Feb 28

Realistic Returns

Everyone knows the main thing that draws people to the markets is the promise of mega returns.

Particularly when the banks are offering us next to nothing for our savings, there comes a point where we think there must be a better option – and what better option is there, than to manage our money ourselves and return a bajillion dollars a year instead of the generous $3.50 our banks are offering?

New traders tend to come into the game thinking anything less than 1283% per annum is an outrage, and that living off investment returns is a given.

But in truth, they have nothing at all to base that assumption on other than the claims of the various market spruikers trying to capitalise on their stupidity.  They certainly don’t know anyone returning that kind of money.  They just ‘know’ its possible.

I came across the Forbes “40 Highest-Earning Fund Managers and Traders” list this morning and was disappointed to see that I had, once again, been pipped at the post by a few no-name hedge-fund managers.  But after my tears had dried enough that I could see again, I noticed that these high-earners didn’t make such outrageous returns.

You know, a mere 30% or so was about the top return, and this was in a bull market where a do-nothing buy and hold strategy on the S&P500 ($SPX) would have returned you just under 12%.

It makes you think.  If these ‘top’ fund managers – the best of the best – are returning 20-30%, are our expectations wildly unrealistic?

What Can A Private Trader Really Achieve?

Personally, I think a trader can achieve anything they set their mind to. The article is about top earners in a dollar amount so it really isn’t a leader-board in terms of return.  I know there are private traders out there who earn substantially more than that every year in percentage terms – but that does not necessarily mean it’s a given for everyone.

The problem is, most people start out grossly over-estimating what they themselves are capable of.  Not everyone is going to be a great trader earning 100% or more every year, and in reality most people will struggle to even be a good one, especially to start with.

Returns can depend dramatically on a few factors which will vary considerably between traders.

  • Skill Yes, you need skill and bucket-loads of it to make any kind of (consistent) return, let alone an out-sized one.  Do not under-estimate the time, practice and devotion to your craft that is required to see success in this.  It’s pretty safe to say that aiming for a 100% return on your account in your first year is going to leave you pretty disappointed.  In fact, if you get to the end of your first year and your account is in the black, you should be happy-dancing around the table.
  • Time Frame With all else being equal, a trader using 5 minute charts will out-perform a daily chart trader simply because they get more opportunity to trade.   Their edge is presented more frequently, trades are closed more frequently and as a result the profits accumulate much more quickly – assuming, of course that their system is a profitable one.  A 5 minute trader can trade a 7R trend in a day, where the same trend on a daily chart will take weeks, if not months to develop.
  • Trade Risk Some traders who earn mega-returns take stupid risks to do it.  There is no point shooting for out-sized gains by risking your whole bankroll when it means you’re finished if it goes wrong.  Keeping things more moderate means a slower accumulation of profit (and loss) and lower returns, but it will also ensure you have a chance to make some kind of return year after year, rather than having your star fall and explode as quickly as it rose.  Common wisdom suggests keeping risk on each trade to less than 2% of your account.
  • Portfolio Risk Some traders will keep their trade risk small, but have a large level of portfolio risk.  This is when a trader risks say 1% per trade, but has 25 positions open that are not yet at break-even.  Again, kinda dumb as all it takes is a shudder though the market and a quarter of your account is gone.  But, you’ll also get higher returns when things go right. 
  • Trader Conservatism or Aggression  Our personalities will dictate to a large part what our returns have the potential to be in any given market.  Someone who is more conservative might decide not to add to profitable positions, while a more aggressive trader might add to their positions through the use of options, for example.  In a favourable market, that can be the difference between a decent return and an amazing one.
  • The Ability to Change Course.   The sad fact is that the market does not always go up.  Traders who have the ability (or some kind of mechanism that shows them) to change course quickly is a trader that will earn more simply because they know how to profit from all market conditions, and can recognise which conditions are prevalent in the market at any given time.

All this just goes to show that there is no real answer for the “What kind of return can I expect?” question.  Return is a huge balancing act between market conditions, personal skill and risk appetite; there is no ‘standard’ return for a private trader.

So How Do We Know How Good We Are?

In trading as well as life, it’s usually counter-productive to compare yourself to other people.  As you can see from above, there are so many variables that it just isn’t helpful.

However that’s not to say you shouldn’t have some kind of benchmark to rate yourself against.  It is helpful to see yourself improving, or having something to tell you somethings changed and things aren’t going so well.

For example, If you trade the constituents of the S&P500 on a daily time frame, you would want your efforts to outperform the index otherwise what you’re doing is a waste of time and you may as well just buy the $SPY.

Or, if you trade just one thing like I do, you could look at the percentage change for the period, and compare that to your results.  For example, it’s the last trading day of February today, and in the month of Feb the $EURUSD fell about 3.5% . I want to return more than that, and if I do I’m a happy girl.  (I’m a very happy girl this month ;) )

When you’re just learning, you can compare your own progress in a not-return way.  For example, how often did you stray from your plan this month, compared to last month?

At the beginning, no-one knows how good they are going to be, it’s something that slowly gets revealed as a trader progresses, but the facts say that most people will fail.  So for most people, 30% return is brilliant but there will always be outliers who are capable of more.  But before you try for outsized returns, prove you can make ‘insized’ ones, and then, with time and experience the outsized ones may come.

*Do you bench-mark differently?  Love to hear your thoughts in the comments section!


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  • Harry

    Hey Jessica, possibly other readers. I just wanted to say, I really appreciated this article, and I am glad to see that me not being able to double my money isn’t all that crazy. After taxes, pip fees and my own game of ‘crapshoot bingo’ I come out on 1.1% a month (non incremental) on a €125.000 diversified portfolio.

    To answer about the stressfulness, follow the simple rule that counts for gambling, ‘Don’t spend money you can’t afford to lose’. I add in my head ‘I consider this a transaction to have fun’. By saying this, I already regard my money as spent and lost. Clearly, if I make a profit it’s marvelous, a bad month where I break even or dip 0.2% red sucks, but I don’t depend on it.

    ———- If you don’t like numbers or w/e, skip the next part ——-

    I’ve been trading, feeling and diversifying for almost 5 years now. Year 1: 2,1% net profit, Year 2: 3,3%
    Year 3: 8,4% (started diversifying a lot more here, more spots to take advantage). Year 4: 13,5%. In 2 weeks I should by all estimates come out on about 13,1-13,3%. for year 5. This is my cap, this is what I can solidly perform, this is what I am comfortable with. It isn’t the magical 5% a month some wankers try to make you fall for, but it’s 10% more ROI than the banks offer, AFTER tax.

    My portfolio: 23% currency, 18% national (Dutch) stocks, 28% US/JP/HK stocks, 8% wines, 4% Real Estate, 9% commodities, 7% rotation (So I can add a bit of a punch to some more surefire investments) and 3% Crapshoot.

    Crapshoot is basically where I test things, theories, methods and also, myself. My rotation helps me edge out a bit more profit without risking pulling some money out too early from other sources. That is a big part of the change from my year 3 to year 4 returns. Less doubt and with hardly any more risk, being able to bet ‘bigger’. With these returns, plus my job, I will start year 6 (dec 1st 2013-dec 1st 2014) with €160.000. I siphon a small bit just to give myself a pat on the back, and to get a nice bottle for myself now and then, but trying to build up to a €300.000 portfolio. the yearly profit would come down on €3000 a month (after tax), so I can purely work from home and focus myself better. Living stingy means I could keep increasing my portfolio-size by roughly 7% a year without having to work next to this.

    Basic figures: Independent from year 11 (01-dec-’18) to having doubled my portfolio and allowance by year 20 (01-dec-’27). But this would assume that even though I play a low risk game with 5 years of practice, I’d be consistent and my life would be.

    Sorry for the enormous bookwork, I hope this helped some people. It’s not easy, but it’s not impossible. However, basic math states that 12% yearly means bankroll/100 = monthly profit. So it’s fun, if you’re good you can make quite a bit of money, but the true fun starts when you can play with €50.000/$60.000/800.000JPY, without you NEEDING that money for survival. Then all profit is sexy, the source of income doesn’t run out, it actually grows. (FYI, those numbers are more based on how much it comparatively gets you in the economy of the currency, rather than accurate exchange rates).

    After ALL this, I actually only have 2 tips: Be the ‘right’ amount of patient AND try to keep about 5% to 10% un-invested so you can add some strength to a good investment without collapsing another trade to make it happen. The Rotation fund shouldn’t be dormant long, but be smart with it, if you got 3 horses, it could pay to wait 30 minutes to 3 hours before injecting the ‘steroids’.

    Take care, and good luck on it all!

  • 3d

    The market can mess with your mind and suck you in. But I’m wondering if I step back, where does the market turn, can I determine that and act on it? I’m talking about yearly turns– looking at BPNYA and % stocks above 50MA, for example. It seems there are some pretty clear points. For example, when the percent of NYSE stocks above 50MA drops below 30, if you buy calls on index or sector-related etfs (think TNA or SOXX or XLK) when the % above 50MA climbs back above 30, then you are hitting home runs. And if you’re buying calls you really don’t care if it drops back down a little until it goes back up (provided you give yourself enough time). And likewise, if you examine and focus on what are pretty good bets of market turn downward (again think broad breadth indicators), the risk there I think is higher but you still have good opportunities. These are just thoughts. It all looks good on paper.

  • Ed

    Great post. Re your comments on “Time Frame”, the problem is with daytrading, commissions really bite and getting an average result of >1R on winning trades is quite hard. Many trades have to be closed at scratch or result in a 1R loss. So you have to be right over 60% to survive (hard). The benefit of longer term trading is that an average of 3R on winning trades may be achievable so win rate can be quite low eg 40%.

    • http://www.roguetraderette.com/ Jessica Peletier

      Commissions do bite, for sure. I don’t know how people can trade 1 minute charts or less, when the spread is 1.7 or more pips. But on a slightly higher timeframe, it’s effect is less – 5 minute is fine, as long as you have some way to get in at really great points.

  • 1Leone

    Surely Size of trading capital, when stating percentage returns, matters? It’s one thing generating a 30% return on $100k than on $100m or $10bn

    • http://www.roguetraderette.com/ Jessica Peletier

      Definitely. Huge funds have to approach things very differently than a private trader, but then again, they also have staff, and lots more money with which to diversify.

  • http://traderhabits.com Eradke

    Futures return math is especially tricky. Many take a small amount and once they reach that they take it all out and start at the small amount again. Rinse and repeat.

  • Richard

    “Most” people will fail. Let’s put the figure on that one, shall we? How about 97%? It’s not worth it. It’s a full-time job. The stress levels cannot be compared with any other human endeavor. “Fees” (i.e. trading losses) required to learn are devastating… and there is no guarantee that you will succeed. At a 97% failure rate, the opposite is true: you are practically guaranteed to fail!

    • Murphy

      ” The stress levels cannot be compared with any other human endeavor. ”

      Crap…there are hundreds of jobs that have higher stress levels…Army Engineers clearing routes in Afghanistan spend 12 hours a day or more in highly stressful environment wearing body armor trying to clear a path for their mates. Any second they might detonate a mine…or miss one and watch a truck full of their mates get blown up, or they will find one and have to clear it. Not to mention the fact that they are high value targets to snipers.

      Just one example, I could come up with 30 more from dozens of other professions that would make trading seem tame.

      By over dramatizing the stress levels you are already setting yourself up for failure. Until you learn its just numbers on a screen and that regardless of what happens, you will still be alive, whole and breathing tomorrow, as will your loved ones, even if it all disappears.

      Once you can do that, then you are able to succeed The fear/stress is only in your head, until you let it go, it, not the market will be what causes your failure.

      • Edward Tran

        @Murphy: What an awesome way to put it!

      • http://www.roguetraderette.com/ Jessica Peletier

        So true. Trading is not stressful when you’ve got it under control. Of course, there are stressful moments like in any job, but in my view if you’re stressed to your eyeballs, you’re doing something wrong and need to change.

  • Kanapaha Lew

    Dear Jess —

    In your list, you forgot a most important item — namely, LUCK.
    See Kahneman, Daniel — “Thinking Fast and Slow”.

    • http://www.roguetraderette.com/ Jessica Peletier

      Luck does play a part – that’s a great topic for a whole new blog post ;)

  • http://twitter.com/DerekBlass Derek Blass

    It would be really great to know what active traders actually make. Something like on Glassdoor, where people can post anonymously. I have been wishing information like that was available, to really determine if this game is financially feasible. Your article was great and well written, but it’s that last dot that I wish someone would connect :)

    • http://www.roguetraderette.com/ Jessica Peletier

      What I made this month I am very happy with, but others would scoff at. It varies so much, and for so many reasons that you’re better off not knowing. Just know it can be huge, but probably won’t be ;)

  • http://www.facebook.com/vlad.ostromensky Vlad Ostromensky

    Have been missing your posts…;)

  • http://www.facebook.com/vlad.ostromensky Vlad Ostromensky

    Love it!!!! :)

    • http://www.roguetraderette.com/ Jessica Peletier

      Thanks Vlad :)

  • Koyasan

    Hi Jess

    Bench marks can be tricky ….. the only way I know is based strictly on past performance of my system and what I can expect going forward. There is of course no guarantee that past performance will be replicated in the future. Specifically I use backtest results over past 3 months (Aud/Usd 30min time frame) and update end of each week. If results deteriate significantly I look to see if I have executed trades according to my rules or maybe the system is losing its edge and needs tweaking. For example one of my strategies (I have four) is based a a trend change indicator and over the past three months these are my benchmark categories and results based on 40:1 leverage:

    Profit/Risk Ratio: 5.7 to 1 ◄▬
    Robustness: 49.0%
    Robust-Adj P/R Ratio: 2.8 to 1 ◄▬
    Total Profit: 79.9%
    Maximum Risk: 14.1%
    Win Rate: 87.5%
    Avg Trade Win/Loss Ratio: 6.1 to 1
    Total Nr Trades: 8
    Avg Trade Duration: 48.4 periods
    Avg Time in Trade: 12.5%
    Avg Time in Profit/Loss: 8.2% 4.3%

    This strategy is very successful but bear in mind it is a trend change strategy (Long to Short) and does not happen often. However it does give me confidence to ‘pull the trigger’ when specific entry and exit conditions are met and more importantly gives me a very specific set of benchmarks to evalute the current performance. Maybe some of the benchmark categories will give you food for thought.

    Thanks for another thought provoking article.

    • http://www.roguetraderette.com/ Jessica Peletier

      Thanks for your response :)

  • http://twitter.com/TraderVancouver TraderVancouver

    Great article. Particularly your comments on Time Frame. Nicely done.

    • http://www.roguetraderette.com/ Jessica Peletier

      Thank you :)

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