Unrealistic expectations or a bunch of market wizards?

Discussion in 'Psychology' started by candletrader, Aug 8, 2003.

  1. My Brethren,

    Firstly, let's lay out a few realities... the majority of traders who attempt to make a living will wash out... some say the figure is as high as 90%+, some say its as low as 70%... but I think that most can agree that its the majority who lose at this game...

    Secondly, it has struck me that many people on these boards scoff at the notion of a long-run return of say 1pt per contract per day on the S&P Emini... let's clarify that such a long-run return is based on the long-term market cycles of "easy" trading periods and "difficult" trading periods... and such an average is calculated from days that include 10 pts+ per contracts, days with gains of 1pt, days with losses of 3pts, days with no trades, flat days etc etc... just to reiterate, the 1pt a day is an average outcome, not a daily target...

    Thirdly, it has struck me that in several quarters, people are somehow mistakenly suggesting that 1pt a day is somehow related to scalping... however, I would assert that such an average can be strategy-independent i.e. if you are consistent at your strategy/strategies, it's possible to make just as much scalping as holding on for more... the major difference will be in drawdowns size and volatility, not in returns...

    Now let's see what 1pt a day per contract actually means... before doing so, let's make a few assumptions:
    1) the 1 point day average is scalable across any number of contracts... one concedes that, with multiple contracts, there may be scaling in and scaling out, so the simplifying assumption has to be that scaling in and scaling out has negligible impact on the long run average...
    2) the 1pt a day is net of all commissions and costs...
    3) that a 1pt a day average isn't somehow the "magic number" as to what to reasonably expect... its simply chosen to demonstrate something that most people would agree is a ballpark reasonably achievable long-run daily average for a consistent trader...
    4) that we are calculating an annual outcome for a given contract level at a given time... of course in reality, we can scale up with profits or scale back with losses... given that we are examining this issue in the context of a successful and consistent trader, the following analysis is therefore likely to be an underestimate of the annual outcome, further reinforcing the argument...

    OK, onto the implications of 1 point a day per contract on the ES...

    The consistent and aggressive trader, with the stomach to endure some major drawdowns on his equity curve (or the lucky and undercapitalized newbie, who has yet to experience his "real" learning curve)
    Let's start off with a trader who uses $5000 per contract and who trades 250 days a year... if the margin required is $2000 per contract, this trader is funding his account by a factor of 2.5x the margin (this is slightly more aggressive than the performance statistics used on futurestruth, which calculates returns based on 3 times margin)... given assumptions 1) - 4) above, 1pt a day will generate $12,500 (the point value on ES is $50)... so the trader will have $17,500 per contract at the end of the year in his account... the annual return is 17,500/5,000 which expressed as a % is 250%... how can this be scoffed at and looked down upon? This is a fantastic outcome, not a mediocre one...

    The consistent, standard trader
    Now let's deal with a more conservative trader who funds his account with $10k per contract (has covered 5x margin of say $2000)... this conservative approach is a highly common practice amongst traders... again, 1pt a day produces $12,500, so the trader will have $22,500 per contract in his account at the end of the year... the annual return (given the various assumptions 1-4) is 22,500/10,000 which expressed as a % is 125%... again, this is a highly impressive outcome...

    The consistent, well-capitalized and highly risk-conscious trader
    Finally let's consider the case of a risk-conscious and well-capitalized trader who wishes to use $20,000 per contract (the assumed $2k margin has been covered by a factor of 10)... this wise trader produces $12,500 per contract, and will have $32,500 per contract at the end of the year... so a well-capitalized trader who trades with $20,000 per ES contract will have generated 32,500/20,000 or a 62.5% return that year... hedge funds will kill for that kind of return...

    The purpose of this thread was simply to demonstrate that even a so-called "crappy" 1pt a day has fantastic implications for your trading, assuming that it is your long-run average gain... given that the vast majority of traders are losers, I can only conclude that people who scoff at the notion of 1pt a day as an average either have unrealistic expectations or are amongst the very best traders around...

    Fraternal wishes,
    Candle

    P.S. I make no apologies for any minor methodological weaknesses, as the point of this thread is to make a general observation, and is not to describe (in any exquisite detail) a groundbreaking analysis... please note that there are alternative ways to determine the number of contracts to trade (the above way was used purely for simplicity of exposition in making an observation about potentially unrealistic expectations)...
     


  2. True, it's just that if you're holding positions for 10 days, it seems a little silly to be saying, "I average X pts a day".

    The entire notion of "per day" has daytrading written all over it and daytrading, rightly wrongly, tends to be associated with scalping (whatever is meant by "scalping").

    Anyway, I agree with your post. Basically then, we can safely ignore anyone that claims to be making more than 1pt a day. Actually, I have a brother who was doing 10pts a week for many months, but that performanced has totally dwindled to negative returns at the moment. A pretty robust position sizing strategy has kept him from giving everything back, but he's close to canning the whole thing. Tough gig this.

    And you'd think, 1pt, one smelly point a day. Much harder than it seems.
     
  3. Thank you for your excellent reply...

    [ I do agree with you about the strangeness of phrasing a position trader's profits in terms of points per day but, since we are talking about averages, it serves to simply standardize things to the horizon that I guess most of us are trading ES within... ]

    One thing: my post was more positive than advocating ignoring people who make more than 1 point a day (indeed, my own average for the last year is actually above 1pt a day --- but nowhere near 2pts)... I suppose, however, if some guy comes along claiming to average 9 points a day (as happened with a guy called Will1 on Hitman's MSN thread) then we should not take such average multiple point per day claimsters at all seriously (at least not in the current non-bubble environment)...

    The post is more about suggesting to people that they should not scoff at people who can average 1pt a day (irrespective of strategy, as you rightly allude to), given that:
    1) the vast majority of traders are losers anyway, so to simply make a consistent profit puts you in the minority...
    2) even a long-run average of a "crappy" 1pt a day translates to a really good annual return (using any reasonable margin assumptions to calculate returns, 3 examples of which were given in the introductory post)...
     
  4. Offtopic: do you trade alongside your brother... how does that work out?
     
  5. Hmmm. With your avg 1.5/day you *probably* make much more than 62% p.a. If you'll start a fund, you'll be a star... elite of the elite. Also in terms of drawdown figure. Your 20% is calculated on a daily basis? Funds report worst DD on a monthly basis (which can be a big difference) and still many of them have 20-50% DD.
     

  6. No. When we used to live in the same house I used to watch him trade, but I wasn't trading then.

    I'm on IM with him a lot during the day, and I ask him about positions, opinions and stuff, but I'm no daytrader -- well, rarely, anyway (and I suck!) -- so whatever he's doing doesn't really affect me much.

    He's very quiet though, so it wouldn't be hard to trade alongside him! :)

    Like DT-Waw said, maybe you should look into starting a fund then? I don't know how long you've been trading, but when my brother and his partner were heavy into researching trading systems and hedge fund performances, their conclusion was that it would be very, very, very difficult to keep up a high level of trading performance longer than five years. (Too bad for them they won't even appear to have made it 1 year :) ). Could be time to look towards cashing in.
     
  7. I suppose we have a bit more flexibility in the way we do things as daytraders but, yes, if a successful daytrader can generate even 50% a year and if he desires to pursue the hedge fund route, then it can be a great idea to pursue...

    Even if hedge fund constraints and/or size issues deflate returns, they may not deflate them too much...

    DT-waw, I sense a note of skepticism in many of your replies... it is indeed possible to make money daytrading (otherwise those amongst us who do currently trade would stop trading), and in order to make a living one does require to make what many would view as high % returns (whatever the margining assumptions: 3 examples of margining assumptions were given in the introductory post)...

    On a positive note, I also recognize the convergence of opinion that you and me both share on the issue of average multiple points per day claims... like you, I cannot understand why people feel that an average of 1pt a day is not a significant achievement, and why they feel that to be a success you need to somehow average multiple points a day...
     
  8. Its something I am sure many of us here consider (and some, like Praetorian have acted upon)... I suppose the downside of starting a fund is that I may become a prisoner again to the things that daytrading allowed me to escape from, namely corporate bureacracy, and a whole batch of responsibilities beyond my immediate remit... not to mention psychological demons (e.g. feeling guilty about losing client money during drawdown periods) which wouldn't manifest themselves in the same way when trading one's own money... not to mention the freedom to do what you want, when you want, wearing what you want...
     
  9. Correct. I'm skeptical. Yes it is possible to make money daytrading, but also I must add that high daily ranges are required to do that. I'm sure you remember the old thread back in summer 2001 (which has been deleted) "Difficult trading conditions", when many of us were disappointed by narrow ranges which were in sharp contrast to trading conditions during market bubble. On the other hand, July 2002 was really good for daytrading, swing trading also... it was my best month ever.

    Regarding convergence in our opinions it is no surprise since we are Brothers :) j/k
     
  10. Well, yes... times are more difficult with these (relatively) narrower ranges... acrary has posted some excellent analysis on various threads on this very theme...

    And, yes, I remember the dead Summer of 2001 very well... fortunately we had reasonable volatility post-911, so the year was actually alright... fwiw, I had deleted that thread (when we had such an ability) cos I had decided to go on strike over some of ET's former policies (I can't remember which ones, it was a while back)...

    And, as for Summer 2002, I for one can say that 50% of my entire year came from that one season...

    You are right to be skeptical, in general terms, about the long-run feasibility of daytrading (acrary's analysis, in this respect, is both excellent and worrying)... perhaps I was confusing this kind of skepticism with what I had perceived to be your skepticism of me.... in my view, its still VERY possible for a person with a plan and discipline to make a living daytrading, even under these non-bubble conditions... but, alas, not if the Summer conditions of 2001 revisit us and become the norm...
     
    #10     Aug 8, 2003