Do you trade for an income or for a compound effect?

[sef88]

Great blog post on capital management and compounding - distinctions between full compounding, half compounding and fixed capital.

https://qoppac.blogspot.com/search?q=compounding

 

[Snuskpelle]

IMO you might as well let your account grow until you reach capacity limits (whether that's due to market liquidity or your personal risk tolerance). You're not gonna be happy trying to make say $4000 per month consistently out of a $20k account anyhow.

 

[MrMuppet]

Most strategies don't scale, thus it doesn't make sense to compound.
I trade for income and set some assets aside to generate cash flow.

 

[sef88]

I believe it is a choice if you go for an income or compound and it should not be dependent on your strategy. Your strategy should depend on your choice of income or compounding.

So if it is a choice, what do you prefer?

Do you have an example of a strategy that is negatively skewed that would make it worth to trade it? I believe every strategy that is worth trading must have a positive skewed reward/risk.

Short volatility strategies like straddles, strangles and butterflies. There's positive expected value over long run but huge negative skew; if you don't place any risk filters, you will probably be killed. Always think of the worst that can happen (1987 crash, 2008, Covid)

https://www.aqr.com/Insights/Research/White-Papers/Understanding-the-Volatility-Risk-Premium

 

[danielc1]

Great blog post on capital management and compounding - distinctions between full compounding, half compounding and fixed capital.

https://qoppac.blogspot.com/search?q=compounding

Thanks for sharing, I will look into it.

 

[SteveM]

Compound effect is the holy grail when it comes to trading (well, that and strict money management).

You cannot make big money trading without both.

For example. These are the 5-year results of a real system that I trade:

Starting balance: $10K
Trade size: $10K fixed size per trade
$10K becomes $38K in 4 years

Take the same exact system, and reinvest all profits back into your trade size (example: you start with $10K, if you make $500 profit on your first trade, the next trade size is $10,500, and so on).

Reinvesting those profits turns the $38K system above into $475K over the same period. That is the power of a high frequency system coupled with compounding.

Final note - what I said above has nothing to do with trading using big leverage.

 

[newwurldmn]

I believe it is a choice if you go for an income or compound and it should not be dependent on your strategy. Your strategy should depend on your choice of income or compounding.

So if it is a choice, what do you prefer?

Do you have an example of a strategy that is negatively skewed that would make it worth to trade it? I believe every strategy that is worth trading must have a positive skewed reward/risk.

Chicken and egg.

If you need income, you will have to find strategies appropriate for that.

If you find a strategy, you will need to decide how is best to capitalize it.

 

[MrMuppet]

Compound effect is the holy grail when it comes to trading (well, that and strict money management).

You cannot make big money trading without both.

For example. These are the 5-year results of a real system that I trade:

Starting balance: $10K
Trade size: $10K fixed size per trade
$10K becomes $38K in 4 years

Take the same exact system, and reinvest all profits back into your trade size (example: you start with $10K, if you make $500 profit on your first trade, the next trade size is $10,500, and so on).

Reinvesting those profits turns the $38K system above into $475K over the same period. That is the power of a high frequency system coupled with compounding.

Final note - what I said above has nothing to do with trading using big leverage.

I don't agree:
Compounding is necessary for asset management and long term investing.

For trading it doesn't matter. You can take 50k buying power and make 15k every single month. Yet, since you trade super illiquid and volatile microcaps you won't ever make more than 15k no matter how much more money you throw at it. You cannot compount, but you make a decent living.

When it comes to investing, you can only dream about 30% monthly returns. However, you can probably throw millions into a single cashflow generator, do nothing and watch it grow.

 

[virtusa]

Compound effect is the holy grail when it comes to trading (well, that and strict money management).

You cannot make big money trading without both.

For example. These are the 5-year results of a real system that I trade:

Starting balance: $10K
Trade size: $10K fixed size per trade
$10K becomes $38K in 4 years

Take the same exact system, and reinvest all profits back into your trade size (example: you start with $10K, if you make $500 profit on your first trade, the next trade size is $10,500, and so on).

Reinvesting those profits turns the $38K system above into $475K over the same period. That is the power of a high frequency system coupled with compounding.

Final note - what I said above has nothing to do with trading using big leverage.

I posted last saturday a chart that clearly shows the power of compounding. I also wrote that most people on ET have no clue about compounding (combined with leverage and frequency).
https://elitetrader.com/et/threads/...10-cents-a-rt-2021.353874/page-2#post-5282082

 

[newwurldmn]

I don't agree:
Compounding is necessary for asset management and long term investing.

For trading it doesn't matter. You can take 50k buying power and make 15k every single month. Yet, since you trade super illiquid and volatile microcaps you won't ever make more than 15k no matter how much more money you throw at it. You cannot compount, but you make a decent living.

When it comes to investing, you can only dream about 30% monthly returns. However, you can probably throw millions into a single cashflow generator, do nothing and watch it grow.

you can compound trading results if your strategy is scalable.