The Truth of Trading

[natedredd10 10]

It appears that you have once again completely misinterpreted previous statements. No where did I say that earing 15% was the goal. Certainly you try to earn more than that, but if you end up at the end of a year with a 15% return, you have done better than most traders. Probably better than 99.9% of them. If you are expecting to on average double and triple your money every year, then, yes, my comment is negative. .

 

Where do you get these numbers from? People just like to pull numbers out of thin air based on based on what billion dollar hedge funds and warren buffet do..

Part of the problem is the success stories get skimmed off by the CTA world at this level. I'm not sure it would even be legal to come on here and pimp your CTA's return.

Here is a guy that had a 150k in 1999, averaged 35% a year and now has 13 million...

Autumn Gold Alternative Investment Website

Took 2 minutes to find that on autumgold and I had never heard of Agustin Silvani or that fund before. I'm sure you can find someone doing something more impressive on there if you want to.

[MightyMouse 12]

You said 15% per year is an awesome return and would put you in the top .1% of all traders on the race thread. Perhaps you forgot? I can't quite see how I misrepresented you.

 

I think we agree in what an edge is, a positive expectancy. You also keep saying that finding an edge is pretty much impossible. Without an edge you can not possibly hope to make money unless you have a couple of lucky rolls and quit well before probability and the law of large numbers does its job (emptying your account). Going back to the point about trading intuitively...that can be considered an edge. In this instance you would need enough data (live trades) to statistically determine the nature of your edge. Another reason it is particularly hard (hugely) to employ an intuitive approach when starting out.

 

There are loads of methods and systems that provide an edge, actually a somewhat better edge than a casinos (though some games like baccarat and certain craps propositions are quite high expectancy for the bank).

 

In short. Finding an edge.....trivial. Applying an edge consistently ... difficult. Grail hunting....recipe for failure.

 

I think the best thing for you to do is to scan the returns of CTAs who manage money to understand where and how I am arriving at 15%. You might find that 15% is on the high side. If you choose to do so, look at their long run rate of return.

 

CTAs are traders who have a track record of success. Verifiable enough to give funders the confidence to place their funds with them. In their case, all their claims are substantiated and regulated. I do not need to assume there is pie in the sky to want to trade, but that is just me.

 

I do not have enough capital to trade for a living, if I did, then I would survive just fine.

 

Before you hastily jump to conclusions, the amount of money one needs to " make a living" varies widely dependent on age, family status, life style, geographical location, etc, etc.

[MightyMouse 12]

Where do you get these numbers from? People just like to pull numbers out of thin air based on based on what billion dollar hedge funds and warren buffet do..

Part of the problem is the success stories get skimmed off by the CTA world at this level. I'm not sure it would even be legal to come on here and pimp your CTA's return.

Here is a guy that had a 150k in 1999, averaged 35% a year and now has 13 million...

Autumn Gold Alternative Investment Website

Took 2 minutes to find that on autumgold and I had never heard of Agustin Silvani or that fund before. I'm sure you can find someone doing something more impressive on there if you want to.

 

 

!5% was a ball park average. This guy seems to be pretty good.He has done anywhere from 0% to 96% in that time period. He trades 70% discretionary. Nice

[natedredd10 10]

!5% was a ball park average. This guy seems to be pretty good.He has done anywhere from 0% to 96% in that time period. He trades 70% discretionary. Nice

 

yea actually thats a bad example I guess...If you look at his full track record with the month to month breakdown, the guy is a machine month to month. He is certainly the best of the best.

Almost seems like he just had to adjust to bigger size during those spinning his wheel days.

[natedredd10 10]

Agustin Silvani: Unlimited Opportunities - Forex - Futures Magazine

 

Just found a book by him too with a google search...a take off on Ed Thorp stuff for FX..if you get my drift..wink wink.

[BlowFish 10]

 

Before you hastily jump to conclusions, the amount of money one needs to " make a living" varies widely dependent on age, family status, life style, geographical location, etc, etc.

 

I try not to hastily jump to conclusions in fact I would suggest it is you that is prone to promulgate ideas based on your own experiences of trading or 'plucked out of thin air' as Nate points out. Some of these ideas are not only plain wrong they are dangerously so. There are plenty of small hedge funds, prop traders and yes retail traders that make a whole order of magnitude more than. The example Nate produced was the first he stumbled upon.

 

Anyway I thought we where talking about edges. Actually I guess that is pretty pointless if you believe they are as rare as unicorns.

[MightyMouse 12]

I try not to hastily jump to conclusions in fact I would suggest it is you that is prone to promulgate ideas based on your own experiences of trading or 'plucked out of thin air' as Nate points out. Some of these ideas are not only plain wrong they are dangerously so. There are plenty of small hedge funds, prop traders and yes retail traders that make a whole order of magnitude more than. The example Nate produced was the first he stumbled upon.

 

Anyway I thought we where talking about edges. Actually I guess that is pretty pointless if you believe they are as rare as unicorns.

 

Yutaka Futures Co., Ltd. - Octopus Program Article at StreetStories.com

Zenith Resources, Inc. - Index Options Accounts Article at StreetStories.com

Xenon Capital Management LLC - Xenon Diversified Article at StreetStories.com

Witter & Lester, Inc. - Stock Index Program Article at StreetStories.com

Winton Capital Management Ltd - Diversified Trading Program Article at StreetStories.com

 

These are simply picked from the list starting at the top. Not cherry picking for the best or worst. Their average is probably somewhere in the teens. The guy Nate found is not the norm. Hopefully, you will see that I didn't just pluck a number out of thin air. Also, you have to believe that a list of CTAs is biased, since if a CTA consistently loses money, he will no longer have funds to manage and no longer be on that list

 

Blowfish, making a lot of money trading is by no means easy. My point in saying that 15%is awesome is that most do not even make that. Most lose money, even though some make a lot more than.

 

And, if you have a tradeable edge that consistently gives you profits, then what is the problem with discipline? it should be a no brainer.

[BlowFish 10]

Irrelevant. A fund is not 'a trader'. Just because a fund employs traders does not make it 'a trader'. Funds have all sorts of restrictions from the prospectus through the issue of remaining invested to liquidity issues getting in and out of positions worth billions. People all ready pointed that out to you on he other thread. Talk to some traders from prop shops or boutiques.

[MightyMouse 12]

Irrelevant. A fund is not 'a trader'. Just because a fund employs traders does not make it 'a trader'. Funds have all sorts of restrictions from the prospectus through the issue of remaining invested to liquidity issues getting in and out of positions worth billions. People all ready pointed that out to you on he other thread. Talk to some traders from prop shops or boutiques.

 

CTAs managing a few million are traders. A trader with maybe one assistant and an intern. Get registered with the CFTC, and you are a CTA.

 

Look, my message is very simple. if you are earnning 15% or so, you do not suck as a trader. You are actually performing as good as some of the best. If you can average that consistantly you are one of the best. For a trader, especially a new trader, I couldn't think of a more positive statement to make.

 

If you can demonstrate that you can consistantly earn better than, say, 15% a year, Goldman, Morgan, Citi, would pay you your weight in gold just to get you in the door. I suppose they have low standards. Sheesh you seem to struggle with facts.

[MightyMouse 12]

Incidentally, the average return for a CTA with funds greater than 10k and less than 5 million for the last 12 months is 4.9%. That is directly taken from the Autumn Gold site that Nate posted. You can verify it yourself if you care to have a dose of reality. This is not the top 10, it is the average CTA listed on that site. CTAs that are this size do are most likely individual traders who went out on their own. Once again, if you are doing 15% you are doing great!

[Kiwi 16]

MightyMouse, I see what you are getting at but I have a sligthly different view. Let me try to explain why.

 

I think that 15% would suck for an active short term trader.

 

OK. CTAs usually trade in some form. But here are some differences from me in swing trader mode (using daily or H4 charts for a 1-10 day hold):

- the majority of them are not short term traders so they don't get the benefit of compounding possible by "high" frequency risking X% of their equity with a 1.Y expectancy. the reason I went short term was to work my money harder.

- they are working for a customer who is scared of equity variations so they have to focus on smooth growth or they lose the customer. a good trader understands their strategy, drawdowns, and can keep on keeping on despite (bad traders and retail customers can't)

- the standard of excellence for CTAs is "doing better than the other CTAs in this market situation" not doing well. hence in 2008 they were all going "we were not awful even though your money went down 30%" because his did too.

 

So I'm saying that a CTA isn't trading to trade well ... they are trading to satisfy their customer base, keep it and grow it. And that means they can never be what I would consider great traders.

 

 

You said "Once again, if you are doing 15% you are doing great!"

 

but you should have said "Once again, if you are doing 15% you are doing better than all those CTAs who are trading with a boat anchor around their feet and one arm tied voluntarily behind their backs!"

[dam5h 10]

CTA's trade other people's money. to put them in the top dog category just doesn't make sense. they don't get to keep the majority of the profits they make at whatever size level their strategy allows them to be effective at.

 

first of all, nothing against them as they are mostly great traders evidenced by their ability to stay in the game.

 

but MM all you do is talk about CTA's as if they are the best traders in the world. if you had an edge and were very consistent, why would you give 70-80% away on every trade?

 

sure you end up tying up more capital. but with brokers/clearers offering 500 bucks per lot on the es, it may just make sense to trade yourself some 100 lot trades rather than 500; especially if your strategy was liquidity limited and the 500 lots started to work against you. admittedly that's an odd example but it makes the point.

 

perhaps the es is the worst example since its so liquid, but if your strat worked best on less liquid instruments the point i make is even stronger.

[MightyMouse 12]

MightyMouse, I see what you are getting at but I have a sligthly different view. Let me try to explain why.

 

I think that 15% would suck for an active short term trader.

 

OK. CTAs usually trade in some form. But here are some differences from me in swing trader mode (using daily or H4 charts for a 1-10 day hold):

- the majority of them are not short term traders so they don't get the benefit of compounding possible by "high" frequency risking X% of their equity with a 1.Y expectancy. the reason I went short term was to work my money harder.

- they are working for a customer who is scared of equity variations so they have to focus on smooth growth or they lose the customer. a good trader understands their strategy, drawdowns, and can keep on keeping on despite (bad traders and retail customers can't)

- the standard of excellence for CTAs is "doing better than the other CTAs in this market situation" not doing well. hence in 2008 they were all going "we were not awful even though your money went down 30%" because his did too.

 

So I'm saying that a CTA isn't trading to trade well ... they are trading to satisfy their customer base, keep it and grow it. And that means they can never be what I would consider great traders.

 

 

You said "Once again, if you are doing 15% you are doing great!"

 

but you should have said "Once again, if you are doing 15% you are doing better than all those CTAs who are trading with a boat anchor around their feet and one arm tied voluntarily behind their backs!"

 

Kiwi,

 

If a trader can consistantly make more than 15%,, then 15% sucks. If he can't even break even, then 15% would be awesome and is far more attainable than 300%. Most traders don't even break even so 15% would be awesome to most traders.

 

If I were a new trader and I were told that 15% was awesome, I would probably reject it too. I, like almost all new traders, had unrealistic expectations when I began. I had no idea that it would be so difficult to simply break even.

 

There are a lot of people on these forums who say they can multiply thier accounts but no one will back the claim up. When you do audit, the returns mysteriously shrink to nearly zero or less. Its funny how that happens.

[MightyMouse 12]

CTA's trade other people's money. to put them in the top dog category just doesn't make sense. they don't get to keep the majority of the profits they make at whatever size level their strategy allows them to be effective at.

 

first of all, nothing against them as they are mostly great traders evidenced by their ability to stay in the game.

 

but MM all you do is talk about CTA's as if they are the best traders in the world. if you had an edge and were very consistent, why would you give 70-80% away on every trade?

 

sure you end up tying up more capital. but with brokers/clearers offering 500 bucks per lot on the es, it may just make sense to trade yourself some 100 lot trades rather than 500; especially if your strategy was liquidity limited and the 500 lots started to work against you. admittedly that's an odd example but it makes the point.

 

perhaps the es is the worst example since its so liquid, but if your strat worked best on less liquid instruments the point i make is even stronger.

 

I don't think they are the greatest in the world, though some great traders have been CTAs and then later became hedge funds. The only reason that I point to them is that they have published data and, given the fact that they are able to attract funds, someone has enough faith in them to give them their money which tells me they must have a track record.

[BlowFish 10]

 

I think that 15% would suck for an active short term trader.

 

 

This was explained to him in the other thread. Incidentally I suspect if you where making 4.9 PA in a prop shop you would be booted. (Unless it is one that makes all there money on commission and fees). James, founder of TL and a prop trader said Risk control is fairly strict. Any down month and you are likely to be suspended or even fired from the position. Other people that work prop have told me similar (though here are various different models out there).

 

Of course if MM acknowledges that there are traders that make money consistently then he has to acknowledge the existence of 'edges'. Actually it doesn't really matter how profitable a trader is, if there expectancy is positive they have an edge. MM has fallen strangely silent on that though.

[TheDude 10]

I think Taleb's comments about MM & CTA's in Fooled by Randomness are worth remembering:

 

Based on the assumption the markets are random 'most of the time' to the unaware, and that the highly educated CTA's stock/commodity picking skills are no better than John Doe, then each trade has a 50% chance of win or lose, same for each year end results.

 

If 1000 new CTA's start trading, 50% will be fired, 50% kept on end of year 1.

Year 2 we have 500 CTA's left

Year 3 we have 250

....

Year 10, we have 2 super star CTA's who have achieved consistent profits year in, year out for 10 years. Everyone thinks they are demi-gods of trading, yet they are just the lucky product of random outcomes and have no skill at all.

 

Just my

[MightyMouse 12]

This was explained to him in the other thread. Incidentally I suspect if you where making 4.9 PA in a prop shop you would be booted. (Unless it is one that makes all there money on commission and fees). James, founder of TL and a prop trader said Risk control is fairly strict. Any down month and you are likely to be suspended or even fired from the position. Other people that work prop have told me similar (though here are various different models out there).

 

Of course if MM acknowledges that there are traders that make money consistently then he has to acknowledge the existence of 'edges'. Actually it doesn't really matter how profitable a trader is, if there expectancy is positive they have an edge. MM has fallen strangely silent on that though.

 

Every day, week, month, and year that a casino opens its doors, they have the odds in their favor. They know this because the have set the edge and payouts. If they need to make more money, they lower the payouts and or increase the edge. If they want to get more customers, they lower the edge and raise the payouts.

 

In trading we do not have this privilege. Nothing is set. We do not know whether the odds are in our favor this time or not, and we don't know what the payout will be. We do not have a set of finite outcomes to draw valid statistical conclusions the way a casino does. If we did, then we would have an edge like a casino has.

 

Mechanically, an edge in trading is a set of circumstances that in the past created a future positive outcome, continues to work in the present, if you are employing it, and you hope will continue working in the future. If you are an intuitive or discretionary trader, trading is only slightly different.

 

The fact that one really does not know what the odds and payout are before entering a trade, makes it very difficult to stick to trading a system for most. The fact that an edge gets "tweaked" means to me that the trader had to adjust to changing circumstances as he perceives the changes in the market if his edge is going to continue to be profitable. A wrong tweak and he is no longer profitable. So, then, a traders edge is based on his ability to read the changing circumstances. If you can read the changing circumstances, you have an edge.

 

Can a trader continue to read the changing circumstances? I want to answer this with a yes.

 

Is there luck involved? Absolutely! I have had incredible strings of winners but I have also had strings of losers. Fortunately for me, my winners have been significantly bigger than my losers. In my case, I choose to remain humble. Humility helps my mind remain limber.

[mktwzrd 10]

Fortunately for me, my winners have been significantly bigger than my losers. In my case, I choose to remain humble. Humility helps my mind remain limber.

 

Oh really? Couldn't help but remember...

 

Trader P/L 2009, post 807:

 

MightyMouse: "Personally, I am currently down slightly for the year."

 

Post 811:

 

thalestrader: "...most day traders whom I know who are survivors are profitable, and they are profitable day after day, with few losing days, rarely a down week, and hardly ever a negative month. It is August. Frankly, if I were down for the year at this point, I'd be out of a job."

[MightyMouse 12]

Oh really? Couldn't help but remember...

 

Trader P/L 2009, post 807:

 

MightyMouse: "Personally, I am currently down slightly for the year."

 

Post 811:

 

thalestrader: "...most day traders whom I know who are survivors are profitable, and they are profitable day after day, with few losing days, rarely a down week, and hardly ever a negative month. It is August. Frankly, if I were down for the year at this point, I'd be out of a job."

 

Look at the dates on those posts. Give me a break. What do you want to prove?

[Cory2679 11]

MightyMouse,

 

First, I don't care at all what so and so does and what such and such fund does. All I'm worried about is me...so I'm not here to discuss that sort of thing.

 

Anyways, I want to present a scenario...

 

Let's say you're a day trader who risks a constant 2% of your account per trade (and you have a handful of trades each day)...

 

Among profitable day traders, I'd say a good/very good trader can make, on average, 5R (5 * 2% = 10%) per week...an excellent trader can make 10R or greater (10 * 2% = 20%).

 

Let's say you're able to make 5R per week (10%), you trade 40 weeks per year, that's a 400% return with no compounding!

 

Am I just naive/delusional? Where have I gone wrong with my logic? Don't tell me what such and such CTA does...just examine my scenario...

 

EDIT: And if we're talking about 15% per year, that would only be about 0.1875R per week (without compounding). ((15%/40)/2%) 0.1875R in a week is break even in my book.

Edited July 16, 2010 by Cory2679

[natedredd10 10]

To be fair though, Most funds managing OPM are not optimized for absolute geometric growth of capital leverage wise. The smoothness of the equity curve with a lower drawdown is what is going to attract qualified investors over time vs higher average returns but with much more volatility, easiest way to do that is to user smaller leverage at the expense of returns because you will make up for it with more OPM.

[MightyMouse 12]

MightyMouse,

 

First, I don't care at all what so and so does and what such and such fund does. All I'm worried about is me...so I'm not here to discuss that sort of thing.

 

Anyways, I want to present a scenario...

 

Let's say you're a day trader who risks a constant 2% of your account per trade (and you have a handful of trades each day)...

 

Among profitable day traders, I'd say a good/very good trader can make, on average, 5R (5 * 2% = 10%) per week...an excellent trader can make 10R or greater (10 * 2% = 20%).

 

Let's say you're able to make 5R per week (10%), you trade 40 weeks per year, that's a 400% return with no compounding!

 

Am I just naive/delusional? Where have I gone wrong with my logic? Don't tell me what such and such CTA does...just examine my scenario...

 

EDIT: And if we're talking about 15% per year, that would only be about 0.1875R per week (without compounding). ((15%/40)/2%) 0.1875R in a week is break even in my book.

 

No doubt about it. If you make 10% a week and trade for 40 weeks, you'll do 400% in a year. If you are doing this, I wish you continued success. I know that statistically, people like you exist.

[Kiwi 16]

Every day, week, month, and year that a casino opens its doors, they have the odds in their favor. They know this because the have set the edge and payouts. If they need to make more money, they lower the payouts and or increase the edge. If they want to get more customers, they lower the edge and raise the payouts.

 

In trading we do not have this privilege. Nothing is set. We do not know whether the odds are in our favor this time or not, and we don't know what the payout will be. We do not have a set of finite outcomes to draw valid statistical conclusions the way a casino does. If we did, then we would have an edge like a casino has.

 

Mechanically, an edge in trading is a set of circumstances that in the past created a future positive outcome, continues to work in the present, if you are employing it, and you hope will continue working in the future. If you are an intuitive or discretionary trader, trading is only slightly different.

 

The fact that one really does not know what the odds and payout are before entering a trade, makes it very difficult to stick to trading a system for most. The fact that an edge gets "tweaked" means to me that the trader had to adjust to changing circumstances as he perceives the changes in the market if his edge is going to continue to be profitable. A wrong tweak and he is no longer profitable. So, then, a traders edge is based on his ability to read the changing circumstances. If you can read the changing circumstances, you have an edge.

 

Can a trader continue to read the changing circumstances? I want to answer this with a yes.

 

Is there luck involved? Absolutely! I have had incredible strings of winners but I have also had strings of losers. Fortunately for me, my winners have been significantly bigger than my losers. In my case, I choose to remain humble. Humility helps my mind remain limber.

 

 

OK. Moving on from "is a CTA's return a good goal post for an independent trader" to which all can agree that CTAs have one hand tied behind their backs by the need to keep and make happy customers.

 

The issue of edge.

 

MM. It seems that we agree but don't agree (which feels weird).

 

You agree in the above that you can take something that historically worked (say, trading 123 breaks at some point that has a higher level of chart meaning like S&R or longer trend resumption and applying an exit strategy) and have an edge that works for a time.

 

You agree that markets vary over time in a way that frequently means tuning edges to match market conditions.

 

But then you say that the traders only edge is the ability to "read the changing circumstances."

 

And thats where we depart. The trader had an edge. The edge became less efficacious so he either retires it or adjusts to (say) greater or lesser volatility. Even if, for a time, an edge stops working that doesn't mean it was not or is not again an edge. It just means that it isn't one that self adapts to market conditions. And given traders tendency to shift their behaviours in terms of round numbers (small not the big necessarily) its not surprising that manual tweaks work better than ATR or AR based self adaptive systems.

 

Sometimes the edge itself doesn't change (thale's breaks for example or pullbacks in trends) but it is still necessary to adjust to the market.

 

That doesn't mean that thales technique lacks an edge. Or that thales edge is his ability to adjust. His edge is in his perception of the market and its activity translated into Context plus the Break.

 

 

The truth of trading is that the majority of people could be given a valid edge, taught how it fits into market context, taught how to adjust it over time if macro context varies and they would still lose money. Why? The truth, as MD explained in The Disciplined Trader, is that the interaction of the markets movements with money committed and peoples wants, needs, fears, hopes, schemas and habit building would cause them to act incorrectly despite the best edge in the world.

[MightyMouse 12]

OK. Moving on from "is a CTA's return a good goal post for an independent trader" to which all can agree that CTAs have one hand tied behind their backs by the need to keep and make happy customers.

 

The issue of edge.

 

MM. It seems that we agree but don't agree (which feels weird).

 

You agree in the above that you can take something that historically worked (say, trading 123 breaks at some point that has a higher level of chart meaning like S&R or longer trend resumption and applying an exit strategy) and have an edge that works for a time.

 

You agree that markets vary over time in a way that frequently means tuning edges to match market conditions.

 

But then you say that the traders only edge is the ability to "read the changing circumstances."

 

And thats where we depart. The trader had an edge. The edge became less efficacious so he either retires it or adjusts to (say) greater or lesser volatility. Even if, for a time, an edge stops working that doesn't mean it was not or is not again an edge. It just means that it isn't one that self adapts to market conditions. And given traders tendency to shift their behaviours in terms of round numbers (small not the big necessarily) its not surprising that manual tweaks work better than ATR or AR based self adaptive systems.

 

Sometimes the edge itself doesn't change (thale's breaks for example or pullbacks in trends) but it is still necessary to adjust to the market.

 

That doesn't mean that thales technique lacks an edge. Or that thales edge is his ability to adjust. His edge is in his perception of the market and its activity translated into Context plus the Break.

 

 

The truth of trading is that the majority of people could be given a valid edge, taught how it fits into market context, taught how to adjust it over time if macro context varies and they would still lose money. Why? The truth, as MD explained in The Disciplined Trader, is that the interaction of the markets movements with money committed and peoples wants, needs, fears, hopes, schemas and habit building would cause them to act incorrectly despite the best edge in the world.

 

I am not sure where you disagree with me. It seems to me that you feel a traders edge is in his perception of the market, etc? That is nearly identical to what i mean when i said that a traders edge is in his ability to keep up with the changing circumstances.

[Kiwi 16]

The difference is that I think that he has an edge that is the original edge.

 

His adaptation results in continuous improvements to the edge.

 

Without the initial edge the adaptation might just result in his flapping in the wind.

 

 

I feel that I'm saying that a sailor has a edge from his sail and an edge multiplier by way of adjusting the sail to the wind strength and minor directional changes. And you might be saying that his edge is only the second part (what I define as an edge multiplier).