Thank you for your thoughtful response. So, an annual CAGR of 20% with a standard deviation of 20% would give you a Sharpe of 1.0 over that period? Regards,
A small retail trader with a decent edge can aim for 100% annual returns with a worst case 50% drawdown. I mean you can start off with a 50K account. You risk 25K of that with an initial drawdown. Once the account is over 100K any 50% drawdowns only come out of profits. There are no 'insane risks' as you call them with this approach. If you lose 25K from the intial account you save that from your day job and try again. This is a major part of a retail traders edge with smaller accounts: The ability to recharge a small account from your day job income if you take an initial hit. A hedge fund manager cant afford big drawdowns, especially in the early days. Investors won't recharge the account. A hedge fund starting with 50M cant drawdown to 25M. This was how i started trading and built my account x10 fold, so its not theoretical. This is all based on having a good edge and the discipline to follow your rules through drawdowns.
Aiming for 100% annually is reasonable for a small account with large-ish drawdowns (20% and more), that's my goal anyway and I've succeeded a few times. Achieving that every year is close to impossible. The only people saying otherwise are the ones that traded the previous few years of the bull market and think they know it all -- arrogance and inexperience. They all would burn miserably in a 2001-2 bear cycle.
If you have capital on the side to "recharge" your account, then you should include that in your denominator for returns.
Thats not what i said in my post. I said you can earn that back from your day job if you have to. Its a worst case thing anyway. Even if you have a 50% drawdown you can still carry on at half size. Dont even have to recharge. Its only when you don't have enough to cover margin for your minimum bet size do you have to raise funds to start to again.
You need a 100% return just to break even from a 50% drawdown and therein lies the problem. With a constant size you'd just be taking more and more risk as the account is depleted. A 50% drawdown is psychologically devastating, speaking from experience.
Most people have a limit. For some people losing $50 bucks is a big deal. For some others $500 others 5000, 50K, 500K.. etc. Thing is you can take a small account up with high leverage and take the drawdowns, but at some point your 'meaningful money' value system kicks in. The idea is stop thinking about the money (results) and to become totally process orientated. Easier said than done of course.
It's difficult not to think "what am I doing with my life" when sitting in a drawdown for a year or more. This shouldn't happen but I figure it happens more often than people would admit. I know on ET it happens to no-one ever The key of course is to live significantly below your means, so over half of the profit built up is just a buffer for drawdowns - look at it as borrowed funds if that helps. Like you said though, easier said than done.
As a retail trader, you should look at your returns and asset base in totality. You should obviously break out your returns by asset class or strategy. But it's disingenuous to yourself to say I returned 100percent when you are sitting on a ton of cash in a checking account as a hedge.