One trader's story, with returns history

Discussion in 'Professional Trading' started by MarketScientist, May 1, 2010.

  1. There has always been, and will always be, much debate about whether it's possible to beat the market as an individual trader, and if so, to what extent.

    I thought I would post my personal experience of trading on this forum to provide one more data point to prospective traders about the potential, joys and pitfalls of this profession.

    I started trading in 2004 after having taken a finance course or two at university. I knew back then that, statistically, chances were I would not succeed. I therefore proceeded cautiously. I opened a trading account with a few thousand dollars and started trading.

    The first few months went well though, so I added capital from other, more passive accounts. I was still very aware that failure could happen, so was not willing to risk more than 50% of my liquid net worth on the venture at any point. Indeed I did some stupid things over the first six months, such as going long a stock overnight with 2x my equity. Had that stock announced bad news while the market was closed, I could almost have been wiped out.

    In the event, I was lucky and despite my inexperience I continued to post good, though volatile, returns. Regardless, the strategy I was running was very screen time intensive, which was affecting my performance at the day job I held. I evolved the strategy to become more long-term to reduce screen time and to dampen the daily cycle of emotions you had to go through as a day trader.

    The evolved strategy was successful also. By this time I had learned to control risk, so that for the past 5 years, there never was a chance of a blow-up. I think this is very important: if you're about 30 like me, there's several decades until retirement, and it doesn't matter if you post good returns for the first 20 years and then, come another 1987 black swan, you blow up. Diversification and hedging (with respect to your total net worth) are important.

    The strategies I ran returned about 110% in 2004, 50% in 2005, 110% in 2006, 60% in 2007, -20% in 2008, 80% in 2009, and have returned about 50% in 2010 so far. You can see the longer-term nature of the strategy in the 2008 return, when I, like many hedge funds, found out that what had worked well in the past stopped working. It was a difficult period, only made easier by the knowledge that the market did even worse.

    The returns are real, but I make no claim to be a great trader. I'm not. These types of returns are possible for one reason: small (<$1M) account size. It would not be possible to run my strategies with a $100M account, although I believe that after some modifications and acceptance of slightly lower returns, $10M would be feasible.

    I have compounded the account without any withdrawals so today my trading income exceeds that from my day job. I continue to hold the job for the daily human interaction and stable income stream it provides, even though I have to admit to a certain detachment from it today.

    My advice to new traders:

    - You have to approach trading analytically. Although they won't tell you how to trade, reading finance textbooks really helped me get started. There also plenty of ideas in the academic finance literature that can put you on a good path towards developing your own strategy.

    - Find your edge in places others aren't looking. Certain strategies will never be implemented by hedge funds or offered by mutual fund firms because they cannot be implemented in large scale. You can have an advantage because you have a small account.

    - Learn programming, and study as much mathematics and statistics as you can. Being good at these things is a strong indicator that you have what it takes to be a good trader.

    - Start small, and add capital only if you're successful initially. Keep risk under control. Don't put a large portion of your net worth into any single position, and control your overall leverage. Think about what would happen if the market gapped up 25% (unprecedented news on the money supply), down 50% (nuclear strike on the U.S.), or if other similar events took place that have never happened before.

    - Yes, you need to be good - according to academic studies, < 5% of those who day trade ever make money. There's a reason why the real prop firms, banks, etc., only hire the best. But on a small account, you don't really need to compete with them - you can find your own niche where competition is more limited and where you can make money. Remember, the pros get paid 10% of P&L, you get paid 100%, so if you find something that works, you can eventually make the same amount of money trading a much smaller account.

    - Believe that through hard work, you too can discover something that works, as others have done before. No one is ultimately going to hand you the thing that really matters, the details of a strategy that makes money. You have to discover that yourself, through trial and error. But, it's possible, if you're smart, lucky, and persistent.

    As for me, trading is the best thing that ever happened to me (financially, of course - there are other things in life that are more important). I now have the freedom to live anywhere in the world. I do not need to fear redundancy from my day job. I can be myself, say what I want, live a life I want. So, yes, it's tough, but it's possible. Do not let anyone say otherwise.
  2. These returns are extremely impressive. Even though you said you are "small", by being less than 1 million. Unless it is one thousand dollars or else one can live off very comfortably with your kind of performance.
  3. Nice post. Can you say anything about the type of strategy you are using? E.g. typical timescale you hold positions for, whether it's mean reverting, trend following, or news/event based and so on. Do you think there's a way to improve if another 2008 came along?
  4. Very nice, MS... Well done and best of luck to you, going fwd!
  5. Igor1


    Can you please be more specific about the day job that you have? You obviously must have a lot of free time to trade during your day job to have those kinds of returns?
  6. epetrov


    What market do you trade now?
  7. would you mind discussing what type of instruments you are trading, , what your average holding period is, and how many positions you generally carry open?

    Not trying to understand what your edge is, but i am curious as to how you are balancing this while working full time.
  8. Thanks everybody for the kind comments.

    I'm able to work full time because I live in Europe and trade the US markets in the evening. The job is strictly 9-5 (which was one of the criteria for choosing it). Also I live 15 minutes away from the office. If I had to travel or work overtime, focusing on the market would become more difficult.

    When I come home, I typically open my trading app and follow the market until it closes. I spend about 3 hours in front of the screen per day.

    I'm a little shy about answering questions about the strategy on a public forum. In response to the question about another 2008, it would have been possible to get a 0% performance by more aggressively hedging against bad markets. It would not have been possible to generate a good return. With this strategy, you have to accept that sometimes, in times of great market dislocation, it just won't work.
  9. 70% CAGR is something to be quite proud of. Way to go, and thanks for the advice.
  10. fogut


    That's great timing. Would your strategy work if you had to trade at the same time you work ? In other words, is the strategy more suitable for day trading or swing trading ?

    Have you considered trading in a prop firm environment ?
    #10     May 2, 2010