One trader's story, with returns history

Quote from MarketScientist:

The strategies I ran returned about 110% in 2004, 50% in 2005, 110% in 2006, 60% in 2007, -20% in 2008, 80% in 2009, and have returned about 50% in 2010 so far. You can see the longer-term nature of the strategy in the 2008 return, when I, like many hedge funds, found out that what had worked well in the past stopped working. It was a difficult period, only made easier by the knowledge that the market did even worse.
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LOL... I must be your anti-clone. What worked modestly for me in other years worked suiperbly in 2008 and 2009. Congrats on your performance.
 
Quote from MarketScientist:

Thanks everybody for the kind comments.

I'm able to work full time because I live in Europe and trade the US markets in the evening. The job is strictly 9-5 (which was one of the criteria for choosing it). Also I live 15 minutes away from the office. If I had to travel or work overtime, focusing on the market would become more difficult.

When I come home, I typically open my trading app and follow the market until it closes. I spend about 3 hours in front of the screen per day.

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This is why I wish I could get a job in Hawaii. Does anyone out there have a job for me in Hawaii (that is legal)? :-) I hate having to choose between steady income and the market, but I live in the wrong time zone.
 
Of all the things you mentioned I think this is the most important. I have a Master's in Computational Finance from a University that parallels an Ivy League program and I can easily say the coursework I did in Statistical Finance are the reasons for my success. There are two elements to trading -- science and art. You have to learn the science first. Then you become an artist applying scientific methods. I strongly believe that traditional technical analysis will always lead to failure. And you also said, "you have to be looking in places that others aren't." Bravo!!

Quote from MarketScientist:

- Learn programming, and study as much mathematics and statistics as you can. Being good at these things is a strong indicator that you have what it takes to be a good trader.
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Quote from garchbrooks:

This is why I wish I could get a job in Hawaii. Does anyone out there have a job for me in Hawaii (that is legal)? :-) I hate having to choose between steady income and the market, but I live in the wrong time zone.
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No need to goto Hawaii-If you live on west coast trade 6 am(scan the market, check news etc) market opens at 6 30 and trade till 8 AM or so put stops in place and walk away :)

Check back on iphone :) if you cant check at work
 
Might we ask what level of leverage you were using? Or are those cash-on-cash returns?

I'm still looking for strategies, and I think the sweet spot is exactly what you mention.. high Sharpe stuff that lacks the capacity for institutional money to be interested in.
 
a trader trades alpha..of course a good trader can beat the market.

if you can't beat the market you should not be daytrading or swing trading or even position trading. institutions with large long position holdings cannot be the market.

the investor who buys and hold is beta cannot beat the market.




Quote from MarketScientist:

There has always been, and will always be, much debate about whether it's possible to beat the market as an individual trader, and if so, to what extent.

I thought I would post my personal experience of trading on this forum to provide one more data point to prospective traders about the potential, joys and pitfalls of this profession.

I started trading in 2004 after having taken a finance course or two at university. I knew back then that, statistically, chances were I would not succeed. I therefore proceeded cautiously. I opened a trading account with a few thousand dollars and started trading.

The first few months went well though, so I added capital from other, more passive accounts. I was still very aware that failure could happen, so was not willing to risk more than 50% of my liquid net worth on the venture at any point. Indeed I did some stupid things over the first six months, such as going long a stock overnight with 2x my equity. Had that stock announced bad news while the market was closed, I could almost have been wiped out.

In the event, I was lucky and despite my inexperience I continued to post good, though volatile, returns. Regardless, the strategy I was running was very screen time intensive, which was affecting my performance at the day job I held. I evolved the strategy to become more long-term to reduce screen time and to dampen the daily cycle of emotions you had to go through as a day trader.

The evolved strategy was successful also. By this time I had learned to control risk, so that for the past 5 years, there never was a chance of a blow-up. I think this is very important: if you're about 30 like me, there's several decades until retirement, and it doesn't matter if you post good returns for the first 20 years and then, come another 1987 black swan, you blow up. Diversification and hedging (with respect to your total net worth) are important.

The strategies I ran returned about 110% in 2004, 50% in 2005, 110% in 2006, 60% in 2007, -20% in 2008, 80% in 2009, and have returned about 50% in 2010 so far. You can see the longer-term nature of the strategy in the 2008 return, when I, like many hedge funds, found out that what had worked well in the past stopped working. It was a difficult period, only made easier by the knowledge that the market did even worse.

The returns are real, but I make no claim to be a great trader. I'm not. These types of returns are possible for one reason: small (<$1M) account size. It would not be possible to run my strategies with a $100M account, although I believe that after some modifications and acceptance of slightly lower returns, $10M would be feasible.

I have compounded the account without any withdrawals so today my trading income exceeds that from my day job. I continue to hold the job for the daily human interaction and stable income stream it provides, even though I have to admit to a certain detachment from it today.

My advice to new traders:

- You have to approach trading analytically. Although they won't tell you how to trade, reading finance textbooks really helped me get started. There also plenty of ideas in the academic finance literature that can put you on a good path towards developing your own strategy.

- Find your edge in places others aren't looking. Certain strategies will never be implemented by hedge funds or offered by mutual fund firms because they cannot be implemented in large scale. You can have an advantage because you have a small account.

- Learn programming, and study as much mathematics and statistics as you can. Being good at these things is a strong indicator that you have what it takes to be a good trader.

- Start small, and add capital only if you're successful initially. Keep risk under control. Don't put a large portion of your net worth into any single position, and control your overall leverage. Think about what would happen if the market gapped up 25% (unprecedented news on the money supply), down 50% (nuclear strike on the U.S.), or if other similar events took place that have never happened before.

- Yes, you need to be good - according to academic studies, < 5% of those who day trade ever make money. There's a reason why the real prop firms, banks, etc., only hire the best. But on a small account, you don't really need to compete with them - you can find your own niche where competition is more limited and where you can make money. Remember, the pros get paid 10% of P&L, you get paid 100%, so if you find something that works, you can eventually make the same amount of money trading a much smaller account.

- Believe that through hard work, you too can discover something that works, as others have done before. No one is ultimately going to hand you the thing that really matters, the details of a strategy that makes money. You have to discover that yourself, through trial and error. But, it's possible, if you're smart, lucky, and persistent.

As for me, trading is the best thing that ever happened to me (financially, of course - there are other things in life that are more important). I now have the freedom to live anywhere in the world. I do not need to fear redundancy from my day job. I can be myself, say what I want, live a life I want. So, yes, it's tough, but it's possible. Do not let anyone say otherwise.
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Again, thanks everybody for the comments and questions.
Might we ask what level of leverage you were using? Or are those cash-on-cash returns?
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After the initial learning period, I kept beta with respect to the market index under 1, and controlled tail risk. The account was always diversified, with stock positions kept under 20% of equity at all times. So, no leverage was really employed, and the returns are cash returns as provided in the annual statements by my broker.
Would your strategy work if you had to trade at the same time you work?
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Yes, but maintaining focus at work would be very difficult. Some of the analytical work could be done outside market hours, so if you lived in the U.S. on the West Coast, trading in the morning before work would probably be feasible.
Have you considered trading in a prop firm environment?
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I interviewed with a (real) prop firm some years ago. They were trading futures in their own style, and were mainly looking for apprentices. It went nowhere. Looking at the web sites of the professional prop firms like Jane Street Capital, Wolverine, etc., it seems that most of them trade at higher frequencies than I do. It's probably the case that few providers of proprietary capital would be willing to tolerate a 12-month 25%+ drawdown like my strategy experienced in 2008.
 
MS: I absolutely love it. Perfection.

Prop firms would want you to leverage your strategy, but be flat at the end of the day. You'll be asked: can't you just keep a much smaller core portfolio overnight? [ Which of course defeats the purpose of your strategy ]. Oh, and you'll get paid out quarterly, but there will be a 'holdback' on some of your split until the end of the calendar year. Want more capital? They have a credit borrowing facility at 5%. No, you cannot clear another firm - you have to use the firm's clearing 'partner' (haircut).

But don't you have a bad quarter, or you're done.

You could always float a private equity prospectus to a few FoF's to see if you can generate some interest. Just make sure to use color slides in your PowerPoint and mention 'Sharpe Ratio' and 'portable alpha' every other sentence.
 
Interesting. From your statements I infer that you trade comparatively illiquid products. I have had similar experiences. Small cap equities are way more inefficiently priced than big cap equities. Just a small example: often small cap stocks (marketcap < 500 M$) which have predictable seasonable sales and earnings patterns fluctuate a lot around the announcements in a predictable fashion. This doesn't happen with big caps, because there are enough traders who can figure it out. Also nano-caps often have extreme spikes, of which some are quite predictable. I haven't looked into options, but I guess it's the same thing.
 
I agree with the comments about illiquidity. For me, my edges are clearly larger with the smaller stocks. I go to a monthly traders meeting and there was some discussion about how important it was to trade liquid markets. I said I preferred to trade at the "limits of liquidity". Stocks so small that with my small account sometimes I can see that I have pushed the stock price. They looked at me like I was from Mars.
 
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