What should return be?

[qubetrader]

I have a fully automated trading system for the dow jones index, long only using DDM and since mid February of 2010 UDOW. Since Jan 1, 2008 to today (5/14/11) i am up 69.8% total. Considering i have been using 2X and currenty 3X etf's, i dont think this is good enough. Any thoughts?

 

[qubetrader]

Here is a yearly breakdown:

2008- 8.96% vs. Dow -33.84%
2009- .95% vs. Dow 18.82%
2010- 25.12% vs. Dow 11.02%
2011 to date- 23.37%

 

[tomorton]

Considering the Dow is down 5% over the same period and you are averaging better than +17%pa I'm not sure this is the right question.

I would look at the horrendous annual drawdown your system can bring - focus on what you could actually lose rather than what you could theoretically make.

 

[qubetrader]

Well the worst drawdown was march of 09, i was -34.44%, finished 1q 2009 at -20.37, and year 09 at .95%. So there was quite a gain there to come back from the low of 09, but this was an extremely volatile time and i don't consider it to be realistic to a normal bull or bear market, if there is such a thing. However, i do understand that nothing is predictable and anything can happen so there's no reason it wont happen again or be of an even longer duration. The problem is, i dont know how to correct for it because any adjustment would fundamentally change the system and some of the bigger gains that i've had would be lowered, kind of nullifying the safety net. No stop limits are used, and by implementing one it lowers the upside as well by not waiting for the comeback.

 

[nikke]

No stop limits are used, and by implementing one it lowers the upside as well by not waiting for the comeback.

So, basically u could be wiped out?

Using stops reduces PF of my systems as well, but I still like to have them.

 

[tomorton]

As I say, if you protect yourself from serious losses, you will be almost guaranteed to be able to stay in the game long enough to make a significant profit. But chasing profit will almost always kill you - maybe why 95% of traders get knocked out, they intuitively think the game is won by being good at making money.
Reward = Capital x Time x Risk

 

[qubetrader]

Well i see your points, however, given the instrument I am trading (the Dow Jones Index, but levered), I will present a defense. I believe the stock market has an overall upward bias, this is obvious, and why shorting is not included. Therefore, I believe the chance of being completely wiped out is nil, and if I am that means things are really, really bad so I'll have bigger problems anyways. Nonetheless, I do appreciate the feedback, I'd be a fool to ignore what your saying. I'll look into it, thank you.

 

[tomorton]

....the chance of being completely wiped out is nil....QUOTE]


If investing in an unleveraged instrument tracking a broad major market index like the Dow I would agree, as the Dow is clearly not going to fall to zero, and if it did, western civilisation is finished anyway.

But, firstly, who wants to do that if your aim is wealth within your own lifetime, and secondly, that's not what you're doing anyway.

 

[qubetrader]

tomorton:

Thats why I chose the levereged instrument. To make some money, you have to take on risk. What is an acceptable level of risk is different for everyone, what I've put together seems ok to me, as I am in and out within a number of days at most. Holding time ranges from one day to probably around 5, I do not have the maximum days held figure in front of me at the moment but it's something I can look up. Thats my first focus on a stop loss is if it hasn't turned around within a specific time period to exit the trade. It's all end of day trading so what kills is anytime there is a massive sell-off, which i'm not sure there is a good stop loss for that anyways, as most times it appears as a huge gap. I plan to trade this method with individual stocks in the near future, I think I will get better, consistant results .

I guess that brings me to the original question of what a good return should be? I mean obviously I am trying to get max gain but who isn't. I'm trying to find out if I need to go back to the drawing board or if realistically I have put together something fairly decent. I guess that depends on who you are as well. What return would you be happy with?

 

[tomorton]

I like parts of that q, you are perceiving risk, you're prepared to kill off older trades, you're trading at late prices, you're conscious of overnight gaps (of course, if you could go short too, overnight sell-offs would be a bonus day but I know not everyone can do that).

 

[amnonco]

tomorton:

I guess that brings me to the original question of what a good return should be? I mean obviously I am trying to get max gain but who isn't. I'm trying to find out if I need to go back to the drawing board or if realistically I have put together something fairly decent. I guess that depends on who you are as well. What return would you be happy with?

i don't get it.
what I hear is
" can anyone tell me what I want?"

a good return is meaningless.
decide your goals in terms of money.
then learn the characteristics of your system's return.
then learn to use specific position sizing algorithm that will take you to your predefined goal.

 

[meanreversion]

You need a metric for measuring performance. Either Sharpe ratio or some other measure of risk adjusted return, e.g. annual return / drawdown.

Calculate your compound annual return since 2008, divide by the maximum drawdown experienced, and if that number is greater than 1 you're doing well. Below 0.5 is nothing special.