Days off per year!
How do you measure your performance?
- Thread starter leapfrog
- Start date
This is an interesting thread... to simplify matters, lets take the example of a 1-lot ES trader... the S&P currently has a value of 933, so at $50 a point an ES contract has a face value of $46,650.
Now let's assume the 1-lot ES trader starts with $5000 in his account, which comprises enough for intraday margin and a buffer for drawdowns.
Now, lets assume that our 1-lot ES trader makes 20 points net in his first month (let's further assume that our guy is not a newbie, but has experience of trading stocks, but is dabbling in ES to get a feel for it alongside his primary stock trading)... given these assumptions, I assert that a point a day net of trading costs is highly achievable in ES, being a modest and realistic assumption... so, at the end of the month, our 1-lot ES trader now has $6000 in his account...
How do we measure his performance?
Lets dig deeper... lets assume that the ES trader had at all times used a 0.75 point stop loss, since he is a scalper... $37.50 is the value of his stop, which is 0.75% of his initial capital...
We now have several ways to measure his performance:
1) $1000 / $5000 = 20% return on initial deposit
2) $1000 / $46,650 = 2% return on initial face value of the contract
3) the actual dollar profit of $1000
4) the net points of profit, which is 20
5) 27x the average stop loss of 0.75 points
(Please note that the above numbers are merely approximations, since further assumptions would have to be made about position sizing, trade management etc... but for simplicity, we will regard these numbers as broadly acceptable...)
I am inclined to believe that 5) is the best measure of trading acumen, since trading performance should be a reflection of how you are compensated for bearing risk, as opposed to being contingent on a somewhat arbitrary combination of margin choice and start-up capital... in my view, we need to move away from the convention of % returns and/or absolute $ values, if we are to arrive at a consistent yardstick for measuring trading performance...
Now let's assume the 1-lot ES trader starts with $5000 in his account, which comprises enough for intraday margin and a buffer for drawdowns.
Now, lets assume that our 1-lot ES trader makes 20 points net in his first month (let's further assume that our guy is not a newbie, but has experience of trading stocks, but is dabbling in ES to get a feel for it alongside his primary stock trading)... given these assumptions, I assert that a point a day net of trading costs is highly achievable in ES, being a modest and realistic assumption... so, at the end of the month, our 1-lot ES trader now has $6000 in his account...
How do we measure his performance?
Lets dig deeper... lets assume that the ES trader had at all times used a 0.75 point stop loss, since he is a scalper... $37.50 is the value of his stop, which is 0.75% of his initial capital...
We now have several ways to measure his performance:
1) $1000 / $5000 = 20% return on initial deposit
2) $1000 / $46,650 = 2% return on initial face value of the contract
3) the actual dollar profit of $1000
4) the net points of profit, which is 20
5) 27x the average stop loss of 0.75 points
(Please note that the above numbers are merely approximations, since further assumptions would have to be made about position sizing, trade management etc... but for simplicity, we will regard these numbers as broadly acceptable...)
I am inclined to believe that 5) is the best measure of trading acumen, since trading performance should be a reflection of how you are compensated for bearing risk, as opposed to being contingent on a somewhat arbitrary combination of margin choice and start-up capital... in my view, we need to move away from the convention of % returns and/or absolute $ values, if we are to arrive at a consistent yardstick for measuring trading performance...
Hurray! A most thoughtful answer to my original question.
Would option 5) be meaningful as an absolute? The more months that pass by the higher this number will get. Perhaps you are getting at the "expectancy" of this trading system, which would be 1.33 (pretty good).
But with that in hand, we next have to look at money management, which then gets us back to $ and % at the end of the day.
That is why I tend to think an annualized & return on risk equity put aside for our "trading business" is the most level playing field we should use between many various types of traders.
Your thoughts? - Rob.
Would option 5) be meaningful as an absolute? The more months that pass by the higher this number will get. Perhaps you are getting at the "expectancy" of this trading system, which would be 1.33 (pretty good).
But with that in hand, we next have to look at money management, which then gets us back to $ and % at the end of the day.
That is why I tend to think an annualized & return on risk equity put aside for our "trading business" is the most level playing field we should use between many various types of traders.
Your thoughts? - Rob.
There is another way to measure one's performance.
You can use Sharpe ratio against your trades.
1. If you do not have the tool, use a spreadsheet and
dump your reference timeframe of data to it. You need
at least a month worth of data.
e.g. 1-min emini sp.
2. Then add the traded prices and size to the spreadsheet.
3. Create an equity column to reflect the equity changes
at the close of each time period.
4. Finally apply Sharpe ratio calculation onto the equity column.
If you do not have intraday data, then use daily equity changes
instead. But in this case, you need at least 3-months worth of
equity data.
For discretionary daytraders, I have seen Sharpe > 15.
You may make a lot of money, becuase that could be because of
very bad habits combined with some luck. If that is the case,
your Sharpe will be quite low (< 2).
You may make only little money, but if your Sharpe ratio is high,
you are doing something right and keep doing it will eventually
lead to more profit with proper sizing based on the equity is applied.
You can use Sharpe ratio against your trades.
1. If you do not have the tool, use a spreadsheet and
dump your reference timeframe of data to it. You need
at least a month worth of data.
e.g. 1-min emini sp.
2. Then add the traded prices and size to the spreadsheet.
3. Create an equity column to reflect the equity changes
at the close of each time period.
4. Finally apply Sharpe ratio calculation onto the equity column.
If you do not have intraday data, then use daily equity changes
instead. But in this case, you need at least 3-months worth of
equity data.
For discretionary daytraders, I have seen Sharpe > 15.
You may make a lot of money, becuase that could be because of
very bad habits combined with some luck. If that is the case,
your Sharpe will be quite low (< 2).
You may make only little money, but if your Sharpe ratio is high,
you are doing something right and keep doing it will eventually
lead to more profit with proper sizing based on the equity is applied.
I keep it very simple. Daily profit goal of $800 bucks a day. This is really difficult as an average, since some days are good and some days are bad. But it keeps me focused and on track.
If I take vacation or the day off.. that comes off the daily average. No fudging.
The longer term goal is early retirement for both me and my spouse. Happy to say we are on track... knock on wood.
I use excel and update the averages every two weeks.
If I take vacation or the day off.. that comes off the daily average. No fudging.
The longer term goal is early retirement for both me and my spouse. Happy to say we are on track... knock on wood.
I use excel and update the averages every two weeks.
A few things I learned as an economics major:
* A clear distinction exists between economic profit and accounting profit.
* Economic profits that arise out of a free market economy represent anomolies that indicate market inefficiency.
Accounting profit = Revenue - Cost
Economic profit = Revenue - Cost - Opportunity Costs
Opportunity Cost: The cost of forgoing one opportunity in favor of another.
As a trader, if you have a 100k account that you grow into a 151k account in one year and based on your experience and skills you're worth 50k a year in the job market then your profits follow:
Accounting Profit = 151 - 100 = 51k
Economic Profit = 151 - 100 - 50 = 1k
* A clear distinction exists between economic profit and accounting profit.
* Economic profits that arise out of a free market economy represent anomolies that indicate market inefficiency.
Accounting profit = Revenue - Cost
Economic profit = Revenue - Cost - Opportunity Costs
Opportunity Cost: The cost of forgoing one opportunity in favor of another.
As a trader, if you have a 100k account that you grow into a 151k account in one year and based on your experience and skills you're worth 50k a year in the job market then your profits follow:
Accounting Profit = 151 - 100 = 51k
Economic Profit = 151 - 100 - 50 = 1k
nice.
When I move people's money to making money it is usually a consequence of looking at lost opportunity costs. They decide to not screw away their capital any longer.
On the otherhand I will hire three college kids this SEP. Their wages will be augmented by my slipping over the the school and having their tuition returned to them since I will pick it up after they get in the groove. This is a very high ROI investment for me even though it seems to not be measurable.
I have a buddy who gives out 200 full scholarships a year. He is definitely one happy camper. His ROE is measured a little differently than where most people operate. He sneaks around looking for kids. LOL....
As I pointed out in a thread I started, the best/highest returns were not necessarily indicative of survivors.
Measures of performance should not only take into consideration returns (the results of your trading edge and acumen), but also consistency/surviveability via money management (Sharpe ratio, max monthly drawdown, volatility, time required to recover from drawdown, etc.).
95% of traders wash out. Another 50% will wash out after that, leaving the truly elite traders. What do you think makes the final difference between the novices, the average, and the elite?
Measures of performance should not only take into consideration returns (the results of your trading edge and acumen), but also consistency/surviveability via money management (Sharpe ratio, max monthly drawdown, volatility, time required to recover from drawdown, etc.).
95% of traders wash out. Another 50% will wash out after that, leaving the truly elite traders. What do you think makes the final difference between the novices, the average, and the elite?