If the account never has a margin deficit, then the risk is just against the funds deposited.
Leverage and typical annual returns, what am I missing?
- Thread starter BillySimas
- Start date
If the account never has a margin deficit, then the risk is just against the funds deposited.
You work for a brokerage firm, and you're asking this kind of...basic...question?
It's leverage/Options...they move much more volatile than the underlying stock...therefore, you can make much more...
Theoretically, you can make Way more than "100-300%" annually -- and it's not as rare or hard as winning the lottery.
it's just a matter of establishing a working formula, and letting compounding work its magic.
Why are you even asking this (you said you work at a brokerage)...you have access to their accounts...you can see their entire game plans/trades...
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+ emotion
EquityGuy4321 provided a good answer: a possible explanation to what you're seeing.
It may be that the actual exposure risk never exceeds the balance in the brokerage account.
The point is that the risk, for example on a per trade basis, would be calculated with respect to the total notional amount. Therefore, it would not be logical to express gains as a percentage of the brokerage account balance.
I've done this with a CFD account where leverage was 1:10. I was not using the leverage as a means for more buying power, but I did make use of it so that I could keep the majority of my allocated trading capital in a safer place. Exposure risk did exceed the balance in the CFD account, but was never greater than total allocated trading capital.
Somebody who saw only my CFD account balance over time would see a volatile equity curve - a 10x magnification of what it really was.
It may be that the actual exposure risk never exceeds the balance in the brokerage account.
The point is that the risk, for example on a per trade basis, would be calculated with respect to the total notional amount. Therefore, it would not be logical to express gains as a percentage of the brokerage account balance.
I've done this with a CFD account where leverage was 1:10. I was not using the leverage as a means for more buying power, but I did make use of it so that I could keep the majority of my allocated trading capital in a safer place. Exposure risk did exceed the balance in the CFD account, but was never greater than total allocated trading capital.
Somebody who saw only my CFD account balance over time would see a volatile equity curve - a 10x magnification of what it really was.
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I've come across several accounts of traders..
What proportion of your client base is this? If we assume that the average trader loses say 10% a year; with a variance of annual returns of 50% (assuming all traders have the same volatility of returns), then with a large enough sample you're always going to have traders who for a few years can make loadsamoney (and a similar number who will completely blow up). That's just statistics; it may or may not tell you anything interesting about those particular traders.
Of course these guys could have genuine skill, but you probably don't have enough evidence to tell you that (I'd need to see the monthly p&l of your entire client base to tell you if their returns really are statistically significant).
GAT
@globalarbtrader But without a large sample, given insight into trading behavior, wouldn't you be able to tell whether there were true skill at hand?
Surely the guy who appears to be systematic might have a higher probability of skill than the guy who is taking pot shots in CL?
Surely the guy who appears to be systematic might have a higher probability of skill than the guy who is taking pot shots in CL?
Perhaps. Given a set of complete trading records, and some backtests of the sort of you can do the following:
- using a series of bayesian tests, work out which system or blend of systems the guy is most likely to be running
- backtest the system or blend of systems
This means if you can get a good fit you can push a few year track record back as far as your price data will go.
This only works if you can replicate roughly what the guy is doing. Note this kind of test would have picked up Madoff in a few seconds (even using the fake fill data).
You can of course do this with just the return series, however it's clearly better if you've got a record of actual buys and sells since that can give you much more statistical information. I think there is an academic paper on this stuff from a couple of years ago. I'll see if I can find it.
This kind of reverse engineering is common at the more sophisticated fund of funds shops.
By the way if anyone wants to play with this stuff I'd be happy to release my full trading record. It would be a fun project for someone to see if they can get this to work.
GAT