Many factors determine how much money you can potentially make in a month by trading day futures. Let’s create a scenario using a risk-controlled trading strategy to get a rough idea of the profit potential.
Remember the following warning: Trading profits vary based on market conditions. During volatile times, when prices move larger, there is greater potential for profit. When the price movement is smaller, there is usually less potential each day. Performance also varies by individual and is influenced by, among other things, the risk-reward ratio of each trade, the trader’s win rate, slippage, and the number of trades taken.
Every successful futures trader manages their risk, and risk management is an important element of profitability.
Traders should keep the risk on each trade to 1% or less of the account value. If a trader has a $30,000 account, they should not allow themselves to lose more than $300 in a single trade. Losses occur, and even a good day trading strategy may suffer a series of losses.
Risk is generally managed using stop-loss orders, which close the trade at the price the trader sets.
While a strategy can be analyzed for success in a variety of ways, it is often determined by its win ratio and risk-reward ratio.
The win rate, also known as the win-loss ratio, is the percentage of all profitable trades. If you make money, or win, 55 out of 100 trades, the win rate is 55%. While it doesn’t have to be profitable, having a win rate above 50% is ideal for most day traders. And winning 55% to 60% of trades is an achievable goal to aim for.
The risk-reward ratio measures how much money is at stake to achieve a certain profit. Let’s say a trader has $7,000 in a trading account and plans to buy an E-mini S&P 500 future and hold it until the price goes up eight ticks. For E-minitick mark (minimum price movement) is $12.50 or 0.25 index points.
The trader places a stop-loss order five ticks below the entry price, which makes the risk for this trade five ticks x $12.50, or $62.50. This amount is below the maximum risk per trade of $70 ($7,000 x 0.01). If the trading scenario goes as the trader wants, they will earn eight ticks x $12.50, or $100 (before commission fees). That makes the risk-reward ratio for this trade $62.50 / $100, or 0.625.
If a trader loses five ticks on a losing trade but makes eight ticks on a winning trade, they will be ahead of the game even if they only won 50% of their trade. That is why many day futures traders are trying to make more profit on each winner.
A higher win rate means more flexibility with your risk-reward ratio, and a higher risk-reward ratio means your win rate can be lower while still making a profit.
Monthly Trading Scenario
Assume that volatility allows a trader to execute five round-trip trades per day using the parameters above. (One round means entering and exiting trades.) If there are 20 trading days in a month, the trader makes an average of 100 trades each month.
Now, let’s see how much a day trader can earn in a month, taking commission fees into account.
- 55 profitable trades: 55 x $100 = $5,500
- 45 trades are losers: 45 x ($62.50) = ($2,812.50)
Gross profit is $5,500 – $2,812.50 = $2,687.50.
Assume a commission and fee of $4.12 per trading round.
Net profit is $2,687.50 – $412 = $2,275.50
Assuming a net profit of $2,275.50, the account return for the month is 32.5%, or $2,275.50 divided by $7,000 and then multiplied by 100.
Replicating this scenario in a live trading account is challenging. Few traders are able to generate double-digit percentage returns every month. That said, it’s achievable, but expect to put in at least a year or so of hard work and practice before seeing consistently favorable results.
It’s not always possible to find five good trades a day, especially when the market is moving slowly for a long time. And during periods of low volatility, hitting the eight tick target isn’t always possible, meaning some trades will exit for smaller profits. In contrast, a trader who exits a trade on their own initiative, rather than using a stop loss, may not always lose the full five ticks.
Slight changes in profits and losses on each trade greatly affect the overall profitability of many trades.
Slippage, when a trade is completed at a different price than expected, should also be considered. In a liquid market, such as the E-mini S&P 500, slippage is usually not a concern. However, when it does occur, slippage usually increases the amount of loss or reduces the amount of profit. Adjust this profit scenario based on your personal capital, stop-loss, target price, win rate, risk-reward ratio, position size, commission and slippage assumptions.