Trading misconceptions about account size?

Discussion in 'Trading' started by Bakinec, Feb 23, 2011.

  1. I posted this a few years ago and so I'm copying/pasting it.

    The way I see it is as that the daytraders make their living off of the natural inefficiencies that come when large orders are entered, especially fearfully or greedily. The orders come from all the various institutions that are trying to chase after a 25% (or 15%, or 10) annual return on vast sums of money.

    A good daytrader can consistently profit on a monthly basis by getting in front of institutional orders and profiting off of natural intraday inefficiency. With a $10,000 deposit he can make several hundred thousand dollar in one year - a return of perhaps 2000%. However, that percentage is meaningless because the daytrader can only take so much size, and the more size he takes the more he becomes crippled and prey for other daytraders and market makers. A daytrader who makes $500,000 in a year is a superstar.

    Let's say you have a way to fully and without error program precisely the strategy that a trader uses to make $500,000 per year. Because that trader only can monitor limited information and thus can't trade all the setups, let's assume there is $3,000,000 in that strategy if it's traded by a computer.
    The strategy only utilizes $500,000 BP, but just to be cautious you use $1,000,000 with a $100,000 deposit, thus your return will be 3000%.

    Someone with $100,000,000 to manage can do better putting his money in the bank than he can with a daytrading system that makes 3% per year.

    You can bet your ass whatever $3,000,000 that is left on the table is being fought for by hundreds - perhaps thousands - of daytraders and investment banks, hedgefunds, market makers, market manipulators, and all the other various participants.

    For anyone trying to make a living off of fees on asset management, it is not worth it to try to make $3,000,000. They must instead try to make $30,000,000 on $200,000,000 for a hedgefund, or manage $1,000,000,000 for a mutual fund. Because the positions required to achieve such returns are so large, it makes it very difficult to freely get in and out of a position in response to short term market action - something daytraders can do - so as long as thousands of institutions are fighting to make $20,000,000 or $300,000,000 on huge sums of capital, we daytraders can fight for our $150,000 - and if we keep $10,000 up at our firm, we can call it a 1500% return, even though whoever is making 15% on 100,000,000 laughs at Joe Daytrader's huge % return number.

    Conclusion: percentage return comparisons of daytraders vs. asset managers are completely useless because of the way the markets work.
     
    #11     Feb 23, 2011
  2. Good show! I am a marginally profitable -- read pennies -- somewhat new trader. I have a sub $5,000 account but will a good chunk of capital behind that. My limitation is skill not capital and yours is clearly capital not really skill.

    You have found a low risk (at least low risk per trade) equation that you are making work in a dramatic way. You are putting together a winning career a trade at a time and climbing the learning curve as you learn. In every business I have ever been in I figured out a way to make some regular coin, even if it was small, so that I could learn the nuances as I made some money. That is where you are at ... a pretty good spot. Don't worry about the debt even though it may look substantial at $750 weekly profit. Once you can comfortably increas your size even by one more contract the debt begins to shrink in relevance to your earning capacity.

    Continue to win!
     
    #12     Feb 23, 2011
  3. couple things not mentioned...

    1-not factoring in huge wins...say, $1,000...after that could even loss 10 smaller times in a row and have $500 net profit for a timeframe...

    2-he could scale up and easily "double" his profits
     
    #13     Feb 23, 2011
  4. Lucias

    Lucias

    >A good daytrader can consistently profit on a monthly basis by getting in front >of institutional orders and profiting off of natural intraday inefficiency. With a >$10,000 deposit he can make several hundred thousand dollar in one year - a >return of perhaps 2000%.

    Prove it (btw like your jounal/blog) . I'm going to explain why it is not the same trading with a small account. I will say I'm attempting to do it but I consider myself elite and recognize I am likely to fail. However, my goal is not the money but to serve my abilities. if I can serve then I'll be happy.

    Here you go:
    1. Trading Expenses Do Not Scale Down

    I want to explain this one. You have fixed expenses in many markets: data feeds, software, research. Let's say you have a pro real-time datafeed = $200 per month = $2400 per year = 48% return required to break even on just 5k. That is not including any software or service fees. There are some good services out there that are worth subscribing too. The cheapest run around $600-$700 per year. Add in just a few services and you will be up to 50% of your capital.

    But worse then all this is that your commission is also fixed. Let say you trade the ES mini on a tiny account. You shoot for $200 winners that means you will be about 5% on commission per trade. This means you need a 55% edge to break even. That's not trivial.

    Another trader trading the emini shoots for 2k winners, he spends .0005% of his profits on his comissions.

    2. Contracts often do not scale properly

    In futures, you can't just scale those down or up easily without having a bit of capital. Want to hold the ES overnight? That is over 5k that needs to be in your account.

    3. The edges that exist are TINY and require massive leverage and minuscule fees to profit from.

    Many of the most consistent edges are very tiny. You take an equity graph that goes straight up and add in the fees and it will go straight down.

    4. A respectable returns feels like dud.

    You make 30% on 10k = 3k = $250 per month. A with 1 million does the same, he has 300k.
    ---------------

    Based on all available evidence the tiny trader is severely limited. How can he win?

    1. He must take significant risk. He must keep his fees per trade down.
    2. He must get access to significant, significant leverage. 30% on 3k ain't going to cut it.
    3. He must pick his spots and take a shot or a few. He can't trade in a way that is CONSISTENTLY going to work the next 5 years. If he tried too he will either just break even or whittle it down to nothing.
    4. He must have income and not touch his trading account. If he tries to trade for a living his odds will plummet to near zero.

    This is where my concept of extreme leverage comes in.

    What else.. yes I don't believe this crap about scaling either. You tell me there is a million dollars out there for any day trader to go grab but the big boys don't want to touch it.

    I don't buy it. What the truth is that these big traders don't believe any opportunity exist. They don't believe the market can profited from in those ways. Also, they require a much higher threshold of proof. That is the real reason these edges exist because they are uncertain, risky, and difficult to prove.

    Money can't buy greatness.

    One more thing, look at the World Traders Cup or competition. It is winner take all in a trading competition and many will throw risk out the window. Check out THE AVERAGE/TYPICAL returns in these competitions and that should represent a good hypothetical ceiling for a retail account.

    I think it is around 50% to 200% for futures. Sure sometimes someone does more. Again this is among traders where the money doesn't mean nearly as much as winning and the monetary rewards that come with that.
     
    #14     Feb 23, 2011