(
Continued from the previous post)
Ok, I must be clear to post now ...
So, this 500% stuff?
Uhh ... uhm ...
No.
There are few areas in trading, where new traders mess themselves up, more than this. Reasonable expectations. It’s something NO new trader wants to hear. But I promise you it’s the truth, and you can verify all of this for yourself, as I will provide you with some links.
First of all? Small accounts? Eh, that really doesn’t matter. Seriously. If you take $5.00 to $10.00, you just made 100% return on your money. But it’s only $5.00. If you take $500,000 to $590,000, you made an 18% return on your money. Far under 100%. However, you also made NINETY THOUSAND dollars. So … yeah, just be careful when snake-oil salesmen out there offering you horrible information on trading, promise returns in the 1,000’s of %. As my Grandfather liked to used to say: “
Figures don’t lie, but Liars should can figure …”
So, what do some of the professionals make? What is considered a “reasonable return”?
I’m going to give you a few metrics to follow. And I’m going to show you some AUDITED databases of what real traders do. Not what THEY say they do. But what an outside, third-party auditing software says they do. No cheating. No “do-overs”. No “if you would have”. What they actually do, with real money.
As someone said earlier? Many are still struggling to break even. But for some reason, new traders fall victim to the Dunning-Kruger Effect (
https://en.wikipedia.org/wiki/Dunning–Kruger_effect ) , and though they can't break even in a single year, for some reason, dream of 500% years.
First of all, a month, is meaningless. If someone came to me, wanted to trade my Firm’s money, and said they had a track record, and they showed me seven months of returns? Once again, like I said in another post, I’d be thinking to myself:
How can I politely figure out a way to ask this kid to lose my phone number?
I need to have some idea of their process, they have to be able to talk about WHY it works (
not some indicator, but WHY they feel they have a REAL EDGE). And bare minimum? I want to see their returns for 3 years (
bare minimum, 5 years is preferable). Then, I will have some sense of their annualized return.
So
Annualized Return.
Then I want to see their MAXIMUM DRAWDOWN (
Max DD). Also called, the MAXIMUM ADVERSE EVENT. (
MAE) In other words, ALL trading programs … even the best ones out there, have drawdown periods. Periods of loss. Just as a successful poker player, has losing hands. Sometimes a losing night, and many losing hands in a row. But over time, they GRIND out an edge.
But that’s over time. So now that I can see a large sample size of their trades? I want to know what their maximum drawdown was.
So
Maximum Drawdown (Max DD)
If you are new? And you can grind out anything over 5% a year? You should consider yourself improving. Most can’t do that. Oh sure ... they'll talk about how "some guy they know" does 500% years.
It's always that.
A guy they know.
"
Oh I know plenty of people who..."
Sure ya do.
Most can’t even do 2% in a year, when they are learning. No, I am not joking. I’ve seen people constantly delude themselves, and blow up account, after account, after account, for a DECADE or more, trying to learn to trade. So at first, try to get 5%.
Now, let’s marry the idea, of Maximum Drawdown, to Annualized Return.
Most average traders? Their Maximum Drawdown is 3x their Annualized Return. So, let’s say that a Trader can annualize 16%. That’s excellent by the way. The databases I’m going to show you in a little bit, prove that. Probably, at some point? Using that 3x rule, they were down -48%. That’s an average trader.
Now a good trader? Let’s take that same 16%. If they can keep their maximum drawdown under 2x their annualized return? You’re dealing with a really good trader. That means that at some point? They were probably down -32%.
Now an EXCELLENT trader? Let’s take the very same 16%. An excellent trader can keep their maximum drawdown around 1x their annualized return. There are very, very few traders on this entire planet, that can annualize 16%, and only have a maximum drawdown of around -16%
Then, there is a rare, rare breed of trader. These “Rock Stars of Trading”? They have 16% returns, and their maximum drawdown is UNDER 1x their annualized returns. So they return 16% (
ANNUALIZED, there will be lean years, and there will be HUGE years of 29%, but annualized out over more time, it tends to go down) … and their maximum drawdown, for years on end? Is like -3% or -5%. That is a literal … rock-star of trading.
Think about it. If you gave someone your money? Which one of those traders do YOU want to go with? A guy that you give your money to, and he can annualize 16%, but you know at some point you’re going to be down 50% on your money? Or do you want to find a guy that can keep that to -16% on your money?
That is why knowing Drawdown numbers is so INSANELY important. Humans desire smooth returns. Traders do. BUT ESPECIALLY outside money, desires smoothness. Plus, it shows skill.
Now earlier, I said you could check these numbers of audited databases. There are myriads of such audited third-party databases out there. What used to be Altegris, and is now Coquest Traders Research. IASG. Barclay Hedge. Fund Seeder is a new option I just checked out, because they're free. Regardless, Company’s that third party audit, to see if a trader is LEGIT. Ones with either Read-Only Access to the account with Live money ... or is audited statements by an outfit like Coquest Traders Research.
I’ll give you a link to one of them. Coquest Traders Research. Here’s what I want you to notice?
These are some of the most talented traders in the world. The database will show you (
and remember, there are many such databases in the world) … that these traders have TENS OF MILLIONS to BILLIONS under management. Why do new traders think they can beat the best of the best, that is managing billions?
Oh, and if they could (
You always hear that ... oh, those Money Mangers? I heard a news blip that says they can't beat the Stock Market?) Oh really? Then why do all of those managers, especially a guy like Dunn? DESTROY the Stock Market returns? Audited? And new guys think they can beat them? Oookkayyyyy. Then why aren't they running a $3 B AUM fund?
The more time a program / firm has? The more that Annualized Return % per year, is going to go down. Notice guys like Dunn, that have been kicking out returns since 1977. Any idiot can come along and have a big year. And as you peruse that database? You’ll see these programs DO have 80% years. They happen. But what about the next year, and the year after that?
You will tend to notice, that with more data, and more time? The return usually settles around 16%, 18% if the trader is REALLY good That’s why we as traders could care less about some one-off guy, that had a good seven months. Who cares. That can happen to anyone. We know with more data? The truth comes out. You see it in these databases.
Notice that EVERYONE has losing months, and lean years. Everyone. Even the best of the best. No one, not one program in these databases, makes money, every single month.
And keep an eye on those metrics I mentioned above to you. Notice the 3x, 2x, 1x drawdown to annualized return rule of thumb. In fact, I’d say I am personally MORE impressed with a guy that can annualize 16% with -16% maximum drawdowns (DD) than a guy that can annualize 25%, and has 75% maximum drawdowns.
So here’s the link:
Coquest Traders Research
Notice the AUM's.
And then compare that to Barclay Hedge. They people who ignored the above statements? Yeah, Barclay Hedge will show you there are TWENTY THOUSANDS dead ... liquidated CTA's who are out of the game, because they tried to beat the above rules of thumb. And lost.
TWENTY
THOUSAND
