What's a Reasonable Monthly Return?

It's the lure of easy money,
It's got a very strong appeal.

~Glenn Frey, Smuggler's Blues


Traders in general perform far worse than they let on. Who wants to admit consistently lousy performance? Most of the time, lack of risk management, or expecting huge, consistent returns will steer potentially good traders straight into the abyss. And for those that don't learn from history, or have a serious gambling problem, the abyss is filled with quicksand, or at least a really thick oatmeal. Must be time for breakfast.

Many traders using a 'special system', will quote extremely good results. If they are not being completely dishonest, the results are often due to good (or lucky) timing, and the system may underperform as market characteristics change over time. In this case, it doesn't always mean that the system is a bad one. Instead, the system used is taking on too much risk, and this leaves the door open for a 'crash and burn' scenario, or huge drawdowns will result over the course of months or years.

In a recent presentation, Mark Sebastian from the Option Pit gave his thoughts on monthly percent gain performance relative to the market and the market pro's.

Mark states:

1% a month on average would beat the assumed average return of the S&P 500.
2% a month would put you at the target return of most successful hedge funds.
3% a month would put you well into the top 1% of all traders and money managers.


A trading system designer who's system exceeds these percentages, or the customer buying into such a system, should ask the following:

1. What additional risk am I taking on in order to achieve these results?
2. What time period do the results correspond to, and has the system experienced various
market cycles in real time rather than through backtesting only?

Caveat Emptor.