This post was contributed by a guest author, and does not necessarily reflect the views of Richard or MovetheMarkets.com
This is actually an interesting thread.
Here is an example: Mr. New Trader wants to replace his current salary of $50k a year with trading income so he no longer has to work for his boss. He’s going to start with $10,000 of savings. This money is of course after tax so it represents about 24% of his actual net income depending on his tax bracket for a single year. It’s no small amount. Typically New Trader is doing this outside of his other investments and chances are good that this allocation is greater than his Investment Advisor would recommend. Most AI’s will suggest a 10% allocation or less to alternative investments to help balance portfolio risk and lower Return Correlation amongst assets. If New Trader saves ten percent of his gross each year for investments ($5000) than only $500 or less should be allocated to FX.
The problem is New Trader is no idiot, has already done some homework; he’s been on the boards and he’s seen a bunch of systems and traders who can make double digit returns every month, but he knows with a $500 allocation (or there about), that it will take him nearly 50 months (4 years) to get to the point where he can replace his income… That will never do. So he’s decided to use the $10k he has in his account which is the equivalent of 20 years worth of alternative investment allocation. This though only momentarily bothers him, because it will be totally worth it when his is completely independent. Trading for a living is going to be Sweet…
New Trader calculates if he can average ten percent a month with his $10,000 he can be at his goal in just about 18 months, maybe less. This seems much more realistic to New Trader… Now he just needs to get his approach down and get to trading.
This post was contributed by a guest author, and does not necessarily reflect the views of Richard or MovetheMarkets.com
January 27th, 2008 at 10:12 pm
I like that he points out the unrealistic expectations on page 1 of the thread. These [expletives] that think they’re gonna pop out consistent doubles of their stakes, year after year, are in for a rude awakening, or a rude wipeout while they persist in holding their masturbatory fantasies of imminent riches.
Like I said in an earlier comment, you’ll never see a wipeout in a trader that’s looking for a consistent reasonable return under strict risk control. Then again, you hardly ever see a retail beginner day-trader or swing trader that’s looking for a consistent reasonable return …
January 27th, 2008 at 11:01 pm
What do you consider reasonable, Bill? That isn’t a facetious question, either.
I had a veteran trader tell me that he targets 1% per day. That seemed rather conservative…that’s $50/day on a $5k account (a point on one ES contract).
January 27th, 2008 at 11:21 pm
I would be very happy with 1 point a day T_T i mean u sit at HOME!! in comfot of ur sweatpants or hey
NAKED! if u want lol >_
January 27th, 2008 at 11:40 pm
Michael, 1% per day is great! If that’s net (including losses), do the math. Assuming you did that each trading day, and you started at $5000, you’d convert $5000 to $1 million in 533 days. Your veteran trader not only knows the value of compounding interest, but how to manage his emotions, and how to control his losses. Setting “low” goals like that keep him from getting too greedy (emotional) which will keep him controlled. The hardest thing about trading is your emotions. The best step to take is to take steps that aren’t emotional. Try for 2.5% a week, and the 5,000 will be over a million in just over 4 years . . . if you can really do it.
January 27th, 2008 at 11:41 pm
Hmmm half of my lst comment seems to have dissapered i think i accidentally deleted it cuzz i was
highlightin parts of it for no apparent reason =/ what i ment to say was i would be real happy with
1 point a day i mean come on!! ur not dealing with a shithead boss who thinks hes captain of
the universe, and u dont have to listen to customers complainging about nothing, and u dont have to
wear a uniform like i did at my old job (red lobster) and u can take breaks when u want, trading seems to
me like the best job in the world though i havent started trading yet…(shud have saved more money, but is my new
goal) anyway yeah trading is awsome cant wait to be in the game with u guys ^^
January 28th, 2008 at 7:42 am
Bantha Fodder, 2.5% should be do-able. I lost money because I was one of many that had $$ signs in his eyes and had a couple lucky 6 point days…followed by 12 point losing days.
I’m confident that David Marsh’s tick trading system will do 0.5-1%/day rather easily. I had no problem being up $100+ on two contracts in the first few mornings of trading it. I’m just going to buckle down and focus on the slow road to gaining back what I’ve given to the market. Greed sure doesn’t pay in futures trading.
January 28th, 2008 at 10:22 am
I didn’t take it as a facetious question at all.
Let me put some parameters around reasonableness, keeping in mind that this is thinking of compounding over several years on average. Year #1 may be more or less than target, and vice versa for year #2, the returns are a long-term target.
I think targeting a compounded annual growth rate (CAGR) more than 1.5 or so times the max equity drawdown amount (DD), or CAGR/DD > 1.5, is the bleeding edge of reasonableness for a system. The implication is, if you’re willing to keep trading a system, without deviation, while losing 2/3 of your account – and this is NOT a blowup but a drawdown that happens over time – then maybe, just maybe, 100% returns are possible over the long term. I personally don’t think that’s very likely, because I don’t think many people will stick with a system through that type of drawdown, rather, they’ll switch to some other system at the worst time, or lose their risk control trying to win it back, or perhaps systems with that kind of DD have a higher real risk of ruin to begin with (which I think likely). Keep in mind that some of these people will be trying to live off of this money, making withdrawals, and a DD will mean they are eating equity to live at the same time they’re losing money trading. If you think a 30% DD is about the max that most reasonable people would risk in designing a system, then probably 45-50% annual is the bleeding edge.
Leverage figures into the above. If I have a system that could get 20% annual with a 15% max drawdown, unlevered, then how much leverage can I stomach in terms of drawdown? How does the leverage increase the risk of ruin in an adverse event? Selling naked puts comes to mind, the return distribution is fairly tight with only a few losses at the outside edge of the probability curve. One could leverage this up really easily to returns that just look tremendous, however, the risk of ruin becomes very real at that point.
Activity figures into the above. My work with testing has been swing and position systems, where I get the CAGR/DD reasonableness upper range at around 1.5 or so. Inactive systems that I’ve tested aren’t as good as active systems, so maybe, just maybe, daytrading systems can expand that. However, if you look at the returns of the funds that specialize in this type of trading, they aren’t that great. Certainly not on the order of 50% compounded over many years, not without significant drawdowns, many occurring this year. They have the technology to trade within milliseconds, and have extremely low transaction costs, whereas the typical daytrader doesn’t have either of those.
Size figures into it. Generally speaking, the more equity one has to swing, the less nimble one is. However, some strategies aren’t possible without lots of equity. There is some function of strategy to size that has to be examined. It’s possible for a strategy to outgrow itself, hitting diminishing returns.
I think it’d be hard to find a trader that made 30% compounded over a multi-year stretch, certainly difficult to find one that didn’t have a drawdown of 30% or more or a blowup along the way, and that’s what kills – the blowups. Vic Neiderhoffer averaged 30% or so for 16 years before going into NEGATIVE EQUITY, losing everything. His CAGR for the whole period? MINUS 110%. Booyah.
1% a day? Start with $5000 and become a billionaire (with a B) in 5 years and 2 months, assuming you increased your trading size with your equity, didn’t withdraw any money, and took two weeks off from trading each year? 1.01 to the 1240th power, 240 trading days per year for 5.167 years.
2.5% a week? Start with $5000 and become a billionaire (with a B) in 4 years and 4 months, assuming you increased your trading size with your equity, didn’t withdraw any money, and took two weeks off from trading each year? 1.025 to the 216th power, 50 trading weeks per year for 4.31 years, I assume you hadn’t taken your vacation yet by the first quarter of year number 5.
Color me skeptical. Highly so.
Bottom line, I don’t think targets over 50% annually are reasonable or realistic over the long term – AT ALL – regardless of tolerance for risk. Just my opinion.
January 28th, 2008 at 10:30 am
Correction: The 2.5% paragraph should read as follows:
“2.5% a week? Start with $5000 and become a billionaire (with a B) in JUST UNDER 10 YEARS, assuming you increased your trading size with your equity, didn’t withdraw any money, and took two weeks off from trading each year? 1.025 to the 495th power, 50 trading weeks per year.”
My bad. Ooops.
January 28th, 2008 at 6:57 pm
LOL. Bill, you are truly the king of no DooDahs. This should be a post in its own right.
BOOYAH. Love it.