How Do Professional Traders Define Profitablity
- Thread starter ironchef
- Start date
Your definition sounds reasonable to me.
Pro traders talk about profitability in terms of average dollars per month. Sometimes bank traders will talk about dolllars per year.
Investors and asset managers think in terms of return and indexes.
If I were to ask another trader about his pnl I'd be very surprised and confused to hear anything other than dollars per month.
Investors and asset managers think in terms of return and indexes.
If I were to ask another trader about his pnl I'd be very surprised and confused to hear anything other than dollars per month.
Thank you all for your comments. Very helpful.
I asked because I think there are differences in mindset and different approaches depending on one's definition of profitability. For example, an investor trades to increase his/her overall asset, i.e., like asset managers. A professional trader may focus on income vs increasing his assets under management.....
In that regard, I trade like an asset manager. My only objective is to increase my overall asset and beat a benchmark. Perhaps someone who trades for a living would focus on steady income per month like garachen said.
The followup question is: Are there fundamental differences in trading style, techniques if you are trading for income vs increase your overall asset base? To start the discussion, my postulate is income traders tend to trade and think short term so day trade or shorter term swing trade tend to be their approach. Asset traders trade longer terms instruments?
Regards,
I asked because I think there are differences in mindset and different approaches depending on one's definition of profitability. For example, an investor trades to increase his/her overall asset, i.e., like asset managers. A professional trader may focus on income vs increasing his assets under management.....
In that regard, I trade like an asset manager. My only objective is to increase my overall asset and beat a benchmark. Perhaps someone who trades for a living would focus on steady income per month like garachen said.
The followup question is: Are there fundamental differences in trading style, techniques if you are trading for income vs increase your overall asset base? To start the discussion, my postulate is income traders tend to trade and think short term so day trade or shorter term swing trade tend to be their approach. Asset traders trade longer terms instruments?
Regards,
Profitability is technically anything above one cent over cost.
But I personally define profitable trading as making atleast what the average American person makes in a year or more
But I personally define profitable trading as making atleast what the average American person makes in a year or more
Profitable is dead easy. Have you made money after commissions and all other costs? This is an absolute measure.
However it can make sense to look at your relative performance against benchmarks. If you are never short stocks, and only invest in the S&P, then looking at your performance against the S&P makes sense. And yes you need to adjust for risk. But for many other traders it wouldn't.
Hedge funds tend to measure themselves against a combination of:
- absolute performance
- performance against stocks, bonds or a fixed portfolio of both (if trumping their diversification benefit)
- alpha against standard risk factors
- alpha against simple "alternative beta" replications of their underlying strategy, or alternative risk factors if you prefer that name
- key competitors
- the standard indices for their strategy (eg Barclay or SG for managed futures)
- for systematic managers, the model they had last year, and the model they're planning to use next year
The best comparison will then be included in the sales literature
GAT
Robert Morse
Sponsor
If you are an investor, this is a great metric. If you are an active trader, you have to wonder if you can't beat the S & P performance, why not just buy the SPY? I think where an active trader shines is in down and sideways markets.
This is more down to style. If you have a strategy with a high win rate, eg market making / scalping then that would be logical to think in terms of a monthly income (with a big cash buffer for the inevitable sharp losses). If you trade more slowly, and have a low win rate, then thinking about income is madness.
It also depends on whether you are living off your trading income, or have a job on the side. In the latter case focusing on assets makes far more sense.
Personally I think it's dangerous to think in terms of income. A good approach that has worked for me is to mentally cream off all money made above the high water mark and then call that "trading income" (at some point I'll actually cream it off, and transfer it to another account and buy income producing assets with it). Any losses made are "mark to market" losses like on stock I haven't sold: they don't give me a negative income (since I don't have to put cash in to the account to keep it going) but affect my household balance sheet on the asset side.
If I don't cream off any money in a given year then that is a year with zero trading income.
That leads to some interesting differences. In the first column is the actual % income I made. In the second column is the "mental" income I made. The most important thing is that the third year of trading shows a positive number because I made a new HWM, even though I'm actually down for this year.
Year 1: 57% 64%
Year 2: 40% 37%
Year 3 (so far): -1% 7%
GAT
It depends: you are managing peoples money so for most providers beating the benchmark index is the goal; you are generating income which means making the same as you would in a job; you are generating capital which is buy low sell high such as starting a business, income may or may not be part of that process.
Almost all traders look to generate income either as the primary, your salary in a job, or as a secondary income, somewhere around 20% of primary or an index basis. Anything below these and you have to question your time vs return unless it's a hobby.
The alternative approach is to target 2%/mth return on capital, so you can then work out what you need to do. If you have gross income requirements of $4,000/mth you will need $200,000 capital with no margin of error, in reality you should have 1.5x to 2x that capital to provide headroom. All very simple.