P. He will have made good money too on this trade (about 6%) but less than the e-mini trader.

Someone else could have taken the trade and used the SPY as the vehicle of choice. His return? Half of what the 2x ETF trader made.

Someone else who wanted to limit their risk could have bought puts. Limited dollar downside and unlimited dollar upside (the amazing lure of long options). Their gain becomes more complicated because of the decision they made along the way as to which put to buy.

Another options trader, more conservative than our trader above, could simply have put on a bear call credit spread on the SPYs. Sell the calls and protect the position by buying the calls. He had the least risk of the group and he also made the least amount of money. Again, its risk and reward.

So how did this one simple trade that worked out so nicely get so complicated when we look at its return? We had this very simple high probability signal trigger last Tuesday night and for most people who took the trade it was a profitable trade. But at the end of the year this one very nice trade will look very, very different on everyone's P&L sheets. Most will have taken different position size than everyone else and many will have used different investment vehicles than others. And I can promise you that almost nobody's P&L sheets are going to look the same on the trade at the end of the year. Now multiply all these variables by dozens if not hundreds of trades made in a year and you have an exponential number of potential combination of returns, all from taking the same trades every day

Position sizing and investment vehicle choice is not something you will learn on television from people screaming out their stock picks or their Dow projections for 2009. All that stuff is as real as the WWE (though in defense of the WWE my 10-year-old son and his friends insist it really is real).

You can only learn proper position sizing and investment vehicle choice by spending time studying this and creating a strategy plan ahead of time. This plan lays out exactly how you allocate your capital and also allows you to see what the potential risks and rewards for the different scenarios are as they play out. This is not an easy exercise and it can take a great deal of tine before ever getting right. But no other profession out there allows you the freedom and upside that this one does. It's time well spent.

We'll continue to look at this topic as we proceed in the future.

Could your short-term stock trading use a boost? Click here now to reigster for Larry's free live trading seminar today at 4:30 p.m. ET. where Larry will introduce some of the new short term trading strategies for stock and ETFs traders that will be part of the Spring 2008 Swing Traders College! Learn how to trade stocks and ETFs to the long side and short side and stay one step ahead of market volatility!

Larry Connors is CEO and Founder of TradingMarkets.com and Connors Research.