You might have read about what a $100 investment in Netflix back at the beginning of 2009 would now be worth. Back then, one share of Netflix was worth $5, giving you 20 shares of the company. After a seven-for-one split back in 2015 and a rapidly moving price chart, that $100 investment would now have you owning a total of 140 shares of the company. The company is currently trading at just over $89 per share, making your original investment of $100 worth more than $12,400. That’s a huge price jump, one that it almost impossible to replicate.
As short term traders, replicating something like this is precisely what we try to do. What would you consider to be a great year of trading? A 100 percent profit? That’s doubling your money each year—something that the best Wall Street managers cannot do. But, if you started out with $100 back in 2009, doubling it each year through the end of 2016, you would now have $25,600 in your trading account at the end of this year. That’s far more impressive than $12,400—more than double. Some of the best Forex and binary options traders are able to post number like this when trading for themselves. It’s not easy to do this, but it is possible on a small scale.
Not many companies are able to replicate that 20 percent year over year growth that Netflix has seen, and none can do it indefinitely. Even Apple has shown signs that they have reached a stall point in their impressive growth, posting a decline in profits recently for the first time in over a decade. Picking a Netflix or an Apple before they exploded in growth would have been a huge boost to your portfolio, but trying to have this kind of foresight is impossible. It’s basically a shot in the dark, and that’s not something you should be basing your future profits on.
Everyone wants huge growth when it comes to their cash, but a lot of traders find that they are not able to hit numbers that are anything like this. Either they have minimal growth, or they are seeing big ups and downs, and eventually lose everything in their trading accounts. The latter is fairly common, especially when you consider the fact that over 95 percent of day traders are no longer trading three years after they begin. The risk of ruin here is very high because most traders do not have an accurate perception of the amount of risk that they are taking on.
The only way to really do this is to understand that your amount of risk should have a relationship with your odds of success. It’s easy to figure out how much risk you should take on mathematically compared to your odds of success, but when it comes to the stock market, or any other market, your ability to predict things becomes less tangible than if you were playing poker or handicapping a horse race. We have indicators when it comes to future price, though. We can look at a company’s fundamental data, how much money they are bringing in and how much they are using. We can look at consumer sentiment to see whether the public is utilizing their products, and how much loyalty they have to a brand. We can look at competitors, sector conditions, and so on. These things can all help us to get a better idea of where an asset is headed. Then, when this is combined with technical data—the price charts and the day to day movement, we can see what’s likely to happen in the future with a higher degree of accuracy, and compensate for risk much more accurately—thus boosting profits.