Perhaps it would be worthwhile to put it in 1. total pips gained 2. maximum pips drawndown as this is a measure independent of financial instrument or account size? Would doing this improve the conversation?
ROI really means nothing to our traders. If they put up $20K and were to make 200%, they would still be "broke".......traders need to make a living, and if they're "using" a $million or more to make $250K, with an account of $25K...then they are "earning" their money via their skill level, not because of account size. ROI generally refers to passive investing, IMO. Don
Pip: The smallest price increment in a currency. Often referred to as "ticks" in the futures markets. For example, in EURUSD, a move from .9015 to .9016 is one pip. In USDJPY, a move from 128.51 to 128.52 is one pip.
I agree with you , Ron, that absolute ROI does not mean much in terms of real performance for the traders. Also, those concepts of Annual or YTD performance measurements are mainly driven by tax regulations more than any other reason. If you start trading a system on July 1st on year 1 with a ROI of 20% for this year 1 but the YTD ROI on July of year 2 is a negative 17% , the two annual ROIs are not representative of the Overall ROI of your system which is ....0
How do you measure a trader's skill level? Well I can't see any other method than to reduce the question to the total profit in terms of "pips" and the maximum drawdown in "pips" too. This is then independent of: 1. Account size 2. Financial instrument traded For example, on futures FX, the spread is (varies tightly around) 1 pip with commissions ~ 1/2 pip (at Interactive Brokers). Somebody else might be trading a small stock at CMC (deal4free) with a market spread of (let's say) 13 pips. Now clearly it is going to be harder to make profits where the spreads are 13 pips (for example) or more. There will be fewer timeframes over which a profitable change in price is likely to take place. So part of the skill of a trader is in choosing the right thing to trade (FX is comparatively cheap, cheap to me = small spreads compared to typical moves, in terms of pips). The reason I suggest we should only talk in terms of pips is simply that everything scales to pips (through stakes) and spreads are fixed on each individual instrument. Hence the skill of a trader should be more effectively discussed through discussion of statistics measured in pips. Stas might include: 1. Total profit (pips) 2. Largest drawndown (pips) 3. Analysis of profit per day / week / month / year to understand statistical distribution of wins / losses 4. I also like to know what % of trades 'make me the profit'. In most businesses there is a 'business winning' cost. For me I think of this as the trades which cancel out (ie all the losers, summed up through to the most profitable trades). Presently only 18% (the top 18%) of my trades 'make the profit'. Translated another way, 82% of my time while trading, in the market, is 'wasted'. This is because I don't have a crystal ball. Instead I use statistics. So I guess a higher value for this measure would also be a measure of success. I reiterate a statistic that I think must be important: Warren Buffet has averaged 21.5% for 40 years - if you can match that (21.5%), then you are doing something right.
Consistency, and $$ of course. All the basics apply....those who work harder seem to do better (whoday thought, eh?). Don