By Dr. Kerry Szymanski of Harmonic Edge*
Posted: Aug 21, 2009

If you had been entrusted to manage a mutual fund and were able to consistently return 15% a year for investors, it is probably accurate to say that you would be widely known on Wall Street and a frequent guest on CNBC. Consistently demonstrating the ability to extract money from the market is a rare talent indeed.

Those who attempt to trade the markets are often unprepared for the realities of trading. Unrealistic expectations are just one of the many reasons that traders fail. Consider this: Just how good do you have to be to make it as a trader?

To answer this question, I will use a simple analogy that you can apply to any size account. Let's begin by assuming that we are trading a $10,000 futures account and that we will make one trade per day. Furthermore, we will use a highly discounted broker, who is only going to charge us $5.00 per round trip in brokerage fees.

With approximately 250 trading days per year, this means that our brokerage fees are going to run us 250 times $5.00 per day, which equals $1,250.00 per year. If we divide the $1,250 in brokerage fees by $10,000 we get 12.5%. What this means is that we must return 12.5% on our trades just to pay for brokerage fees!

Remember, though, that we also have fees for data, software and education and, lest we forget, slippage. These could easily double our expenses (meaning that we’d have to earn 25% on our trades to break even).

This illustration makes two things very clear:

• We are unlikely to win this game trading one contract or even two for that matter (although this is the preferred way to start because we are likely to lose at first anyway).
• We have to be very good at what we do. (A 15% gross return might be meaningful to a mutual fund manager who gets hugely discounted brokerage fees and can spread out costs over a large portfolio, but, for most of us, 15% will mean that we are just breaking even or losing money.)

Perhaps even more enlightening is the danger of over-trading. An extra trade a day is going to double our brokerage fees and mean that we must now earn an additional 12.5% just to break even! When trading is viewed from this perspective, some might feel that it is impossible to consistently beat the market.

That is not the case, however. Some traders consistently pull double-digit returns out of the market nearly every month. So, the question is: "Just how good are you?"

Viewed from this perspective, trading is not a game but a serious business. The margin between winning and losing can be narrow (as it is in many businesses), and it often comes down to how you handle the little things. The efforts made to effectively control costs and execute a sound trading plan (business plan) are not simply useful or important -- they are essential.

*Reprinted (and modified) with permission from Kerry Szymanski