Are trader's skills really important?

Hitman:
Wrong again, you do not need a 10 point continuation to make money, you are carrying a load of baggage from the breakout day's of 99 and breakdown day's of 00, in this market when I see a 10 point move to one way I would rather go for the other direction.

10 point was just an example. It can be 5, 7, or 20 points. The idea is important. You have to choose some point increase or decrease to verify trends continuation. You can use time frames instead, but this will complicate the analysis.

and that last paragraph tells me that you still don't believe in yourself

I can't be 100% sure that I will succeed. No one can be. I just want to have odds on my side. I hope, that someday I will succeed in trading. That's why I'm doing this analysis, and trying to get funds to start trading real money.

Cesko:
I can't day trade listed stocks due to 25k SEC rule. And I don't have $2k to open an IB acct. I live in Poland, Europe so I can't go with Merc... Polish law requires a special permission from our Central Bank to trade on foreign markets. Of course, I have that permission. I'm very lucky, that I have cheap and reliable internet connection. In my country it's a BIG problem. I have 128 kbs cable for $25/month. You can only get it in capital city in some areas of the city. Other providers want about $300/mo for the same connection. In Poland it's not that easy as in the U.S.

DT-waw

 

this has been covered ad nauseum, but at least admit that it's risk adjusted P&L that matters. otherwise i could go out, buy $10k worth out of the money options, and have a fair shot at being your semi-god for january 2002.

- jaan

 

jaan is right. Or at least your % return on the account in the long term is the only thing that matters. Not P/L in dollars.

I've seen on CNBC in Nov or Dec 1999 an interview with a CEO of some index fund which invested only long in nq100 futures. The fund had amazing returns. But it doesn't mean they're genius! I don't know how they're doing in the last year...

DT-waw

 

We discuss this in detail in both our college courses and our training class. Traders do not use "return on investment" as an indicator of success. We simply use dollars earned. The reason is pretty simple. Our traders may put up only $25K, and many make $5,000/week. Now, who would believe me when I say that some traders make 20% per week ROI? The obvious reason is that they are using the firms capital to trade with, and they could not make that kind of money with only $25k in their account otherwise.

The main point that I want to make is that traders get "paid" for their time, skill, dedication, and discipline...in other words their overal ability as a trader. This is why it is silly for "so-so" traders to go out and get a lot of capital trying to start a "hedge fund" to get 15% ROI per year (and yet, some people donate to these things!).

 

This is why it is silly for "so-so" traders to go out and get a lot of capital trying to start a "hedge fund" to get 15% ROI per year (and yet, some people donate to these things!).

Don, I don't think the hedge fund comparison is valid in your example because the vast majority of hedge funds deal in much longer time frames than the type of trading that your traders do. Hence, they are more able to take a trading methodology that returned 50% on $1M and apply those same principles to much larger sums, such as $100M-$1B. The longer the time frame the less the effects of slippage due to size.

For example, I would guess that your traders who are making $5,000/week could not simply increase their size 10x and make $50,000/week if someone were to offer them the risk capital. Such is the nature of very short-term trading and my original comment to Hitman regarding the differences between hedge funds and very short-term trading.

(Now I'm waiting for someone to tell I have no idea what I'm talking about b/c I've never worked for a hedge fund... common, i'm waiting...)

 

Actually your points are valid. The people who start "hedge funds" (in quotes for a reason, since most are simply borrowing money under the guise of "hedge fund"), for the most part are simply people with a "little bit of knowledge" about trading, and who want to insure their own financial success by taking money from others. If you are a good trader, you can make more money on your own and not have to pay out your profits to the "hedge fund" contributors.

The longer time frame is accurate, and yet so many try to churn the accounts intraday to show activity. Most funds underperform the overall markets anyway (mutuals especially!), and the few that we have been associated with have been groups of good traders who join efforts to maximize their overall abilities as individual traders (I hope that makes sense....i.e. several good traders who simply cannot watch more than 10 or 12 Mergers or Pairs at the same time, with similar trading styles).

 

Ah, you were being facetious with "hedge funds".

Got it!

 

Exactly!!

 

There’s a serious possibility, that majority of trader’s results come from the luck factor only. Here’s a interesting simulation I’ve made.

Let’s say we have 200 traders, each of them trades ES futures with a simple “system” – close every position at 5 point gain or 5 point loss. There’s no other rules. In other words, they have no entry rules, time and price of entry they choose are random. It’s clear that their “system” has expected P/L = 0 ( before commissions ).
They pay $5 commission per round-trip. Every trader starts with $22,000 account and begins trading with 5 contracts ( margin is $4,000 ). Traders always trade with 100% of their current capital. ( For example with $19,000 acct they will trade with 4 contracts - each has 4k margin ).

Question is: what are possible rates of returns on initial capital for traders from that group, after making 500 round-trips?

My simulation shows that:
148 traders ( 74% of all ) will lose 50% of their initial capital or more,
32 traders ( 16% ) will lose 0 to 50%,
7 traders ( 3,5% ) will earn 0 to +50%,
7 traders ( 3,5% ) will earn +50% to 100%,
6 traders ( 3,0% ) will earn over 100%

One trader can earn as much as 792% of his/her initial capital. I attach a graph. Of course, if we’ll simulate results of larger group of traders ( e.g. 500 traders ), results will vary more widely ( Turok was right in his signature, “results may vary – widely”. BTW: I can’t wait to see more Turok posts here! )

These statistics are similar to real trader’s statistics - 90% of traders lose money! And YES, it’s possible to have about 792% rate of return by trading a random system, which doesn’t even have positive expectancy ( commissions costs )! It’s just a matter of luck.

I should change thread title. - Are “skills” exist in the stock/futures markets?
For example there’re no skills in roulette. The best you can do is to lose less. Ha, the best you can do is to avoid playing roulette, since there’re no positive expectancy systems for this game.

At this point, I don’t know if there are any positive expectancy systems for stock/futures markets. Some of them do work, but do they work in many different periods on many markets? One system can make good results in some specific year on some instrument. The same system can produce losses in another year on different instrument.

One thing I know for sure – the impact of luck factor is huge.

DT-waw

 

Sorry - after doing a post preview my attached filed wasn't attached.