How much should a "good" system make annually?

[anley]

15% - 20%

Otherwise the system is taking on far too much risk.

Always exceptions to the rule, but very few.

 

[damianoakley]

Hi Anley,

You've brought up a very good point there.

Anyone looking at "how much a system makes" should also be looking at how much was actually risked to make a particular return.

For example, let's say a trader has a capital of $50,000 and over a year doubles their money to $100,000. On the face of it, that looks superb because they have made 100% profit. But what if it was then revealed that during the year, the trader had a drawdown of 70% - would that still mean that the trader had a good system?

It would take a massive amount of discipline to carry on trading a system that had grinded away over half of your trading capital - most traders would abandon such a system and look for something less volatile.


Thanks

Damian

 

[RunTheNumbers]

Hi Anley,

You've brought up a very good point there.

Anyone looking at "how much a system makes" should also be looking at how much was actually risked to make a particular return.

For example, let's say a trader has a capital of $50,000 and over a year doubles their money to $100,000. On the face of it, that looks superb because they have made 100% profit. But what if it was then revealed that during the year, the trader had a drawdown of 70% - would that still mean that the trader had a good system?

It would take a massive amount of discipline to carry on trading a system that had grinded away over half of your trading capital - most traders would abandon such a system and look for something less volatile.


Thanks

Damian

These things are always relative.

In your example if I was totally reliant upon the income/gains generated by my trading then I would be inclined to agree with you. However when I started the cash in my trading account was less than one twentieth of my and my wifes share portfolio. It was therefore a relatively insignificant part of my overall asset value and hence my ability to tolerate large drawdowns was and still is significant. When/if the money in the my trading account really mattered (ie made the difference between work and a life of relative leisure), then I would tend to agree with your statements more.

Regards

Ben

 

[damianoakley]

Hi Ben,

You are right - the amount of risk a trader can tolerate is directly relative to their personal circumstances.

If your trading capital is spare money that you can easily afford to lose, then you will be happy to take on quite a big risk - in fact you are probably willing to risk every penny of it. If that risk pays off then your returns will be huge.

However, a trader's attitude towards his trading capital changes completely when the money really matters. When you rely on your returns for an annual income, then all of a sudden every penny of your capital becomes significant. Every penny of that capital cannot be put at risk. Your trading has to become safer and more consistent because you are no longer in a position where you can risk a huge drawdown on your capital.

There is a massive difference between trading for a hobby and trading for income.


Thanks

Damian

 

[anley]

Yep Damian as you say it's all about how many $'s (or fractions of) you risk to make $1 and this is where so many newbies get it wrong.

They start drooling when sombody tells them how to make 300% a year whereas they'd laugh at a guy who 'only' makes 20%.

But 99% of the time the guy making 20% a year is the smart one...........

PS. And don't worry if you do get the above wrong as most people do when they start out, including myself. Took me about 2 years to understand it, but I'm a slow learner

 

[Splitlink]

15% - 20%

Otherwise the system is taking on far too much risk.

Always exceptions to the rule, but very few.

Why take the risk? I'm getting much more than that on buying and holding the shares, plus the dividends. Of course, we are in a bull market and, if there is a reverse, we must sell and put the shares in the bank, whereas traders short.

But, still, there has to be a better return than that.

Split

 

[timsk]

Why take the risk? I'm getting much more than that on buying and holding the shares, plus the dividends. Of course, we are in a bull market and, if there is a reverse, we must sell and put the shares in the bank, whereas traders short.

But, still, there has to be a better return than that.

Hi Split,
I may be labouring under a misapprehension about potential returns and their correlation to the time frame traded. Perhaps you or other subscribers can provide some insight and clarity.

My impression is - and my feeling is that this is a view held by many members - is that the shorter the timeframe, the larger the potential returns. Conversely, the longer the timeframe, the poorer the returns. Damian makes the point that day traders might expect better returns than swing or position traders because they tend to put in many more screen hours. In other words, the potential return is commensurate with the time and effort put in. Many people would add that day trading carries more risk than swing or position trading, although this is both a separate topic and a contentious one.

Attached is a monthly chart of the FTSE 250 index from 2000 - 2006. At a glance, it is easy to see that returns in excess of 20% P/A are attainable from 2003 - 2006. However, someone who swing or position trades and manages similar returns in the first half from 2000 - 2003 will, arguably, be doing very well indeed. I'd be interested to hear how those of you who trade longer time frames faired in these first three years.

Looking at the chart, one can see why day traders might do better than than those trading longer term time frames. Day trading is dependant upon a degree of volatility rather than a strong and enduring trend. As we all know, trends are fickle things: there's no knowing how long they will last and deciding when they start and finish is a subject of endless debate. All of which must amuse the day trader, whose only real concern is finding a highly liquid market with enough volatility to trade his or her strategies. In fact, day trading is a doddle by comparison, isn't it?

Happy New Year one and all!
Tim.

 

[new_trader]

Hi Ben,

You are right - the amount of risk a trader can tolerate is directly relative to their personal circumstances.

If your trading capital is spare money that you can easily afford to lose, then you will be happy to take on quite a big risk - in fact you are probably willing to risk every penny of it. If that risk pays off then your returns will be huge.

However, a trader's attitude towards his trading capital changes completely when the money really matters. When you rely on your returns for an annual income, then all of a sudden every penny of your capital becomes significant. Every penny of that capital cannot be put at risk. Your trading has to become safer and more consistent because you are no longer in a position where you can risk a huge drawdown on your capital.

There is a massive difference between trading for a hobby and trading for income.


Thanks

Damian

I think it would be better to trade with the attitude that every penny always mattered. I don't see why any trader should ingrain a reckless attitude. A hobby trader may one day find themself in a postition where they must trade full time. I think the reason why many traders fail in their transition from paper trading to "real" trading is because paper trading doesn't really matter.

 

[Mr. Charts]

"All of which must amuse the day trader, whose only real concern is finding a highly liquid market with enough volatility to trade his or her strategies. In fact, day trading is a doddle by comparison, isn't it?"

Absolutely, Tim. And with zero overnight risk

"If your trading capital is spare money that you can easily afford to lose, then you will be happy to take on quite a big risk - in fact you are probably willing to risk every penny of it. If that risk pays off then your returns will be huge."

I realise you are not advocating that, Mr.Oakley, but it really needs to be said that anyone with that attitude is guaranteed to fail in anything other than the very short term - it is the attitude of a gambler and is classic negative re-inforcement.

" think it would be better to trade with the attitude that every penny always mattered. I don't see why any trader should ingrain a reckless attitude. A hobby trader may one day find themself in a postition where they must trade full time. I think the reason why many traders fail in their transition from paper trading to "real" trading is because paper trading doesn't really matter."

Quite right. too. Although it is not the same thing as real trading, I think every beginner should paper trade first. If you cannot be profitable paper trading, there is no way on this planet you will succeed when real money is at risk. Obviously success at paper trading doesn't guarantee success in the real world.
Happy New Year to everyone
Richard

 

[chump]

I can't answer the question posed directly at the at the start of the thread ,because it's not the right question (I'm in trouble again ...LOL )
The question ,or one of them is this ,at any given moment where should I have my money based upon what I know. Most of what I practice is sacrilege in terms of what normal financial
practice advocates . According to that I'm too heavy when i should be diversified LOL.
There are some commonsense ways to employ money management ,but if you really want to make money you're going to have to ask questions and think for yourself rather than accept what is offered by common practice.

 

[Splitlink]

Hi Split,
I may be labouring under a misapprehension about potential returns and their correlation to the time frame traded. Perhaps you or other subscribers can provide some insight and clarity.

My impression is - and my feeling is that this is a view held by many members - is that the shorter the timeframe, the larger the potential returns. Conversely, the longer the timeframe, the poorer the returns. Damian makes the point that day traders might expect better returns than swing or position traders because they tend to put in many more screen hours. In other words, the potential return is commensurate with the time and effort put in. Many people would add that day trading carries more risk than swing or position trading, although this is both a separate topic and a contentious one.

Attached is a monthly chart of the FTSE 250 index from 2000 - 2006. At a glance, it is easy to see that returns in excess of 20% P/A are attainable from 2003 - 2006. However, someone who swing or position trades and manages similar returns in the first half from 2000 - 2003 will, arguably, be doing very well indeed. I'd be interested to hear how those of you who trade longer time frames faired in these first three years.

Looking at the chart, one can see why day traders might do better than than those trading longer term time frames. Day trading is dependant upon a degree of volatility rather than a strong and enduring trend. As we all know, trends are fickle things: there's no knowing how long they will last and deciding when they start and finish is a subject of endless debate. All of which must amuse the day trader, whose only real concern is finding a highly liquid market with enough volatility to trade his or her strategies. In fact, day trading is a doddle by comparison, isn't it?

Happy New Year one and all!
Tim.

On answering Anley's post I was referring to his 25% expectation for trading. I expect far more than that, or I would not do it. The work is too much, especially at my time of life! Even so I made about 35% this year, which is no great shakes, I know, and a lot will laugh at the figure,

As far as buying and holding is concerned, you'll find my present ones on another thread. Ones I had during 2003 and sold in summer of this year, when I needed the cash for other purposes, have been LOOK, CNE, MTI, ASK Central (which was taken over and produced good profits in just a few months). I tend to, and still do, go for the cheaper priced stocks but I splashed out and bought BDEV, which gave me a great profit, just when I needed the cash most-

Now I'm building a portfolio, again, with less money and with two I did not sell, HYD, SUY and a spec penny one, GLD. This Christmas I bought RAB.

You are asking for results during a very good period for the markets. They are results that I, personally, do not think I would have been capable of by trading and they may not be repeatable in the future. I am, simply, incapable of committing the time and capital necessary to trading and I know that I would have been too nervous to stay in a trade for very long and would not have made the money I made with the portfolio, probably losing a lot of it. The most, (and very rare for me) that I have been in is nine days.

Now, why is it that (they say) 90% of traders fail? I think that it is too frequent trading. Probably, shorting stocks that are, fundamentally, good growth stocks. Things that a buy and hold man does not do. I watch the chart when I buy but I've done the figures first, and nosed around for opinions on other boards. That is what gives me confidence and peace of mind with my holdings.

The old adage again. Horses for courses! All the Best to All of Us for 2007

Split

 

[Splitlink]

Hi Split,

My impression is - and my feeling is that this is a view held by many members - is that the shorter the timeframe, the larger the potential returns. Conversely, the longer the timeframe, the poorer the returns. Damian makes the point that day traders might expect better returns than swing or position traders because they tend to put in many more screen hours. In other words, the potential return is commensurate with the time and effort put in. Many people would add that day trading carries more risk than swing or position trading, although this is both a separate topic and a contentious one.

Tim.

Hi Tinsk, again-

Your second paragraph. The same patterns are available on all time frames. The shorter the frame, the closer can be the stop and the smaller the loss. However, the greater number of trades. My view on this is that if one is a day trader, then he has to trade all day. Some say that they only trade for a certain number of hours. I can only trade during the morning because of afternoon commitments. The number of losers I have had with index trades in the mornings, which could have been recouped in the afternoon, is nobody's business!. A kind of Sod's Law. So, after a few weeks, I left index trading and am back with swing and position trading of shares. I find that more suitable to my style. Now, as is the difference between day trading and position, so is the difference between position trading and having a portfolio.
The losses get greater, but the trading gets less frequent and there is more time to make a decision ( and go fishing, if you like that!)

Regards Split

 

[new_trader]

My impression is - and my feeling is that this is a view held by many members - is that the shorter the timeframe, the larger the potential returns. Conversely, the longer the timeframe, the poorer the returns. Damian makes the point that day traders might expect better returns than swing or position traders because they tend to put in many more screen hours. In other words, the potential return is commensurate with the time and effort put in. Many people would add that day trading carries more risk than swing or position trading, although this is both a separate topic and a contentious one. Tim.

I don't think there is any correlation between timeframe and potential returns. How can there be?

 

[chump]

"don't think there is any correlation between timeframe and potential returns. How can there be?

The answer is in the market structure and the capital committed and the strategy selected and what capital it can bear which comes back to market structure...which all comes back to the question of where should my money be.

 

[yacarob1]

Dunno about a good system as such but good working methods coupled with concentration and focus should enable one to make a living and have some left over.

I am not a materialistic person but the way I look at it is my trading should be enough to cover all my basic living costs plus some............some being a large enough figure to enable me to take luxury holidays, provide a holiday home in the sun ( at my expense, not the Bee Gees or Cliff Richard ), Lexus LS 430 or equivalent and a hired hand to wash it.

No need to think of percentage returns on capital.

Just think of an absolute sum of money and then earn it.

Then double it and so on etc. etc. etc..

 

[new_trader]

Dunno about a good system as such but good working methods coupled with concentration and focus should enable one to make a living and have some left over.

I am not a materialistic person but the way I look at it is my trading should be enough to cover all my basic living costs plus some............some being a large enough figure to enable me to take luxury holidays, provide a holiday home in the sun ( at my expense, not the Bee Gees or Cliff Richard ), Lexus LS 430 or equivalent and a hired hand to wash it.

No need to think of percentage returns on capital.

Just think of an absolute sum of money and then earn it.

Then double it and so on etc. etc. etc..

Luxury holidays, a place in the sun and a fully maintained Lexus are basic living costs. What you want is some money left over for food.

 

[yacarob1]

:cheesy:

 

[survivor]

I don't think there is any correlation between timeframe and potential returns. How can there be?

As usual it all depends.

Mathematically

If the geometric return = 1 + x where eg. x = 0.001

then the total return = (1+x) raised to the power of N

Where N = number of trades.

Thus if the geometric mean return of system 1 = 1+x1 with N1 trades and similarily = 1+x2 for system 2 with N2 trades, the net returns can be estimated from the formula above. Of course, the greater the number of trades, the better. But, of course again, the greater the number of trades the greater the draw down.

So, one has to compare the two figures and check.

As has been discussed in the posts above, the greater returns from trading in the shorter term may be due to any one of the parameters.

 

[philhackett]

If you trade FX risk 1% of your bank per trade and as your bank increases your trade size will increase. Assume and average of 50 pips per day net on average. Some months will be better than others; this year will probably be a very good year.

Phil

Hi, I'm playing around with making my own system.
I'm only curious of how much a system should make to be really good!

Ok, I understand that a system that makes 1% is effective when you reinvest over a thousand years and all that bull. But I would like to know how many percent anually one really should be aiming at?

Beating the S&P or other index? That doesn't seem to be hard, or is it?

 

[zagreb]

taking into account that trader has experience, plan and devotion, on average 5-10% per month can be obtained without much drawdown risk. If we take out some month (ended in minus or trader away), 50% annualy compounded return of investment should be obtained without much pain.

This result can be reached by making between 50-100 pips per month while risking 1% per trade (f.e. by using 1:10 leverage in fx). Such a small risk combined with implementation of fixed fractional percentage money management will make drawdown relatively small (under 10%). It is very unlikely to expect more than 8-9 losses in a row (losing streak). More than that mean dead wrong tactics (worse than coin tossing) or stellar incompetence

Somenone right said, daytraders will use different tactics and spend more time so their results can be x2 or even x3.

If trader cannot earn 50-100 pips per month, then he is in the wrong business. What's the point of being F1 pilot if you are not able to drive faster than 50 mph. Those both situations are waste of one's precious time