The problem with trading is that the income is generally lumpy. Meaning that you cant always bank on X amount each month. You need to take what the market is willing to give you in accordance with your trading system. Sometimes your trading method just isn't in sync with the market conditions. For that month, you may just be happy to break even. That would still be a better month than trying to force trades and ending up down for the month. Then the next month you might make enough to cover both the current and prior/next month.
But yes, I agree completely that over the long term you need to cover expenses at a minimum.
You donít trade the markets; you only trade your beliefs about the markets.
- Van K Tharp
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I'm firmly rooted in the Yes, to Daily Profit Targets camp. This thread has some great discussion on the topic, thanks for starting the thread, @David_R .. I enjoyed reading what @djkiwi posted, I wish I had the ability to get my points across as thoroughly as he, in so few words. ALL of the following is My Opinion.
Facts are hard to come by in the markets. The only ones I've found are historical, with one exception RISK, if I don't control my risk I will fail. Every trading system/method must address profit and risk. These two ends of the trading system/method must be evaluated with respect to each other, they cannot be evaluated independently. Risk is a wide sweeping topic, it can be viewed as draw down on a single trade or draw down over an entire year.
I think of Daily Profit Targets as a tool, just the same as any indicator on my chart. The "tool" may not be suited for everyone just as some indicators are given the "cold shoulder" and never a second look. The one topic that appears to be slipping through the cracks in this thread is SKILL. Yes, markets change over time. Yes, some traders trader better in trends some in ranges. But I believe a traders SKILL will allow them to continue to trade during the bad times and consistently produce profits in the good times. This topic has no "bottom to it" opinions make the forums thrive. BUT if you are a trader suffering from overtrading, taking profits to early, moving stops to BE to soon or find yourself giving back profits later in the day I invite you to take a long hard look at how a Daily Profit Target can be an effective tool to curtail or eliminate psychological issues that often plague traders for YEARS.
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This is very true. It can be eye-opening to see distributions of trade results from profitable traders, and realize how much of the overall profit is derived from a small handful of trades. Don Miller, for example, from the Trading After Dark site, breaks down a year's worth of trades on a scatter chart. Just about all of the days hover close to the zero line, some small losers, some small winners. Then there are a few winners that stand out like redwood trees. (The real key to profitability is that there are no outsized losers like that, but that's somewhat beside the point of this thread.)
A hard daily target would lop off the tops of those trees. He does however say that he uses some kind of trailing equity stop that halts his trading once he drops too far below the daily high water mark. Not sure what parameters he uses for this stop though.
I did not say I did this. I was asking for opinions regarding the concept and reasons to back up the opinion. I used to think a goal was needed, but I don't feel that way anymore, but I will say if I am up on the day, I find it very difficult to risk those gains. But that difficulty is a psychological thing and not a methodology thing.
Ok, the original post is: "is the concept of a daily target a good idea, or a bad idea"
The answer: it's a bad idea. Why? Because it's impossible. Markets don't work like that.
I'm just responding to the original question for the benefit of new readers interested in an answer, not necessarily you in particular, since it sounds like you've moved on from that point, which is good.
Last edited by mwtzzz; March 14th, 2013 at 05:59 PM.
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Good points you raise. I hope @David_R doesn't mind as these comments are slightly offtopic but still related to the overall intent of the thread. This is such a critical topic it's worth expansion.
Your situation may be different to others but in general most full time traders rely on the income to pay the bills and need to monitor performance closely. Like any business if you are unable to generate the required income to cover your expenses, you will eventually either close down or go bankrupt. A good example is a buddy of mine who trades equities full time for a living. He is profitable but just isn't making enough compared to his old job. His wife works but he is responsible for the mortgage, property tax and other expenses. His fixed expenses are on the high side. He asked me to look over what he was doing. It was immediately obvious based on his position sizing, expectancy and account size he would likely never make enough money to cover the family expenses.
He has disciplined risk management but the problem is his account is simply too small. His immediate reaction was to increase his position size. As we know this can be a double edge sword. If he increases his size from say 2% to 5% risk per trade and has 10 losers in a row it will wipe out over half his account when compounded.
My personal view is an average full time trader should have a fairly large account balance ideally in excess of $250k to make a consistent living trading. Why is this? A couple of reasons. Firstly, traders have an unrealistic expectation of what they can earn in a given year. You hear numbers of 100% return per annum etc which is only achieved by very few traders. Even a more realistic goal of say 20% a year would equate to only $50,000 per year in gross income. If the trader can only earn 10% per annum (like most managed futures funds) this would equate to only $25,000. The trader would probably make more money per year cleaning the bathrooms at Walmart with no financial risk.
Traders with say a $50k account trading 5% risk per trade (including leverage) will eventually suffer a massive drawdown. This is a mathematical certainty.
Attempting to cover cash outflows instead of accrued expenses can put the trader in a risk enhanced position due to timing differences in my opinion. I'm a licensed CPA and watched clients go to the wall because of their inability to generate sufficient revenues to cover mistimed cash outflows and bloated overheads. In general their inflows were fairly stable to cover most months but an abnormal cash outflow would eventually sink them as their overall revenues were insufficient.
Exactly the same concept can be applied to a trading business. For example, if your fixed family cash outflows are $5k a month for rent/mortgage etc and then you have a planned $12k cash outflow in say September then you should spread that item out over the year.
Your minimum target trading income should therefore be $6k per month otherwise the trader may need to take excess risk in August or September to cover that unusually high $12k cash outflow. Property tax is a good example which is typically paid twice a year so should be fully accrued on a monthly basis. An additional contingent/unknown amount should be included as well. Let's not forget about the wife's "new gold earrings" she just had to have which could be classified as an overhead.
Comparing your computer consultancy business and a trading business has an important difference. In a consultancy business you have the luxury of calling up regular clients in advance and finding out when they are likely to have work scheduled. This means you will have at least a ballpark figure of income. I used to be a consultant as well and had a pretty fair idea of when my next job would commence. In trading you have no such luxury only historical results as a gauge. The other critical difference is emotions play a greater role in the variability of trading income than many other businesses in my opinion.
So I believe if someone has a daily goal of say $500 a day to cover all expenses including a stretch target this goal should be on a fully accrued basis. i.e. all expenses spread over the entire year.
The trader then needs to address the issue of whether his trading setups have sufficient expectancy to cover the expenses? If not, retool or get a 9 to 5.
Last edited by djkiwi; March 16th, 2013 at 05:09 AM.
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It is generally understood that the best traders/funds make 20-30% annual net return over a several year timeframe. Use this as a "best case scenario" in calculating whether you can afford to make trading your full time job.
A quote from Mike Dever answering the question "how much startup is needed by a trader who is determined to make a living through trading?"
"They're going to need a few hundred thousand dollars to make $50,000/year happen with any reasonable degree of probability."
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