Trading Strategy: How You Could Retire on 1% Gains

What if I told you that you could retire with 1% average gains? As implausible as that sounds, the truth is that averaging 1% gains could yield substantial profits – even if you don’t have a million-dollar account…

It’s all thanks to a simple, but underappreciated strategy that’s helped scores successful traders become millionaires by seeking out single-digit profits on their trades: I’m talking about frequency.  Today, I want to show you exactly how 1% gains can build wealth – and how you can put this strategy to work for your own portfolio in 2011.

First, let’s get back to that 1% trade…

You see, only knowing that we booked average gains of 1% doesn’t really tell us anything at all. That’s because there are two components to performance numbers: gain size and duration. Each is equally critical to just how much your portfolio grows.

Think about it this way: if you could guarantee a 1% gain each trading day, your average gain at the end of the year would be that paltry 1%. Hardly anything to write home about. But because your holding period is so short (just a day), in a single year, your portfolio would have gained 252% in total (since there were 252 trading days in 2010).

If you’d factored in compounding, that same 1% average gain would have left you with 1,127% profits by the end of the year…

So, if you had a $10,000 portfolio, those compounded 1% average gains would translate into single-year trading earnings of $112,740.02.

Obviously, if you missed your 1% benchmark, you’d take home less, and if you hit an occasional 5% homerun, you’d bank much more. The point, however, is indisputable – small, repeatable gains can turn a modest portfolio into a windfall.

How to Focus on Frequency

But while frequency has clear upside potential, it’s a strategy that’s sometimes difficult to put in place – especially if you’ve been a buy-and-hold investor in the past. The key to improving your trading frequency is to focus heavily on your sell signal before you enter your trade. In other words, you need to have an exit strategy in place before you have your entrance planned.

That’s a difficult pill for many investors to swallow – particularly if they’re used to buying stocks they like and holding on for an undetermined amount of time.

For traders, who should ostensibly have target exit prices and stop loss levels in mind for any trades, that’s a less daunting plan to put in place.

Of course, there are potential hiccups to increasing your trading frequency. One is the impact of commissions on small position sizes. If you’re aiming for consistent 5% gains, you need to be sure that you’d have enough profit left over after trading commissions to justify the risks.

Another potential problem is the pattern day trader rule, which limits traders with account sizes of less than $25,000 to 3 day trades for every 5 business days (a day trade is a trade that’s opened an closed in a single trading day). For that reason, it’s essential to keep track of any day trades you may make if your account falls below the threshold.

Putting Frequency into Practice

By hypotheticals are one thing – real life examples of trading successes are another…

The last few months of 2010 were an excellent example of the power that trading frequency can add to your portfolio. In September, I launched my small-cap trading service, Penny Momentum Trader, as a free BETA to readers of the Penny Sleuth (it’s since graduated to Agora Financial’s roster of premium advisory services). By December 31, 2010, our average booked gain rang in at 19.27% in just 22 days. That’s an average annualized return of 319.7%.

That was all done without resorting to day trades, and without taking on more than a small handful of positions at any one time.

And we beat the S&P 500 index by more than 4.8x from the start of our trading.

If you don’t have any experience with shorter-term trading, I’d recommend starting off by “trading paper” first – that is, opening a demo account with your broker that allows you to place hypothetical trades based on real market data. It’ll give you a glimpse of how your higher frequency plays fare without risking real cash.

Cheers,
Jonas Elmerraji
Penny Sleuth

January 4, 2011

Trading Strategy: How You Could Retire on 1% Gains was originally featured in the Penny Sleuth. Check out Wall Street’s 5 Most Profitable Penny Stock Patterns Report.

This story was originally featured on Penny Sleuth.

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