Let's get real about returns

Quote from vulture:

The original post by AAA has a few flaws in it for one reason. First, comparing leveraged and deleveraged returns are kind of like a footnote to most of the outsized return numbers that we hear about. If you study the manager profiles of CTA's, CPO's, etc you find the MER or margin to equity ratio. Since that number varies from manager to manager, you almost always have to adjust the return according to the amount of deleveraging. In reality, once you deleverage and then subtract the sizable management and incentive fees, you find alot of these managers are not in the same league you might have thought they were..

The sword slices both ways. Candletrader referred to it in the previous post, the drawdowns can be excessive if you want to use the leverage available.
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Yeah. I just made a big post about that LOL.

The secret is to find ways to decrease your risk while increasing your leverage antiproportionally.

I.e. Everytime you find a way to reduce your real risk by 50%, you can increase your leverage by 100%.

I think, as a basic figure to start with in this pursuit, we shouldn't exceed our exposure to more than 2% net risk.

Some people don't seem to have a problem risking ie. 5% on a trade. To me, that's mind-boggling.


Sincerely,
~Scientist
 
Thanks for your message Brother Scientist... my methodologies (when taken together) are robust through most market conditions, and my drawdowns are acceptable to me (you may yourself find my drawdowns acceptable if you saw the context in which they have occurred i.e. the longer term trend of my equity curve over the last few years)... volatile equity curve drawdowns are just part of my way of doing things; without them I doubt I would have gotten to where I am today... I always keep an eye on how my equity curve is going, and I recommend to all traders to integrate the technical behavior of their equity curve into their money management system...

If I ever do decide to set up a hedge fund (which at the moment I doubt very much), I will disclose an audit of my historical trading, so that my clients can see all the details...


Quote from Scientist:


Brother Candletrader! :)

Regarding the 20% dd's - May I ask what kind of stop-losses you use? You must be using stops in excess of 2-3 pts in order to do that? I would never accept such hight dd's, I'd believe they'd wipe me out eventually! And/or do you use high margin? This probably is the issue. (As discussed in my previous post)

Maybe you should look out for shorter timeframes? I tend to not to be willing to risk more than 2% per trade, I.e. when I scalp, I would not take into account more than 6T (8T/2pts including slippage), which is 2% risk on my $5k-pc rule (which I use when I'm scalping).

Do you trade reversals or trends/retracements? What's your style? If your risks are so high, you might lower it by trading (short-term) retracements, since stops are very small.

Retest-failures off daily highs/lows, particularly if supported through Stoch/RSI (double/triple) divergences or even price projections can also be very profitable and have a high R:R.
Particularly during the typical S&P reversal times.

I would also recommend that you always monitor and chart at least the NQ, if not even the YM next to your ES - To look for correlation, but also to maybe enter a trade in these issues if the setup is better than the ES - Often the ES don't "quite get there" on i.e. a retest-failure.

Correlation, to me, is extremely important when monitoring the ES. While I mainly trade the ES (liquidity, lower commissions), it is technically rather random compared to the NQ, for example.

I've run countless tests and systems on both, and figured out that the NQ are a lot more "technically reliable". Even if you have a look at programs like OT (OmniTrader) that generate automatic trading signals by testing hundreds of TA indicators, you get staggering results on the NQ, while it doesn't seem to spit out much at all in returns on the ES!

Many people poo-poo OmniTrader. I found that if you have very good knowledge of TA, you can do amazing things with it. Now you can even develop trading systems in it! I think in terms of systems development, it will soon beat TradeStation, the way eSignal just has and WealthLab -long- has.

Anyway, I would personally say that NQ is much better to trade with a purely technical/mechanical trade-system and ES is better suited for "discretionary trading".

However, if you're trading "discretionary", then the ES are better, since mechanical systems don't get such a good bite of it's opportunities and "human discretion" rules on the ES. Also, the NQ are a "leading indicator" for you if you're trading the ES, since the ES are "following" the NQ.

The reason, as we know, is that the YM is the primary market, while NQ is the speculative market and the ES find themselves "wedged" right in between...


Also, you said that commissions take a lot of your deal? You might be able to negotiate professional rates!

Are you with IB? If you're doing more than 350CRT (contract-round-turns), which would be 35RT on 10 contracts per month,
it would be worth going with i.e. RemotePro by FFasttrade, which offers you $3.32/RT rather than IB's $4.80/RT, so you'd be saving $1.48/RT!

If you're doing just 5RT per day on 10 contracts, you'd be saving yourself $74/day - $1,480/month - $17,760/pa

If you're doing (scalping-style) 20RT per day on 10c's, you'd even be saving $296/day - $5,920/month - $71,040/pa!

Only downside is that you've to shell out $550/month for the platform. However, if you're doing high-volume (>350CRT/M), it could be worth it.

FFastTrade also claim that they've got the fastest execution and feed in the industry. Ask them about it.

It would be good to find out if there are better rates out there. As soon as my volume gets to the next higher level, I'll certainly try to negotiate more. Remember - At the end of the day, they all want your money! I think there's a chat about this issue on ET on Tuesday.


Yours Sincerely,
~The Scientist :cool:



Alter Ipse Amicus. - <i>A friend is another self.</i>
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Quote from candletrader:

Thanks for your message Brother Scientist... my methodologies (when taken together) are robust through most market conditions, and my drawdowns are acceptable to me (you may yourself find my drawdowns acceptable if you saw the context in which they have occurred i.e. the longer term trend of my equity curve over the last few years)... volatile equity curve drawdowns are just part of my way of doing things; without them I doubt I would have gotten to where I am today... I always keep an eye on how my equity curve is going, and I recommend to all traders to integrate the technical behavior of their equity curve into their money management system...
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Dear Brother Candletrader,

There is a book by Daryl Guppy (my favourite Guppy book) called;
"Better Trading - Money and Risk Management"

It includes (as detailed on front cover):
-Using Risk Management to improve returns
-Protecting Capital and Profits
-Better ways to add to winning Trades
-Using Trend Risk to boost Profits

And many more. But basically it's a book about risk management and it discusses equity curves and position risk/sizing etc in quite large detail. I loved this book from the day I bought it.

I thought it might help, since it hasn't been published in the USA, so here's the link where you can buy it;
http://www.guppytraders.com/gup64.htm


All the Best in Your Endeavours, Brother Candletrader,

Yours Sincerely,
~The Scientist
 
Why not simply state your average annual return or 1,2,& 3 yr returns and your corresponding beta - to account for the leverage....this would put everyone's risk adjusted returns on the same playing field. Then we could truly determine those positive alpha traders!


20+% drawdown candletrader??!!!! UGHH, you have cahones of titanium mi amigo.....but hats off to you for the massive discipline this would obviously take.

Had my worst drawdown to date about 3 weeks ago, 2.1% of the portfolio. Got hit with a bunch of busted trades.
 
Quote from MR.NBBO:

Had my worst drawdown to date about 3 weeks ago, 2.1% of the portfolio. Got hit with a bunch of busted trades.
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I guess it's 9th losing day in your 7 years trading career, am I right?
http://www.elitetrader.com/vb/showthread.php?s=&postid=261456#post261456

There're two possible explanations:

1) There's sharp disparity between
the best CTA's & hedge funds
vs
the best individual traders
performance or big vs small players, if you like to call it like that.

2) People who claim such superb performance are not telling the true.
 
Quote from MR.NBBO:



20+% drawdown candletrader??!!!! UGHH, you have cahones of titanium mi amigo.....but hats off to you for the massive discipline this would obviously take.

Had my worst drawdown to date about 3 weeks ago, 2.1% of the portfolio. Got hit with a bunch of busted trades.
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Actually the discipline is not massive... I have complete faith in my methodologies and in the long run trend of my equity curve... that confidence allows me to absorb drawdowns with the mentality that is akin to knowing that I will be just fine... the positive flipside to the drawdown volatility is of course the disproportionate upward thrusts on my equity curve...
 
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