Interesting topic. This is one of the biggest questions we traders struggle with - how do we measure our performance? Is X% a year good or just ok? Is X% of the days range good, or is that a weak performance?

Everyone comes into this with sights set way too high. Market lore is filled with inspiring success stories, combine that with internet-fueled urban legends and false advertising from vendors, and you really can't blame newbs for having pie in the sky dreams.

I think when we read about Marty Schwartz or Michael Marcus and their accomplishments, it probably didn't occur to us that their trading talents were on par with those of sports stars like Michael Jordan or Joe Montana or Tiger Woods, and thus expecting to perform at that level was not reasonable at all.

Brett Steenbarger had a blog post that touched on this and I'll link it. (hope it's ok to post a link - it's to a free blog) :

TraderFeed: The Capitalization of Traders: Why It Is Crucial to Success

I think most would be surprised (I know I was at first) that the brokerage contact had never seen a sub-100k trader generate returns that could sustain a living. Goes against all the hype, doesn't it? When he said over 80% blow out, note he said the % is much higher for small accounts. And that's just those who lose it all. It doesn't include those who lose, but stop before the account is depleted. Sobering.

So I'll go with Brett (a verifiable real person) before I believe anonymous internet stories of making 1k a day off a 15k account.

pinetree 

I think most would be surprised (I know I was at first) that the brokerage contact had never seen a sub-100k trader generate returns that could sustain a living. Goes against all the hype, doesn't it? When he said over 80% blow out, note he said the % is much higher for small accounts. And that's just those who lose it all. It doesn't include those who lose, but stop before the account is depleted.

I couldn't agree more, and I am definitely not surprised.

Small accounts naturally push a trader to overlook all money management rules to give some sense to his trading, simply due to the simple fact that the numbers are so small for satisfaction, let alone complete financial independence.

If one is trading a $50,000 account and is to respect institutional money management strategies, standard financial engineering and general risk management rules, he can't expect more than 20% to 40% return per year on average, and this won't happen each year, please trust me on that... This accounts for a $10k to $20k gain per year gross.

So how can a trader live on such an income per year?
Of course many people live with less, but these guys never tried trading for the most part... Usually retail traders come from a middle to higher social class, with some kind of education, an average to a good job position and most importantly a certain level of income that allowed them to save those $50,000 in the first place.
I have yet to see a trader that takes a loan from the bank to start trading. Not saying it never happened, there surely is somebody out there who thought about it and tried it; but I'd better not encounter such a case for the remainder of my career

Great insight here guys. Thank you!

pinetree 

Everyone comes into this with sights set way too high. Market lore is filled with inspiring success stories, combine that with internet-fueled urban legends

Yes, most of those "success" stories are temporary and involve substantial risk, much more than the average person would be comfortable with. In fact, many of the traders behind those stories later on have admitted that they were reckless and would not do it again. Skating very thin ice.

Quoting 

So I'll go with Brett (a verifiable real person) before I believe anonymous internet stories of making 1k a day off a 15k account.

Yes it is entirely unrealistic because it fails to account for drawdown periods, much less make any attempt to quantify those drawdowns. People should realize that rewards are commensurate with risk. With a reasonable strategy you can expect maybe 1-3 reward/risk ratio. For every $1k you earn, you have to wait through a $3-$4k drawdown in the process.

So if you're getting 1k/day, you're taking on a $3k loss during that same day. And you're repeating this day after day. Of course all days aren't the same, so your $3k loss will get carried over sometimes. Now you're talking a two, three or four day period where you're not making any money, and you're carrying a $3k loss. So, the "$1k/day" thing actually is no longer a $1k/day. It is now a $1k/4 days. Or $1k/week. Or $1k/two weeks.

And your drawdown will not stay at $3k, unless you have really really good money management techniques. So your drawdown will fluctuate too. Unless you know what you're doing, your drawdown runs the risk of a margin call. Then it's game over.

Fadi 

Small accounts naturally push a trader to overlook all money management rules to give some sense to his trading, simply due to the simple fact that the numbers are so small for satisfaction, let alone complete financial independence.

Absolutely. Risk is commensurate with reward. To get X reward, you take X risk. To get X + 10 reward, you take X + 10 risk. Small accounts means small risks and small rewards.

And 30% net return per year is definitely not something any beginning trader should even consider likely. Those are best case figures for professional traders. I mean, most people are going struggle for a couple years at least (if they survive that long) to barely break even. Then hopefully they have enough insight and acumen to be able to tweak their strategy enough to where it starts getting profitable.

You can't just go into trading without doing any thinking. You have to spend a lot of time thinking about your risk management, your setups (entries/exits), your markets - what drives them, what defines them. But nobody does this. Everyone jumps into it with the "jock attitude:" "I'm a gunslinger. I'll make it work with confidence and adrenaline."

Naw. you won't.

mwtzzz 

Absolutely. Risk is commensurate with reward. To get X reward, you take X risk. To get X + 10 reward, you take X + 10 risk. Small accounts means small risks and small rewards.

I agree with the overall sentiment of your post, but am scratching my head a bit at the above quote. You seem to be describing a symmetric risk profile. The best traders make their profile asymmetric; some great example of large funds doing this are in the Hedge Funds MW book by Schwager; they create opportunities where the downside risk is fairly limited, but where the upside potential is quite large. I'm not suggesting that as potential reward goes up that risk should not also go up, but I am saying that it does not need to (nor should it be) a symmetrical, linear relationship.

What is a reasonable return?


something that allows you to return the next day and turn the machines back on.


((hint: Trading Places )))

josh 

I agree with the overall sentiment of your post, but am scratching my head a bit at the above quote. You seem to be describing a symmetric risk profile.

Yeah, don't take it literally. It's just to make the point that greater returns = greater risk.

I also want to add that while Brett's post may seem discouraging, at no point did he or his brokerage contact ever say small retail traders couldn't be profitable. Just that they weren't going to make enough to sustain a living.

I personally know of two traders that trade for a living (primary source of income is trading) from home in a retail account who started out as typical undercapitalized newbs. I see a lot of crap that makes me skeptical but both these guys have passed my BS test and I completely believe both of them.

They didn't just start making a living off an 8k account though. It was a long process, including initial years of frustration-- losing money and sim trading, then growing their capital through trading profits and continuing to work a job until it was enough so that they could quit the 9-5 jive for good.

I can't say how much money they make or what size they are trading because neither of them volunteered it, and I thought it would be impolite for me to ask. But I can confirm that they each started out with less than 10k and "made it" in under a decade.

pinetree 

I also want to add that while Brett's post may seem discouraging, at no point did he or his brokerage contact ever say small retail traders couldn't be profitable. Just that they weren't going to make enough to sustain a living.

My homepage has a trading section that summarizes my views on trading. In my opinion, long term success hinges on whether or not you do the things listed in the "Guidelines" section.

Is long term profitability possible? Yes it is. It is difficult? Not particularly, once you've defined and quantified the key things. But getting to that point is a bit "tricky" because it requires that you have a correct understanding of what motivates asset prices and that you have done enough strategizing to develop a good method of limiting risk. As all traders know, the tricky part is limiting risk while still remaining profitable (over the long term.) Once you've gotten past that hump, the rest is straightforward.

Getting past that hump really gets to the heart of the matter: the ugly words "randomness" and "unpredictability" that traders don't like to hear. But, once you embrace those, you're halfway home.

Here is another "in the wild" observation of Charles Kirk.



The graph comes from an article in Barron's.

Impressive returns, but far from $X per day, day-in-day-out.