How Do Professional Traders Define Profitablity

As a trader, I define profitability as income <> the opportunity cost.

The opportunity cost of allocating my funds towards an alternative investment.

The opportunity cost of allocating my time towards a different career or venture.

If my income and other benefits from trading are not greater than the opportunity cost then i'm not making an optimal business decision.
 
If the S&P went down for the year, say 20% and a trader lost 10%, would you say the trader is profitable? Obviously not. Therefore comparing against the index doesn't make sense.

A better way would be to:

1) Did you make money for the year after commissions and taxes? If yes, goto 2), otherwise you were not profitable.
2) Estimate the number of hours spent trading (include looking at screens, analysis, time spent on elitetrader and other forums) and work out your hourly profit rate. If this is better than what you could have made by being in a decent job particular to your education, experience etc, then yes, you were profitable.
 
Visaria said:
If the S&P went down for the year, say 20% and a trader lost 10%, would you say the trader is profitable? Obviously not. Therefore comparing against the index doesn't make sense.
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If you are trading for income that make sense.

But if I am trading to increase my total asset and do not depend on trading profit for livelihood, and have a longer time horizon than one year, I would argue that I did well that year if I lost money but were 10% better than the SPY benchmark. If I can do that year after year, I would be quite well off in the not too distant future.:)

Best wishes to you.
 
ironchef said:
If you are trading for income that make sense.

But if I am trading to increase my total asset and do not depend on trading profit for livelihood, and have a longer time horizon than one year, I would argue that I did well that year if I lost money but were 10% better than the SPY benchmark. If I can do that year after year, I would be quite well off in the not too distant future.:)

Best wishes to you.
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You aren't a daytrader, so most guys here aren't going to think like this. Personally I look at monthly and yearly PnL. The most important is average annual income from trading.
 
ironchef said:
I am not a professional trader and I define profitability as when I beat the SPY benchmark for that year and longer term beat the cum SPY returns.

Do you define a profitable year differently?
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in general one is striving for success

in human (capitalistic) society success usually results in profitability

but in order to succeed one must to do the right thing in chosen filed

so concentration of the trader should be on constantly verifying, checking am I doing the right thing (profitability will follow)

any moron can be profitable... some lucky morons can be profitable for quite a while...

but no morons can do the right thing, that is their problem :)
 
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and regarding the term professional

i think the person either trader or not

those who are not traders trade either as a hobby (enjoying themselves) or with aspiration to become a trader (learning, which is not really a lot of joy)

for those for whom trading is hobby profitability is really accidental

for those who wants to become the trader it is very important not to confuse profitability with ability
 
ironchef said:
Do you define a profitable year differently?
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why year? why not ten years or one week?

what time has to do with it?

professionally speaking if one still strives to improve himself as a trader (investor) he should be looking for improving efficiency, which is imho should be defined not just as the profit but as the profit per trade per unit of time (year, week, day, minute) after making statistically significant number of trades
 
ironchef said:
I am not a professional trader and I define profitability as when I beat the SPY benchmark for that year and longer term beat the cum SPY returns.

Do you define a profitable year differently?
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Man, I'm just trying to beat the long bond. SPY is for gamblers and hedge funds. We are all white shoe over here, very exclusive. otherwise, for a trader annual percentage doesn't mean much, especially when 25% in a day is not uncommon. But you must take into account, I would never put all my money in trading for a serious return.
 
Some pros would say: If you have a written trading plan and plan all your trades with the profit & loss exits in advance than you a professional trader.

Do professional traders have flat or losing years? Of course they do if they have been trading long enough it is inevitable. If a persons sole income is from trading and they have been living from the profits - despite having a losing or flat year every so often they are a profitable trader.
 
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Robert Morse said:
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.
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Good points. I think if you are a professional trader, like the other posters said, you trade for income you go by different set of objectives.

From reading all the posts on trading and this professional trading thread, pro traders and those trading for a living have much higher expectations of profitability. I read about folks with profit objectives of the order of 5-10% a month or more vs if I can get 5-10% a year over SPY I would be a happy camper. And then there is the question of scalability, if I can get 10% a month with $100K can I get 10% with $1-10M?

If 5-10% a month trading is very doable, I really need to learn how to do that.

Regards,
 
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